Dec 06

AM: Anticipating employment

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:17 EST

MARKET BEHAVIOR

Seems we are in a holding pattern after yesterday’s whipsaw action and anticipating tomorrow’s employment numbers.  It is still early in the day and the markets could make a break one way or the other, but so far things are steady to slightly positive.

MARKET SENTIMENT

Is this the calm before the storm?  What will send us higher or drop us lower?  The impact of Sandy will be in this employment  survey as business and consumption on the east coast was interrupted.  But everyone already knows that, so rational expectations will be for a weaker number.  Of course if the market is predisposed to selling off, it could use that weak number to justify liquidating shares.

The interesting thing to watch is if the employment will be the catalyst to get this market moving again, either up or down.  The Employment Report will be long forgotten by late morning as traders refocus on political risk, but if employment kicks off a wave of buying or selling, it could last for a couple of days.

TRADING OPPORTUNITIES

Currently we are pushing back toward the 50dma.  Holding above that key psychological level would be bullish, but don’t buy the first break above the 50 and wait to see if the breakout fizzles and reverses again.  There is more profit potential by being early, but there is also significantly more risk and more often the risk/reward doesn’t pan out of the overly-agressive trader.

A market refreshes itself by either pulling back, or trading sideways.  We came a long way in a short time the last few weeks and one way to clear the path higher is pulling back to the 200dma, the other is churning here for a bit.  A couple of months ago we churned above 1400 for a month before making a 50 point surge in just over a week.  I’m bullish over the intermediate-term, but more cautious here.  This is a great place for a value investor with a 6+ month time horizon to buy in.  For a more nimble trader, wait for the market to make its next move because you might see modestly more attractive prices if the coming days.

It seems a lot of traders are adjusting their portfolios for non-fundamental reasons, namely tax motivated selling.  This selling could create a buying opportunity leading into next year as stock rebound from this artificial inflation of supply.  And beyond that, we could see this same money pumped back into the markets in the near future.  What was weakness becomes strength.

AAPL daily @ 1:18 EST

INDIVIDUAL STOCKS

AAPL is having a wild ride today.  It gapped lower at the open and traded as low as $518 before rebounding back to $550.  There is a truckload of emotion tied to this stock right now and many of the investors who had a set-it-and-forget-it mentality regarding AAPL are freaked out right now.  Their sure-thing doesn’t feel so sure anymore.  Anyone who bought in the last 10 months is sitting on a loss.  How can it be possible to lose money on the surest of sure things?   While there is a lot of talk about tax selling, the thing people are overlooking is there are hundreds of millions of shares underwater right now, many of those held by late-to-the-party retail investors.  This kind of flush out isn’t surprising and is clearing the deadwood.  I’m not an AAPL bull and don’t know how much more upside is left in this name, but I think this selloff is getting out of hand and is creating a buying opportunity.  Buying here is catching the kinife and that is rarely a good idea, but if someone was wiling to hold for 6-12 months, they will be rewarded by stepping in front of this un-fundamental selling.

Stay safe

Dec 05

PM: Much ado about nothing

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

The market was all over the place Wednesday.  Broke below 1400 in early trade, popped above 1415 in afternoon trade, and ultimately closed near break-even   Today’s price action did a good job humiliating bears and bulls alike and the multiple head-fakes triggered the strongest volume we’ve seen in a while.

For all the excitement, we are still suck between 1400 and the 50dma and today’s move didn’t shed much clarity on where the market is headed next.

MARKET SENTIMENT

Bears were sucked in with an early selloff, but were squeezed out a couple of hours later as the market surged higher.  Bulls jumped all over this rebound, but were ultimately let down as the market soldoff into the close.  What does this mean?  The market is still emotionally charged and short-term traders are trying to jump ahead of the next move.  These aggressive and premature traders are the source of this volatility and the market probably needs to marginalize these traders before the market can reveal its true intentions.  A couple more wild days like today will convince many of these short-term traders to stay away for a while.  Once they are out of the picture, the market will make its next move.

TRADING OPPORTUNITIES

Today’s move chased out a lot of weaker hands on both sides and there is a strong possibility the next move outside the 1400 to 1415 range will signal the market’s near-term intentions.  Or it could be just another head fake intended to humiliate and demoralize all the traders trying to jump ahead of the market.  This whipsaw selloff very well could have refreshed the rally and made room for further upside progress, it could also be the last gasps of the rally before nosing over, or it could be the just the start of a volatile trading range.

On this blog I often talk about high-probability trades, but right now a valid and solid case could be made for a move in either direction.  Pessimism remains at elevated levels and most traders expect us to fly off the Fiscal Cliff, meaning it is already priced in.  But at the same time the market rallied on hope that the Fiscal Cliff wouldn’t be such a big deal and we have corrected very little since negotiations in DC started bogging down.  This is turning into one of those situations where the probabilities are fairly well-balanced, making it nothing more than a flip of a coin.  To make money we need to see more of an imbalance and extreme in sentiment and we just don’t have that here.  At times like these it is best just to sit on cash and wait for more information.  The biggest mistake most traders make is needing to be in the market nearly all the time.  If you don’t have an edge on the market, take a break and go fishing.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL was pounded relentlessly today.  This is what happens when a stock is over-owned and someone yells fire.  AAPL closed down 6.4% on no news as investors climbed over each other trying to get to the exits.  Lets be clear, AAPL is not a GMCR or NFLX with an astronomical and unsustainable valuation based on outrageous growth expectations.  But AAPL does suffer from being one of the most owned stocks in the world and it has run short buyers.  Blame it on tax increases next year, Android, supply chain issues, or whatever else people are talking about.    But the truth is everyone who wants some AAPL already has some AAPL and there is no one left to buy shares from the guy who wants to cash in.  It is anyone’s guess how far this selloff will go, but unlike other bubble stocks, AAPL is the real deal and it isn’t about to implode in on itself.  If anything, the street is under appreciating its growth, cash flows, and profit margins.  We might see a double bottom form, but recognize over the near-term this stock has transitioned from investment grade to trading material.  Expect the stock to remain volatile until we have concrete fundamental data out of the company, most likely the Q4 earnings.  Until then trading AAPL will just be legalized gambling.

Stay safe

Dec 05

AM: 1400 bounce

By Jani Ziedins | Intraday Analysis

 

S&P500 daily at 12:57 EST

AM Update

Markets tried to selloff and no doubt hungry bears piled on the early weakness.  But just as quick, the market bounced off 1400 and sent late bears running for cover.  Did this rally correct enough to refresh itself and is resuming the uptrend, or was this simply a false bottom on our way lower?

MARKET BEHAVIOR

Wild early trade.  Markets opened higher, then slid through he first couple hours before bouncing off the 1400 level and jumping back to new highs.  AAPL was pounded and no doubt contributed to the index’s early weakness.  The market flirted with 1400, a level that provided support multiple times going all the way back to August, before surging back above 1410.  Is this another legitimate bounce off 1400, or just a fake rally to suck in premature bottom-pickers and flush out aggressive shorts?

MARKET SENTIMENT

Last week everything was looking up and now everything is falling apart.  It is maddening how the market switches personalities like this, unless you understand how the market works and then these swings become profit opportunities.  As anyone who has been reading this blog for a while knows, we try to get ahead of these moves, not whipped around by them.

Everyone gets to contribute their ideas about what the market does, and they do this by buying or selling stocks.  But unlike the traditional one-person one-vote, in the markets some people’s opinions count a lot more due to the size of their trading account.  But the interesting thing about voting in the stock market, once you place your vote, you no longer have a say and are just along for the ride until you buy or sell more shares.  It is this ‘along for the ride’ period where interesting things happen.

This phenomenon was on display the last few weeks.  The markets sold off hard after Obama’s reelection as a mass of disappointed Republicans voted with their money and pulled out of the market in droves.  But after a certain point all these disappointed Republicans sold and they were no longer influencing the market’s direction.  At this point other investors saw an opportunity to buy heavily discounted shares on the heels of an emotional selloff.  These new buyers poured money into stocks, but after a couple of weeks they also ran out of money and after all the buyers bought, demand dries up and markets fall under their own weight.

While it seems like the market is changing personalities, it is simply reflecting the opinions of the traders actively buying or selling at that moment in time.  Recognizing what actually makes the markets move brings you one step closer to figuring out how to win at this game.

TRADING OPPORTUNITIES

Selling has modest to this point and we’ll most likely continue lower until we drop where it rattles some of the more confident traders.  But expect the market to saw tooth its way lower as bottom pickers and late shorts create these rallies.

Of course the market can go either direction and regaining and holding above the 50dma would signal this rally is back on.  We have the November employment report this Friday and that might be the catalyst to nudge the market one direction of the other.  Since we have rallied strongly the last couple weeks, expect and upside move to be more limited than a move lower that still has lots of room to run.

Stay safe

Dec 04

PM: Modest selloff so far

By Jani Ziedins | Intraday Analysis

 

S&P500 daily at end of day

Markets down for a second day, but panic has not hit the street yet.

MARKET BEHAVIOR

Stocks finished in the red, but off of the day’s low.  We fell back under the 1410 level that was temporarily providing support.  Volume was up from Monday, but still below average.   We declined the last two days, but it has been anything but a mad rush for the exits as volatility and volume are well under control…..so far.

MARKET SENTIMENT

Buyers failed to show up for a second day.  Volume was lower than average, showing selling wasn’t the sources of the weakness.   Buying pushed this market higher, but now the rally is struggling to find new buyers willing to commit fresh capital at these levels and as a result we hit this soft patch.

Last week everyone was hoping for an early compromise to the Fiscal Cliff, but that view has changed 180 degrees and now it seems everyone expects us to blow past the deadline without an agreement.  I’m getting tired of always talking about the Fiscal Cliff, but it is the topic of the moment.  The overall impact will be minimal, but the market is obsessing over it and that creates tradable opportunities due to these overreactions.

Depending on how things go over the next couple weeks, the act of falling off the cliff could actually be the point of maximum pessimism and become the buyable catalyst. We’ll have to keep an eye on sentiment and see how other traders are positioned the closer we get to the deadline.

AAPL daily at end of day

TRADING OPPORTUNITIES

No reason to buy the dip here and most likely any strength is a good shorting opportunity.  Longer-term holders prepare mentally for a modest selloff and don’t let all the hype in the media scare you out of your positions.

INDIVIDUAL STOCKS

AAPL really took it on the chin today and it is getting harder to find an AAPL bull.  The selloff and this shift in sentiment is dramatically lowering the expectations for the company on what should be a blowout quarter.  IPhone5 is still on backorder, we have the iPad mini, the new iPad4, and the refreshed iMacs to make for a strong bump in Q4 sales.  This doesn’t mean AAPL can’t go down more, but AAPL at $575 is far less risky than owning it at $700.

Stay safe

Dec 04

AM: Weakness persists

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:10 EST

The market is running out of buyers prices are softening.  Some will blame this or that, but the truth is a change supply and demand is the driver behind this weakness.  Look for a potential sawtooth selloff to at least the 200dma.

MARKET BEHAVIOR

Stocks tried to stage a rally in the first hour of trade, but quickly fizzled and we are currently down 0.3%.  Yesterday’s reversal had a large intraday range, but it happened on low volume.  From this we can infer it wasn’t a wave of selling that hit the market, but a lack of buying.  This further reinforces the notion this rally is running out of buyers.  If prices continue declining, we will naturally expect volume to pick up.  It will be this burst of volume on downside that signals the end of the pullback as the last surge of the sellers rush for the exits.  At that point selling dries up and we head higher due to a lack of supply.  The market is one a giant pendulum that swings back and forth.    It seems we are starting to swing back the other way.

There are a lot of people who claim it is foolish to time the markets.  What they really mean to say is most people, pros and amateurs alike, cannot time the market.  But that is simply because they are looking at the wrong clues.  The market is pretty straight forward if you understand the dynamics that cause prices to rise and fall.  Namely the emotions and positioning of other traders.

MARKET SENTIMENT

Over the last couple weeks the market’s rebound seduced many traders into thinking the Fiscal Cliff didn’t matter any more.  Anyone who was shouting doom and gloom was humbled by the recent rally and it encouraged anyone who expect the Fiscal Cliff to be resolved to jump in head first.  But the market doesn’t like being easy or predictable, so just as everyone thinks they have it figured out, the market throws a wrench into the works to keep everyone off-balance.

The biggest question we need answered is if this is the start of a real pullback, or just the last short-squeeze.  It is super easy to figure out what the market will do next, the challenge is knowing when it will do it.  Timing is where all the money is made.  Without a doubt the market will pullback because it always does, what we need to figure out is when it will happen.

TRADING OPPORTUNITIES

Breaking the 50dma yesterday and squeezing out the last of the bears really puts the odds in favor of this being the real pullback.  But don’t mistake favorable odds with certainty.  There are no guarantees in the market and the chances of this being the real pullback are about 2/3 to 1/3.  So while it makes the pullback more likely than not, out of three similar setups, one will continue higher.  But as a trader that is okay.  The goal isn’t to always be right, but to make more money when we are right than we lose when we are wrong.  We use risk management techniques like limiting losses and letting winners ride.  We also look for setups that put the probabilities in our favor.  Combining these techniques vastly improves the chances we will be successful, but there are no guarantees in this game.

I think this is the real pullback, but there is a smaller probability there could be last short-squeeze before this rally leg is done.  Most likely we will see a sawtooth lower as  bottom-pickers get sucked in prematurely on the way down.  The rule of three works pretty well in these situations.  This is where we get two or three head-fakes before the real reversal happens.  There is a lot of psychology behind why this happens, but just know that every short-squeeze or false bottom brings us one step closer to the one that actually sticks.  Ignore the first couple, but get ready to trade the 3rd or 4th.  We had several short squeezes over the last couple weeks and that is why I am more confident in this attempted pullback.  And on the other side we’ll see a few failed rally attempts before the real one can succeed.

INDIVIDUAL STOCKS

AAPL outperformed yesterday and is getting whacked today.  There are opinions abound about AAPL from it being the first trillion-dollar company to it falling 70%.  And you know what, both could be right.  AAPL’s rally could still have legs if international sales continue exploding.  While AAPL’s products are premium priced, the number of people around the world who can afford it are growing every day.  It is highly unlikely AAPL will lead the budget handset market, but with the exploding global middle class the pie is growing so fast AAPL will do just fine focusing on the upper end of the market.  But at the same time technology companies rarely dominate for long.  Palm and Rim are recent examples of 800lb gorillas  being supplanted by a newer innovator.  Ten years from now Apple will still be a big player, but it won’t have the coolest or most innovative producer on the market.  It is fine to trade AAPL, but I wouldn’t plan on handing shares down to your heirs.  Hardware is just too volatile for any one company to stay at the top of the hill for more than a couple iterations.

Stay safe

Dec 03

PM: Too-far, too-fast

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Is the market finally running out of buyers?

MARKET BEHAVIOR

The market’s character is changing slightly as we saw the biggest intraday selloff in a month.  Today was an outside reversal, meaning the high was higher and low was lower than the prior day.  The market opened above the 50dma, but those were the highest levels of the day and the market sold off through the close.  There were a few failed rally attempts, but each only temporarily halted the selling.

This breaks the pattern of intraday bounce backs after early selloffs.  We will see if tomorrow can find support, or if this too-far, too-fast rally has finally reached the breaking point.

MARKET SENTIMENT

It will be interesting to see how Tuesday trades.  Today’s price action was fairly negative and that could cause many would-be buyers to take a wait and see attitude.  Few are going to buy tomorrow if they think they can get a better price in a few days.  Without a demand from a pool of buyers, prices will fall to the point where buyers are finally tempted to come back.

After today’s selloff, the ball is in the value investor’s court.  We will fall until they see prices they can’t resist.  We could see them stepping in tomorrow if they expect an imminent resolution to the Fiscal Cliff, or they could wait for us to bounce off the 200dma.  They could even wait for us to penetrate the 200dma before stepping in in meaningful numbers.

And lets not forget most of the bears were chased out of the market the last couple weeks and they are ready to pile on any weakness, further pressuring a weak market.

TRADING OPPORTUNITIES

There is no such thing as a safe trade in the stock market, but there are situations more favorable than others.  It is these high probability trades that give the savvy trader an edge over the long-term.  It looks like we are on the verge of one of those opportunities.  No doubt this could turn into another short-squeeze, but I think the market has risen far enough to flush out the vast majority of shorts, meaning there is not a lot of shorts left to squeeze.  We’ve also consumed most of the demand from buyers willing to chase this rally higher.  There are no guarantees here, but it seems like the odds favor a pullback to at least the 200dma.

Of course this is for the more nimble swing trader.  Anyone with a longer view of the market should continue holding.  Just be aware of the imminent pullback and prepare mentally for some near-term weakness.  As most people cognitively recognize, we’ll resolve the Fiscal Cliff at some point, but the market could get emotional as the negotiations get ugly.

INDIVIDUAL STOCKS

AAPL’s daily price action mirrored the indexes day-long slide, but it finished in the green by a fraction of a percent, outperforming the broad market’s half-percent decline.

There is a lot of talk of people selling their big winners ahead of an imminent tax policy change, but never ever let taxes influence your trading decisions.  The market moves way too much for any tax savings to be worthwhile because they can be wiped out in a matter of days.  Long-term capital gains, short-term capital gains, dividends at ordinary income rates, wash sale rules, etc, it doesn’t matter, trade the stock market. If you thought AAPL had a good run over the last 10 months, but chose to hold for two more just to get long-term capital gains treatment, how did that work out for you?

Anyway, all the people who are listening to their accountant and selling gains this year are creating weakness in good stocks.  Their loss can be your gain.

And of course all these recently liquidated trading profits (and special dividends) are going to need a home next year.  That buying could put prices higher in the first half of next year.  Remember, only supply and demand directly determines prices, not fundamentals.  If all these traders are buying back into the market after their tax sales, it will support the market no matter what else is going on in the world.

Stay safe

Dec 03

AM: Markets struggling for direction

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:14 EST

AM Update

MARKET BEHAVIOR

Markets opened above the 50dma and almost instantly began selling off.  Could this be the last short-squeeze before pulling-back and digesting some of the recent run up?  It is still early in the day and we need to watch if the market rebounds this afternoon like it has with other recent intra-day declines.  If we fail to get that bounce, we might be seeing the market shift character and a change its near-term trend.

MARKET SENTIMENT

Everyone knows the kind of rally we’ve seen since the bottom on Nov 16th can’t keep going up indefinitely.  But what they know rationally doesn’t always connect with what they feel when looking at their trading screens.  We had several categories of traders in the recent move:

  • The first were the fearful trader who sold out on the slide and is looking at this rebound with deep regret.
  • Next are the fearful traders who were paralyzed during the decline and through inaction inadvertently held through the dip.  He is felling pretty good about himself right now.
  • There is the opportunist who felt the selloff was overdone and bought the dip and is beating his chest with pride.  Some of these dip buyers sold for a quick profit, but many are feeling cocky and still holding for more gains (greed).
  • We also have the bear contingent that have waited for this market to break wide-open and have piled on the shorts every chance they get.  They were on top of the world a couple of weeks ago, but are now bloodied and battered 4+ short-squeezes later.
  • And the last group is the value investor that has a longer-view and holds through good times and bad.

Where we go from here largely depends on what the aggregate of the above groups does next.

  • Prudent risk management has forced most shorts out of the market as we relentlessly marched above one key technical level after another.  At this point most of their buying is done, but this also means they have fresh resources to re-short the market if new weakness develops.
  • Regretful sellers of the Obama dip are sitting on their hands afraid to act.  They are rationalizing that selling two weeks ago was right thing because the market really is going to breakdown…….eventually.  While most of these guys can’t put any additional selling pressure on the market because they are already out, they won’t support the current rally with their buying either.  Eventually they will come around and provide fuel for a future rally, but it takes time for them to regain their confidence and for fear of losing money to be replaced by fear of being left behind.
  • Indecisive owners who held through the dip are likely to have flashbacks if prices start falling and they could easily get shaken out this time around.
  • And the last group of value investors are cool, calm, and collected, but they are also reluctant to buy stocks after a run-up and instead prefer to let prices come back down on what they view as the inevitable pullback.

So what does all the above mean?  It means we are running out of new buyers and a fresh wave of sellers could show up if prices start pulling back.  The financial press always tries to find a fundamental reason stocks moved one way or the other, but the truth is prices only move to balance supply and demand.  Now sometimes unexpected news will affect expectations and in turn skew the balance of supply and demand, but often in  medium timeframes supply and demand will move the market by itself independent of the news around it.  For example stocks will often sell off when everyone is most optimistic on a stock because at that point everyone who wants some already has some and without any new buyers waiting in the wings, demand dries up and the price declines.  The opposite has happened here.  Fiscal Cliff talks have grown further apart over the last two weeks, but the market has rallied in the face of these negative developments.

TRADING OPPORTUNITIES

If there was a time to lock in profits, now is looking pretty good.  If the break above the 50dma doesn’t stick, this would also be a place for aggressive and experienced traders to look at shorting the market.  But if we continue holding these levels for a few days, that shows buying hasn’t climaxed and there is still upside left in this move.  If that is the case, I don’t think owning the market here makes for a good risk/reward because there is only so much higher this steep rally can go, but for shorts it would be a prudent to cut bait and wait for the next entry.

INDIVIDUAL STOCKS

AAPL is still in the green, but off of early highs like the rest of the market.  All of the above commentary applies to AAPL as a stock too.

Stay safe

 

Dec 02

LA: 1 of 3

By Jani Ziedins | Intraday Analysis

Look Ahead

I’m adding weekend posts designed to take a wider view of the markets and filter out much of the daily noise.  These Look Ahead posts will focus on what we could see in the coming week and how to respond and trade those possible outcomes.

MARKET BEHAVIOR

As we covered in the last post, the weekly charts show the recent selloff is not much more than a standard 200dma correction at this stage, far from a major selloff that some feared.  Larger selloffs and bear markets tend to grind lower so slowly that people hardly notice the small leak in their portfolio.  The last few weeks were anything but a stealth move and what goes down quickly finds a bottom quickly.  While we might not have seen the lows of this move, we certainty found an intermediate bottom and recaptured nearly all the emotion fueled Obama reelection selloff.

MARKET SENTIMENT

We are entering the holiday zone between Thanks Giving and Christmas.  Trade will be lighter than average, but with the markets up nearly 13% there will be pressure on some portfolio managers to catch up to their benchmarks by yearend.  At the same time you might see other managers that are ahead sit on their profit cushion and coast into yearend.

We regained most of the Obama selloff and the market showed once again that emotional trading is the quickest way to give away money.  Many of these traders would have been better off-putting a pile of money in their driveway and lighting it on fire.  That would have been far more efficient and spared them the emotional torment of being on the wrong side of the market.  But that trade is now ancient history, so lets focus on what is in front of us.

The market is at a decisive turning point.  The market can prove its strength and march right through the 50dma in defiance of all the headline risk domestically and internationally.  This scenario is not unreasonable given the fair amount of pessimism currently priced into the markets and the recent selloff that flushed out weak holders and replaced them with opportunistic value investors who are far more patient and willing to sit through volatility.

The next scenario is the market breaks the 50dma and passing this key level triggers autopilot breakout buying from managers who don’t want to be left behind and stop-loss buying from bears managing their risk.  Key technical levels attract clusters of buy and sell orders, often creating a self-fulfilling prophecy, at least temporarily.  The big test will be watching for follow on buying after the short-squeeze.  If buyers fail to show up at the higher valuations, demand will dry up and we’ll reverse fairly quickly.

And the last scenario is where buying dries up before we even have a chance to touch all the buy orders sitting above the 50dma.  We could simply run out of buyers after all of last weeks buying, or the rhetoric in Washington reaches such a level that buyers get nervous and step away.

TRADING OPPORTUNITIES

I’ll take these in reverse order.  The selloff scenario is pretty straightforward.  If the market sells off and fails to bounce back immediately like we’ve seen in recent weeks, expect it to continue lower and retest the 200dma, likely breaking through it before finding footing.

A short squeeze above the 50dma will fail quickly and present an even better opportunity to short the market.  Wait a few days and let the market prove itself before buying the breakout.

And lastly, a sustainable break above the 50dma will hold above this level for several days, at which point we can assume real buying is propping up prices at these levels and we can tentatively venture in on the long side.

Honestly I would be surprised if we didn’t see some volatility before this consolidation is resolved.  But this is a good thing; volatility is how traders make their money.  Don’t complain about the markets indecisiveness and irrationality, profit from it.

Take a wait and see approach Monday morning and watch for which of the three above scenarios starts playing out.  Maybe it will happen Monday morning, or maybe we’ll trade sideways for a few days.  But there will be a resolution to this test of the 50dma and we need to be ready to trade it proactively.

INDIVIDUAL STOCKS

Expect AAPL to struggle with the 200dma unless the broad market decisively breaks through the 50dma.  A double bottom is still on the table, or alternately the stock could just churn sideways.  At this point it needs a catalyst to regain the $700 level.  Maybe that is a great quarterly report, a highly compelling AppleTV, or some other new and must have device.  The holiday season will be important for AAPL and it could blow away estimates since most of its products were refreshed last month and that will lead to larger than normal upgrade wave this quarter.

Stay safe

Dec 01

WR: Rally back on?

By Jani Ziedins | Intraday Analysis

S&P500 weekly

Weekly Review

It helps to take a step back and look at longer-term charts to see what the market is really up to.  Paying too much attention to the daily noise can be confusing and misleading.  Weekly charts and analysis average out the noise and give a far more clear view of what is going on.

MARKET BEHAVIOR

Markets closed in the green for the second week in a row.  We finished the week up 0.5% on higher volume than the previous week, no doubt helped in part by end of month window-dressing.  While the last few weeks felt dramatic between the post-election selloff and the subsequent rebound, the longer-term charts make it look like a fairly benign pullback to the 200dma.

MARKET SENTIMENT

If this pullback is anything like what we saw this summer, we can expect some daily volatility, but the weekly chart will resume the up-trend.  And this makes a lot of sense if we filter-out all the noise and rationally think about where the market and economy are headed next year.

Discounting the Fiscal Cliff, Euro-Mess, and China, we are left with a slow but stable economic recovery plus corporate profits and balance-sheets that are as good as they have ever been.  Year-over-year numbers are not as eye-popping as they were simply because we are running against tougher comps.  The only reason 2010 and 2011 looked so strong is because the prior years were downright horrible.

The driving force behind this counterintuitive corporate strength is the massive streamlining and cutbacks made during the recession.  Cutting the excess made companies leaner and meaner than they were in boom times, giving them profit margins not seen a couple of years ago.

Looking forward six-months, we have an economy that is still healing and a stock market that is nervous.  That is the exact recipe for a bull market.  We need to doubters for prices to appreciate because when everyone agrees things are great is when we run out of buyers and the market tops.

TRADING OPPORTUNITIES

While we might experience some near-term volatility , the long-term prognosis for the economy and markets is great.  There is so much widespread fear of the stock market that we are likely on the verge of a 15 year bull-market.  Something we’ve seen every time in market history after a decade of stagnant stock prices.  When everyone is pronouncing buy-and-hold is dead is the best time to buy-and-hold.

INDIVIDUAL STOCKS

AAPL is bouncing back from its recent selloff and challenging the 200dma.  Given that AAPL nearly doubled in the twelve months leading up to the September high, a 20% pullback is normal, expected, and healthy.  I have no idea if AAPL can keep up the pace of innovation over the next ten years or not, but it has barely tapped the potential global market for smart phones as the world’s middle class explodes.  Given the huge market opportunity, high profit margins, and very reasonable valuation, there is no reason to expect AAPL will collapse like a bubble stock.

S&P500 daily

SCORECARD

October 18th, 2012  “Start looking for longs to lock in profits on and watch for weakness to short.  Don’t get in front of this steamroller by trying to pick a top, but if weakness forms, jump on the short and ride it through the 50dma.”

Stay safe

Nov 30

PM: Fiscal Cliff worries behind us?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks were flat on the last trading day of the month.  The 50dma is providing overhead resistance and breaking through this level should be met with skepticism.  We’ve come a long way and it wouldn’t be surprising to see the market pullback some.

MARKET BEHAVIOR

Stocks entered a holding pattern on the last day of the month.  We ended virtually unchanged on higher volume as portfolio managers adjusted their positions for month-end.  The last 10-minutes provided some excitement as the market surged higher, trying to breakout, only to give back most of those gains in the final 5-minutes.  Portfolio managers and index funds make their trades in the final minutes of the day and their jockeying made for those last-minute fireworks.

MARKET SENTIMENT

Technically we are still under the 50dma and it is providing overhead resistance.  The 50dma is a widely followed technical indicator and breaking through could trigger a wave of short-covering and breakout buying since many traders follow the same technical trading philosophy.  But given how far we’ve come, I would be suspicious of any breakout rally and recommend waiting  a couple of days to confirm it is the real thing.

Sentiment wise it seems like a lot of the fear of the Fiscal Cliff has evaporated.  A couple of weeks ago the market was selling off as politicians extended olive branches to each other, and now we are rallying as they use press conferences to throw barbs at each other.  A bit odd if you ask me, but that is standard operating procedure for the markets.

The market often looks ahead six months or more and could have already discounted the Fiscal Cliff .  Or the market could be sucking in the last of the momentum buyers before the rally fizzles and reverses lower.  While most of the market might cognitively acknowledge the Fiscal Cliff will eventually be resolved, the fear of the unknown can overpower rational thought and herd instinct compounds these impulses.  As humans we fear risk about 2.5 times more than a similar reward and this is why the stock market sells first and asks questions later.

TRADING OPPORTUNITIES

Are we on the verge of something like we saw in the summer of 2010 and again this summer?  I don’t think so because those two cases started from a level of high complacency after big rallies.  We have sold off since September and sentiment is already fairly low.  The market could get spooked by a bad headline out of Washington, but it should find a floor fairly quickly.  We could easily break the 200dma again and even challenge the recent 1343 low.  But don’t count on going lower than that.

Another scenario is pessimism is already elevated and the Fiscal Cliff worries over the last couple weeks scared off all the emotional traders, meaning there are very few sellers left to spook out of the market.  In that case we could continue rallying into the end of the year.

The easy trade is if market plunges on Monday.  The harder read is if we pop above the 50dma.  That could be the last gasp of this rally, or it could be a continuation move and  the rally resumes.  Short-squeezes are very short-lived phenomena and within a couple of days we’ll know if a break above the 50dma is going to stick.  If it can’t hold, expect a selloff through the 200dma.  If the breakout sticks, the market doesn’t want to sell off and the smart trade is buying and holding on.

INDIVIDUAL STOCKS

Surprisingly AAPL was left out of the broad markets recovery today and it finished off 0.7%.  Under normal circumstances this would be a red flag, but we might give AAPL the benefit of the doubt today simply because it is the most widely held stock and month-end window-dressing could be part of today’s weakness.  AAPL has rallied a good ways from the November 16th low and broad market weakness could push the stock down again.  Hold off buying AAPL for the time being because you might get a better opportunity over the next couple weeks.

How did I do?

SCORECARD

Looking back at recent calls from CrackedMarket:

November 26th, 2012  “The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.”

Stay safe

Nov 30

AM: Looking for direction

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:36 EST

Markets trading sideways today as the market is looking for direction.  The recent rally used up a lot of the bull’s ammunition and we should be on the lookout for reinvigorated bears to take back some of those gains.

MARKET BEHAVIOR

Stocks are trading modestly lower this morning.  There is not any big new and the market is digesting recent gains.

MARKET SENTIMENT

We’ve come a long way from the panic driven selloff to 1350 where everyone expected the world to implode between Obama’s reelection and the impending Fiscal Plunge.  In a couple weeks we went from the world ending to everything is going to work itself out just fine.  Funny how bipolar the markets can be.  While most people are frustrated with this behavior, the savvy trader exploits these emotions for quick profits.

Right now the market is approaching complacency, anticipating the two parties will work this deal out.  It is also assuming a plunge off the Fiscal Cliff might not be such a scary thing because the ‘Cliff’ really is a gentle bunny-hill that takes a full year to fall down.  The thinking is that even if we fall off the cliff, there will be plenty of time to continue negotiations and retroactively unwind the any tax and spending implications.

And while that analysis is spot on, it assumes the market will be perfectly rational when the financial press starts screaming we are about to fall off the cliff.  What we have here isn’t a serious structural problem, but a one of irrational fear.  And that is exactly what I am hoping for.  It is impossible to consistently make money off of a rational and efficient market, we need emotional market cracks to exploit and the a breakdown in talks between Democrats and Republicans will do that.

Last week the two parties were open to compromise, but that was an unspecified compromise.  Now that both sides are getting into actual numbers, they are realizing just how far apart they really are and neither side is willing to compromise enough to meet the other side.  It will happen eventually, I have no doubt about that, but each side is going to follow the negotiation handbook first and that includes making unreasonable demands and walking away.  We are on the verge of this unreasonable demands and walking away part and that will no doubt spook the market, letting the air out of this optimistic rally.

TRADING OPPORTUNITIES

It is a given these negotiations will blow up at some point, the question is when.  Will it be this weekend?  Will it be closer to the deadline?  Or are both sides so sensitive and considerate of the stock market that they will work together and push through a deal without all the bickering.  Ha, ya right!

There is some sizable downside risk in the near-term for the trader, but for the investor this will just  be a blip it should be easy to hold through.

The experienced and savvy trader can look for a good shorting entry point.  There is risk of one more short squeeze if we push through the 50dma on more conciliatory talks out of Washington.  On the other side there is the profit potential of a 30+ point slide lower as talks breakdown. At this point it is up to the individual trader to decide how much risk they are willing to accept and if they want to get in early or take the safer route and get in a little late.

For the investor, get your wish-list out and wait for the inevitable breakdown and let prices fall to more attractive levels.

INDIVIDUAL STOCKS

Everyone’s favorite AAPL is feeling the broad market’s weakness but at a rate 3.5x the market, down 0.7% to the markets 0.2%.  AAPL is surprisingly volatile for the most valuable company in the world.  Given the high-beta trade of AAPL, it no longer makes for a safe-haven in turbulent markets and wary investors should look for other places to hide their cash.  But beta cuts both ways and AAPL will be an attractive buy when the market bounces back.

How did I do?

SCORECARD

Looking back at past ideas and commentary from CrackedMarket:

November 1st, 2012  “Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.”

Stay safe

Nov 30

PM: Buy or sell the breakout?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets notched a new high for the rally as we approached the 50dma.  Bears are becoming an endangered species as the bulls continue running them off.  But one of the more powerful paradoxes in the markets is the smaller a group gets, the stronger they become.  Expect the remaining bears to make themselves herd in coming days.

MARKET BEHAVIOR

The market finally cleared 1410 and rose to the 50dma before settling back to 1415.  Volume was average and the masses were not rushing to buy this breakout.

Boehner caused a dip in early trade during a press conference when he said the sides were not close to a deal.    Stocks have come a long way in a couple of weeks as optimism of an imminent deal boiled over, but is this time for the pendulum of sentiment to swing back the other way?

MARKET SENTIMENT

Stocks have been rallying nonstop regardless of the news.  Bad news might cause stocks to sell off momentarily, but within an hour they rally back.  That’s what happened with Reed’s comments a couple of days ago and Boehner’s comments today.  This is a Teflon market as it shakes off anything and everything.  Does that make it a safe time to buy, or is the perceived safety making it even more dangerous?

Bears have gotten chased out for the umpteenth time and are starting to get discouraged.  Markets will often feign a reversal a couple of times before actually going through with it.  Given the recent whipsaws, we are getting close to that real reversal.  Many of the buyers have bought and most of the shorts have been squeezed out.  Without a new catalyst, we will run out of buyers shortly.  There might be enough gas in the tank for one push higher through the 50dma, but don’t expect our politicians to pretend to get along for much longer.

TRADING OPPORTUNITIES

Maybe we’ll poke our head above the 50dma tomorrow, or maybe we’ll finally breakdown.  There has been a lot of hope built in to this rally that the Fiscal Cliff will be resolved early.  But this is nothing more than wishful thinking, as anyone who regularly follows national politics will tell you.  These negotiations will get far worse before they get better and the rhetoric will only get louder as both sides try to court public opinion.

This is a good time to lighten up on stocks because not much upside remains without a definitive Fiscal Cliff deal.  At the same time there is plenty of downside risk if talks breakdown.  Friday might be a good day to try out a short because the weekend will give extra time for some politician to stick his foot in his mouth and wreck the fragile hope something constructive will come out of Washington.

INDIVIDUAL STOCKS

AAPL is riding along on the Fiscal Cliff rollercoaster like everything else in the market, albeit with a little more beta.  There is hope AAPL will declare a special dividend because of the impending tax changes, but I wouldn’t hold my breath on that one.

How did I do?

SCORECARD

This segment recaps past blog posts to see how I did.

November 5th, 2012 “Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.”

Stay safe

Nov 29

AM: Rally extends to the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:55 EST

AM Update

Bears tried again to break this market but this rally is stronger than most expect.  But don’t let this support lull us into complacency.  Each failed breakdown brings us one step closer to the one that sticks.  As an added bonus, at the end of this post I highlighted some of my analysis from a couple weeks ago.

MARKET BEHAVIOR

Markets opened higher and traded up to the 50dma.  Then Boehner held a press conference, spooking the market and it gave back all those gains in a matter of seconds.  But like we’ve seen over the last couple weeks, the market bounced back from the initial knee-jerk reaction.

As seen from recent price action, the market remains emotional and we should anticipate elevated volatility in the coming weeks. But this is a good thing; a perfectly rational market is an efficient market.  It is these emotional swings that present us with the best profit opportunities.  Other people’s pain is our gain.

MARKET SENTIMENT

I hear a lot of traders complain that politicians are driving this market.  But the truth is only supply and demand can move markets.  Politicians are not moving markets, emotional traders hanging on every utterance in DC is what is causing these wild swings. If traders don’t like how the market is behaving, they only have to go as far as the closest mirror to see exactly who is responsible.

A couple of days ago it was Reed’s fault the market sold off.  Today it was Boehner’s.  The truth is it doesn’t matter.  Bears were looking for an excuse to lean into the market, the got it, and they tried their hardest to break this market.  But much to their disappointment, no one else followed their lead and the market bounced back.

But with each failed breakdown, we are that much closer to the one that will really work.  So rather than grow increasingly complacent with each rebound, we need to grow more suspicious.

TRADING OPPORTUNITIES

Lighten up long positions and get ready for the short that is getting closer by the day.

INDIVIDUAL STOCKS

AAPL is holding up nicely along side the broad markets.  The nonstop selloff has been abated, but it needs to rally a few dollars more to retake the widely watched 200dma.  But at this point the ‘death-cross’ is all but inevitable as the 50dma is quickly racing toward the 200dma.  While a lot of people will make not of this, it is a trailing indicator and it is really late to this party.  More than a selling signal, any weakness on the ‘death-cross’ could be a buying opportunity.

How did I do?

SCORECARD

I’ve been sharing a lot of ideas on this blog and I want to start this scorecard feature to highlight my successes and failures.

Nov 15th 2012  “The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers has already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

Stay safe

Nov 29

PM: Tough day for bears

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Bears got taken to the woodshed today were bloodied yet again.  Many of the value investors who were accumulating shares over the last few weeks are comfortable and confident with their positions and their discipline prevented a wider emotional selloff.  The selloff is coming, just not yet.

MARKET BEHAVIOR

It was a big day in the markets with a 25-point swing between the high and low.  In the first hour of trade it looked like the market was breaking down, but the selloff ended just as quick and the subsequent rally continued through the day.  We finished higher by 0.8% and regained the highs of this recent rally.

MARKET SENTIMENT

It was a bad day to be short and this was clearly a bear trap that snared a lot of pessimists.  As I mentioned on Tuesday, this was the wrong time to be short the market.  There is nothing wrong with taking profits here, but it is a little early to be jumping on the short bandwagon.

Volume was just a hair under average and similar to what we saw on Tuesday.  The relatively modest volume showed that while this was a wild ride, not a lot of people were sucked in by the apparent breakdown or subsequent reversal.  This further reinforces the idea that many of the buyers over the last few weeks are confident and prepared to hold through some volatility.  Their willingness to sit tight in the face of selling pressure is what constrained supply and lead to the bounce.

Yesterday I talked about how all the selloffs in the last 5 years were great buying opportunities.  Obviously this isn’t always the case, so how do we tell the difference between a buyable dip and the start of a bear market?  It all comes down to what other traders think.  Right now everyone is obsessed with the Fiscal Cliff and all the other negative headlines out there.  It is this widespread negativity that shows we are still in a bull market.

Compare this to the spring of 2008 after the market already sold off from the 2007 highs.  Even then complacency was the norm as everyone was used to easy money and viewed the market as an attractive buy.  At the time Obama and Hillary were fighting for the Democratic nomination and in the process were trashing Bush and the economy.  Investors took a lot of offense to Hillary and Obama suggesting we were entering a recession.  In fact the candidates were so widely criticized for spooking people that they started referring to it as the “R-word” so everyone would back off.  Obviously Hillary and Obama were simply making political hay and had no idea what was about to unfold, but that obliviousness by everyone is exactly what set the stage for a major selloff.

The question we have to ask in the present day is if traders are complacent and oblivious to the risks in front of us.  Not only are investors in tune with the risks in the world, so is the average Joe.  This doesn’t mean we won’t have volatility and selloffs, but those selloffs are buying opportunities, not a time to head for the hills.  Given how badly the 2008 selloff damaged the average investor’s psyche, I think it will be years before we see widespread complacency lead to a major bear market.

TRADING OPPORTUNITIES

Given the strong reversal today, the 50dma is within easy reach and the bigger question is whether we will break through it or hit our heads.  The market is sensitive to headlines and the building expectations of a Fiscal Cliff resolution are setting the stage for disappointment as negotiations drag on.  While the Fiscal Cliff is not as big of a deal as other crisis in recent memory, it will be enough to spook emotional traders and present an attractive profit opportunity for a savvy trader willing to go against the grain.

In the near-term look for the market to rally a bit more before pulling back.  The selloff will be swift and decisive, but it will find support after breaking the 200dma and 1400.  I’m not a psychic and can’t predict if we’ll make new lows or not.  But if we take our profits early, it really doesn’t matter.  The more important trade will be buying this Fiscal Cliff selloff and getting ready for the inevitable bounce.

INDIVIDUAL STOCKS

AAPL is trading sideways and consolidating recent gains after bouncing off of the $500 level.  What was the must have stock became the must short stock.  It worked if you were daring enough to get in, but this stock is too much of a darling to not bounce hard when the price declines this much.  No matter what the fundamentals show, many traders are infatuated with AAPL and will buy it all the way down.

As for the fundamentals, I have yet to see a young person with an iPhone5.  The Samsung Galaxy SIII is the new cool kid on the block and I’ve seen far more of those than iPhone5s.  No doubt there are a lot of soccer moms who still lust for an iPhone5, but the days of undisputed rule are coming to an end.  AAPL makes a great product, but expect competition to hammer market share and profit margins in coming years.  Of course this is a longer viewed prognosis and in the near-term the emotional volatility surrounding AAPL will make for some great swing trading.

Stay safe

Nov 28

AM: Impressive bounce off the 200dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EST

Bulls are eating bear lunch today as the market bounced smartly off of the 200dma on a failed selloff.  The market will selloff, just not yet.

MARKET BEHAVIOR

The markets attempted a selloff in the first hour of trade, but rebounded just as sharply after getting close to the 200dma. The market tried a second selloff during an Obama press conference, but the market bounced back and is now trading in the green.

Clearly there are people trying to takeout this market, but the market is unwilling to go along and bounces back each time.  All is not well with the world, but you have to respect the market’s resilience here.

MARKET SENTIMENT

Little doubt this early selloff seduced many bears into jumping on the short bandwagon, but this quick rebound shows the market is not ready to selloff yet.  The short trade isn’t working because it is failing to trigger wider selling by other holders.  The recent dip to 1350 shook out most of the weak holders and the current crop of owners is more comfortable holding and less likely spooked out of the market.  In addition, these recent shorts are creating the fuel for yet another short-squeeze.  All of this makes for a tough short.

TRADING OPPORTUNITIES

A pullback is in our future, the market just isn’t ready yet and we have to respect this supportive price action.  This is a perfectly acceptable place to take some long profits off the table, but it is still a little too early to short the market as many bears are finding out….yet again.

While I expect we might see more upside here, the risk/reward is not very favorable for owning stocks here.  There is limited upside remaining in this move accompanied by quite a bit of downside exposure.  But this is just for the short-term trader.  Medium- to long-term traders should expect some near-term volatility but will be rewarded for sitting through it.

INDIVIDUAL STOCKS

AAPL is turning into a high-beta proxy for the markets.  It saw the same early selloff but is now at the day’s highs, although not quite in the green.  A little retracement here is a good thing because the recent run was a little aggressive and unsustainable.  Some churn here makes the rebound more likely to stick.

Stay safe

Nov 28

PM: Fear the Cliff?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM UPDATE

MARKET BEHAVIOR

Markets traded lower and finished at the bottom of the day’s range, just a tad under 1400.  Is this the break bears were looking for, or just a bear-trap to snare all the eager top-pickers?

Volume was a tad under average, but picked up significantly from Monday’s sluggish levels.  We are between the 200 and 50dma and a hair under support at 1400, a key level dating back to August.  We still have a way to go before breaking the trend of lower highs, the last high being 1434.

MARKET SENTIMENT

No doubt today’s declining price tempted many chronic bears to re-short the market.  Maybe they will be proven right, or maybe they are early, only time will tell.  Honestly it can go either way here, but usually when all else is equal, you are better off siding with a continuation.

The market was spooked on some commentary out of D.C. about lack of progress and that was enough to send a shutter through the markets.  But any intelligent investor needs to recognize this is boilerplate political negotiation conducted through the media. Expect it, trade it, profit from it.

We are still early in the negotiation process and I expect today’s issues will quickly be ironed out.  It won’t be until closer to the deadline where we will encounter seemingly fatalistic breakdowns that will send the market materially lower.  Heck we might even go over the proverbial Fiscal Cliff when Republicans and Democrats can’t agree on what exactly what revenue increases and cost cutting looks like. But that is just our elected officials playing a high stakes game of chicken.  If you can’t stomach that turmoil, then maybe you need to find another hobby.

TRADING OPPORTUNITIES

Every single catastrophic selloff in the last five years has been a buying opportunity.  The 2008 financial meltdown came and went.  Euro Contagion has blown over a couple of times already.  The Fiscal Cliff Part I came and went.  Even a downgrade of US Debt was a buying opportunity.  And this time will be no different.

Now some people will say buying prior to these events exposed people to a lot of risk and heartache.  But that is buying before the worry sets in.  We are well past complacency and everyone is already fretting over every interview with politicians or central bankers.  Fear complacency not headlines.

Now this is a longer view, in the near term we probably need to whip around a bit before this is done.  And that is a good thing.  It is the other traders who cannot control their emotion that give us the best profit opportunities.  Seeing how we ran up nearly 5% last week, a modest but dramatic pullback is in order.  Maybe it will start tomorrow, or maybe next week.

As for all the ‘tax selling’ going on in the markets anticipating tax hikes next year, all this money coming out of the markets will need to find a home next year.  Selling now is buying later, just another catalyst for a continued rally next year.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL is rising from the grave.  This is obviously a stock that is swinging dramatically from an imbalance in supply and demand.  In September it was over owned around the iPhone5 launch and more recently the huge wave of selling was overdone.  In all reality the big run is probably coming to an end and it is changing from a buy and hold stock to a trading stock.

FB is also showing life after being left for dead with all they shares that were supposedly going to hit the market after the lockup expiring.  Funny how the day that the stock was supposed to crater it went up huge.  Proof again conventional wisdom doesn’t work so well in the markets.

ET CETERA

I’m experimenting with posting twice a day, once during the trading day and another in the evening.  This will let me share ideas midday while there is still time left to make a trade and again in the evening to help digest all the day’s action.

Stay safe

Nov 27

AM: Markets still finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:54 EST

AM UPDATE

MARKET BEHAVIOR

Stocks are churning above 1400 and in the green at midday as traders demonstrate willingness to buy and hold at these levels.  We are finding support as tentative optimism over a Fiscal Cliff compromise persist.

MARKET SENTIMENT

No doubt cynical bears are leaning into the is market again, but the market is holding up for the time being.  Bears putting on new shorts are creating the fuel for what could turn into one more short-squeeze.

It all comes down to how many new buyers can be tempted to wade in above 1400.  We’re working on our 6th close above the 200dma and 3rd close above 1400.  The longer we hold here, the more tempted people will be to buy.  Of course the irony is their confidence is what will ultimately undo this rally.  Once they are done buying, demand will dry up, and we’ll selloff.

There is always news in the world, both good and bad.  Right now the market is gravitating to the good news and ignoring the bad.  It helps that our politicians appreciate the importance of perception and are doing their best to make it look like they are working toward a compromise.  Of course it also helps that we are at the early stages of the negotiations and it is easy to agree in principle   But the devil is in the details and we should expect some major wrenches in the works when the negotiations move into the finer details.  A major snag is what could trigger the next round of selling.

TRADING OPPORTUNITIES

I still think there might be a little more upside left in this move, so wait a little longer before putting on a short position.  But we are getting close to the end of this run and longs should start looking to lighten up.  Of course this is directed toward the swing traders, longer viewed investors can continue holding, just expect some near-term volatility and be prepared for another dip before all of this is resolved.

Stay safe

Nov 27

Buy, sell, or hold?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets finding support after last week’s sharp rally, but how long can this keep up?  Maybe the more important question, is wise to holdout for those last few dollars?

MARKET BEHAVIOR

It was an interesting day in the markets.  Initially the market sold off, but it found support and finished near the day’s high, although still in negative territory.  AAPL made a huge comeback and no doubt contributed to some of the tech market’s strength.

Today’s volume was below average, but not surprising being the first trading day back from the holiday weekend.  Today markets the 5th consecutive day above the 200dma and it seems the worst fears of careening off the fiscal cliff have dissipated.  Of course this rally creates room for another bout of pessimism to take hold.

MARKET SENTIMENT

It is pretty obvious we’ve come a long way in a short amount of time.  The speed of the bounce has not allowed many people to change sides and we still have a fair number of bears gunning for the markets even if they were chased out in last week’s short squeeze.

Where we head from here largely depends on how other people are positioned.  There are still a lot of bears out there, but many of them were chased out of their shorts last week, meaning they have renewed ammunition to use against the market.  We also had some momentum buyers jump on board the break above the 200dma and 1400 resistance/support.  Momentum buyers are a fickle group and will bail at the first hint of trouble.

Both of these factors point to selling pressure in the near future, but the counter argument is these things often go further and longer than most expect.  Combining those two ideas, we might expect a little more upside before this bounce runs out of steam.

TRADING OPPORTUNITIES

As I shared last week, we are close to the end of this move, but I would like to see one last push higher before rolling over.  I thought we might get that at the open and that would have made for a great exit/short.  But opening lower makes it more likely we might see one last push higher before rolling over.

Of course debating a little higher or simply lower is nothing more than trying to pick a top and gambling at best.  We need to accept that we can never sell the top and it is foolish to try.  Either we intentionally choose to sell early, or the market forces us to sell late.  A case can be made for each, but personally I prefer selling early because it is far less stressful to be in cash.  Holding temps brings out the emotions greed and regret.  When I’m in cash, it keeps my head clear, allowing me to identify and pounce on the next opportunity.  I’ll always miss some upside, but I’m okay with that because it means I will be in a better position for the next move.  The goal isn’t to make all the money, only the easy stuff.  Leave the rest to the gamblers.

More often I find people who think it is better to sell late because the logic is you capture the entire move and leave the door open to an extended run higher.  And don’t get me wrong, I understand the logic behind the idea.  But in reality it works less well in practice because human emotions of greed and regret get in the way when trying to sell something on the way down.  We start obsessing about what we could have sold it at just a couple of days ago.  Then we are tempted to wait for it to come back.  If it comes back, greed kicks in and instead of selling we decide to hold a bit longer.  If it falls again, we convince ourselves this is just a minor dip and it will continue higher if we just wait a little longer.  I know because I’ve been there.

The beauty of selling early is you don’t have any of those doubts.  And the proof is in the pudding. I’ve read countless interviews with successful traders and virtually all of them claim a major key to their success is selling too early.  In fact, I can’t recall a single one that said he prefers to sell on the way down.

Like many aspects of trading, this is an individual decision and you should stick what gives you the most success.

Stay safe

Nov 23

Why you should sell this pop

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Really strong rally on the abbreviated, post-Thanks Giving trading session.  Obviously volume was ridiculously light, but it was real money exchanging hands and low volume profits are just as real as their higher volume counterparts.

MARKET SENTIMENT

I didn’t expect today’s strong rally, but at the same time it didn’t surprise me either.  The press is attributing it to strong Black Friday sales, but that is baloney.  All of the decision makers were out of the office and today’s trade was nothing more than tripping autopilot buy orders.  Most of them were stop-losses from shorts, but there were also some breakout buying as we easily cleared resistance at 1400.  But rather than traders sitting in front to their screens making decisions to buy or sell, last week traders placed tripwires above and below the market as a risk management technique to prevent them from being caught with their pants down while they were on vacation.

The thing we have to be wary of with today’s trade is people are not as committed to these gains because most didn’t actively chose to buy these levels.  Instead it was automated risk management that triggered this pop.  Shorts were protecting against larger losses and longs were buying the breakout so they don’t risk being left behind.

This setup makes for an awfully fragile rally and we covered a ton of ground in five trading sessions.  There is no way the rate of this rally, mostly driven by a short squeezes, can continue.  The point of maximum pain for shorts is where the market will peak and turn lower.  Decisively breaking 1,400 could be that point.  Or we could regain all the post-election selloff and test the 50dma to fully humiliate bears before turning lower.  But either way we are far closer to the end of this thing than the start.

TRADING OPPORTUNITIES

Longs should lighten up after this strong run.  It is possible we’ll see a little follow-on buying when the market opens on Monday, but the smart money is taking profits here, not buying the breakout.  The goal isn’t to top tick the market, but to make the easy money and let someone else shoot themselves in the foot by holding too long.  We’re currently in a swing trader’s market as the pendulum swings back and forth between bears and bulls.  Expect some turbulence in the near-term intended to demoralize both bears and bulls before the market finally reveals its true intentions.

I expect a continuation of the current bull market because there is nothing new and unexpected lying in front of us.  It is the fear of the known, not the unknown, that presents the best profit opportunities for the savvy trader.  Everyone already knows about the Fiscal Cliff, Debt Ceiling, European Debt Crisis, Middle East conflicts, and slowing China.  The fact that everyone is already talking about, even obsessing about these issues means we can safely ignore them.  Their fear is our profit opportunity and it is the crowd’s reluctance to buy that creates the asymmetric trade.

For the time being, lock-in swing trading profits and anticipate for the impending pullback.  But over the medium term, plan for an upside breakout from this consolidation.

Stay safe

Nov 22

Holders are holding

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets added a little on this pre-Thanks Giving session.  As expected, volume was far under average.  But seeing the market close above the 200dma is encouraging as it demonstrates holders are not eager to flip their shares.

Friday’s shortened session will have even less trade and most likely make for another boring session.  But after the last couple months, boring is good.  Don’t expect any real buying or selling until next week.  There is always political risk in the Middle East, but outside of that not much should happen until big money managers return to the office.

MARKET SENTIMENT

It is constructive to see people continue holding stocks after the large bounce back to the 200dma.  That means most holders are waiting for higher prices and their continued holding will keep supply tight and support prices at these levels.  This current stability is demonstrating everyone who thought the world was coming to an end already sold and the current crop of holders has a longer-term view.  This shift in ownership is what put a floor under the market.

TRADING OPPORTUNITIES

If there is one thing the market doesn’t do well, it is finding the perfect balance point.  Instead it tends to overshoot on both the high and low side.  We sold off more than we should have and no doubt we’ll also bounce higher than we ought to.  Expect prices to continue higher next week, but don’t get greedy and be prepared to lock in profits because while the news might be random, the market’s reaction to it isn’t.  The market will get a little frothy, we’ll run out of buyers, and the inevitable negative headline out of DC, Europe, or the Middle East will send of lower.  And if we’re being honest here, it isn’t the headline that sends us lower because there are negative headlines every single day.  It is running out of buyers that knock the markets lower.   But people don’t realize this because the financial press gets paid for coming up with reasons and they always find something to blame it on.

After we peak and come back down, we might make a new low, or we might bounce prior to 1350.  But the great thing is it really doesn’t matter to the trader who is in cash and patiently waiting for the next trade.  The market will bounce when it bounces and the opportunistic trader will be there to make money.

The game plan is higher, lower, and then higher again.  Sounds easy enough, but the money is made in the details, in this instance, getting the timing right.  And that is why we watch to see what everyone else is doing so we can put the odds in our favor.

Stay safe