Jan 19

WR: New 5-year highs

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review

Stocks set new 5-year highs, but how much longer can this rally keep it up?  How are you going to trade AAPL’s earnings next week?  Are there other ways trade this than just buying ahead of the announcement?

MARKET BEHAVIOR

The S&P500 broke out to 5-year highs this week and printed levels we haven’t seen since 2007.  Volume for the week was average as most traders returned from the holiday break.

The market is 65-points above the 10-week moving average and 90-points above the 40-week moving average.  (similar, but slightly different from the 50dma and 200dma)  While it is not unusual to trade this high above these moving averages, it makes it less likely we will go significantly higher before the MA’s have time to catch up.  There are two ways the market closes the gap, one is dipping back to the moving averages, the other is trading sideways and letting them catch up.  The 10-week moving average is turning up quickly and the 40-week is edging higher as well so we might have to wait too long before resuming the uptrend.

MARKET SENTIMENT

What a difference a week makes.  Last week’s negative headlines disappeared and all of a sudden the world is a much better place.  This is a bit of an exaggeration, but the market’s attention has moved away from pessimistic worries and is focusing on upbeat data that justify the recent strength.  This is the typical tail wagging the dog that goes on in the financial press.  Journalists look to see what the market is doing and then dig to find plausible reasons to explain the move.  If the market goes up, they report positive developments.  If the market heads lower, they highlight the negative.  I don’t blame them for this, they are journalism majors and just doing their job, but as traders we have to see through the noise and figure out what is really driving the market.

We came from an extreme oversold condition following the election and no matter what the news was (impending Fiscal Cliff showdown), we were bound to rally because after all the sellers sold, supply dried up and there was nowhere to go but up.  And here we are, 140 points higher and no one can claim the market is still oversold.

So where do we go from here?  The economy is slowly improving, recent earnings have been decent, and politicians are making progress on the Debt Ceiling, but that is what we already know and how traders justified buying this rally.  To get the market heading even higher we need even more.  Either we get better than expected fundamental data or we need these fence-sitters to jump in and start buying.  Without these catalysts, the market will probably trade sideways and let the moving averages catch up.  And this is not a bad outcome either.

TRADING OPPORTUNITIES

Expected Outcome:
Sentiment has improved dramatically in recent weeks and the market isn’t paying nearly as much attention to negative headlines.  The Debt Ceiling is a page three-story as the teflon rally breeds complacency.  I have little doubt the market can keep heading higher next week as we find new shorts to squeeze, but I’m not in the business of picking tops.  I want to make worthwhile a profit and then move on to the next trade.

To clarify, this position is only intended for the more active traders who try to time the market’s regular fluctuations.  Longer viewed holders should keep holding, but expect some near term volatility before the market continues rallying.  While many of you hold for longer periods of time, understanding what the market is doing in the near-term helps manage the anxiety when the market goes through a normal and healthy dip.

Alternate Outcome:
The market can continue climbing from here.  The distance above moving averages is still not at extreme levels and we have room to go.  There are shorts still hanging on and pessimists to be converted.  This could give us one more push higher, but what’s another 20-points gain on a 140-point rally?  If a trader got in early enough, it isn’t worth risking existing profits for a few more dollars.

And don’t get me wrong, I’m not predicting a crash or a sizable pullback, just step back after two big steps forward.  I swing-trade the market and try to take advantage of these smaller market moves.  Depending on market action, next week I could jump back in if I like what I see, but this is my trading strategy and time horizon.  You need to follow what you are most comfortable with.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had an exciting week as the stock broke recent support at $500 and plunged to $484 before finding support.  Most of the selling was from a high concentration of automatic stop-losses placed under the widely followed $500 level.  But as soon as these autopilot orders were triggered, the market found a bottom because most of the holders who bought during recent weakness are willing to hold through some volatility.  They are value investors taking a longer view on the stock and were not going to let a $15 dip change their entire investment thesis.

AAPL’s earnings are coming up next week and will mark a significant turning point for the stock.  Bears have leaned into the stock recently and the burden of proof falls on them.  The stock sold off in anticipation of slowing growth and shrinking margins and that has been the lead weight dragging the stock down.  If it turns out the concerns were overblown, expect this weight to be cut free and the stock to pop higher.  But there are no guarantees in the market, especially when dealing with such a polarizing stock.  The safer play would be to trade the stock after earnings.  If earnings are bad, the stock will be oversold before value investors step in and prop it up.  If it beats, the stock will surge higher over coming days and weeks.  In either case, the stock would be buyable after earnings and you avoid the risk of holding through earnings.  The one circumstance I would not buy after earnings is if the stock traded flat.  Without an oversold dip to buy or a strong rally to jump on, I’d stay out and look for something better to trade.

Stay safe

Jan 18

PM: Is it finally time to be cautious?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Markets recovered from early selling and set new highs, but rather than celebrate, I’m growing nervous.  AAPL is settling around $500 leading into earnings, but look for big upside and limited downside after earnings.

MARKET BEHAVIOR

The market opened weak and finished strong, this time adding a third of a percent and setting another new high.  Volume was 12% higher than average and a tad above Thursday’s breakout.

MARKET SENTIMENT

Stocks had two strong intra-day surges, one recovered early losses at mid-day and the second pushed to new highs into the close.  No doubt these strong rallies were fueled by shorts covering and day-traders buying the now routine afternoon recovery.  For weeks the market has opened weak and finished strong, to the point of being a broken record, but beware of the market’s trap.  Once you think you have things figured out, the market changes the rules.

Republicans offered a deal that would push the Debt Ceiling back three months and the market seemed to like that combined with other positive earnings related news.   After the market is clearly marching higher, predictions of a pullback have been silenced by relentless strength and repeated 52-week highs.

Rather than be lulled by the complacency taking hold in the market, the savvy trader is getting nervous.  Anyone buying the rally here is late to the party and is taking a huge risk.  The market is most dangerous when it feels the safest.  This is the invincible rally that nothing seems to phase, but that is what I am most afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
I’m increasingly cautious here and anyone who has been reading these posts will detect the change in tone.  The rally into the close is what finally gave me pause.  Ideally we would have traded sideways for a bit before marking a new high, allowing us to build more of a base.  No doubt we can continue higher, but this seems like a good time to take profits and look for the next high-probability trade.  The goal isn’t to make all the money, just take the easy stuff and let the gamblers try to pick the top.

There are two ways this rally will continue, on is fast and the other is slow.  Fast is not sustainable and will reverse without warning.  The second is steady and deliberate.  The latter is what big moves are made of, but given the slow nature of  sustainable moves, there will be plenty of time to jump back onboard once the market proves itself.

Alternate Outcome:
If the expected trade is taking profits, then the alternate is doubling down.  No doubt we could see the market surge higher as more shorts get chased out of the market, but this is not a sustainable phenomena and buying will climax and reverse quickly.  Timing these moves takes the kind of precision that can only be achieved through pure luck and is not a game I want to play.

No doubt I’m getting out of the market early, but I’m okay with that.  If I’m wrong, it is a lot easier to get back in than recover lost profits from holding too long.  If we see the market pullback and find support at 1473, I’ll consider buying back in.  If the market surges higher, I’ll look for a place to short the market. If we break under 1473, I’ll also look for a short entry.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL dipped under $500, but recovered mot of those losses by the end of the day.  The $500 level is far less significant after all the stop-losses were triggered earlier this week.  That is why this break under $500 today was fairly uneventful.  We are a couple of days from earnings and shouldn’t expect the stock to do much before then. Both sides made their case and now we wait to see who is right.

If the stock disappoints, expect initial weakness but the stock will quickly find a floor as value and income investors snap up discounted shares.  If AAPL surprises to the upside, look for a big move on the release, but continue holding for additional gains over coming weeks as the pessimism is flushed from the stock.  Limited downside and huge upside makes for a great asymmetrical trade.  But as always, no matter how confident you are in a trade, make sure you can be wrong and still survive to trade another day.

Stay safe

Jan 18

AM: Early weakness is bullish

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:09 EST

S&P500 daily at 1:09 EST

AM Update

Markets opened lower, but found their footing in midday trade.  AAPL broke $500 today, but it was a nonevent this time and already found support.

MARKET BEHAVIOR

Stocks opened modestly lower and the S&P500 slipped back under 1480, but the slightly negative trade is supportive of the recent breakout.  The market is still above previous resistance at 1473 and a slight pullback shows buying isn’t getting out of hand.  The most sustainable rallies are two-steps forward, one-step back.  Markets that lunge ahead without pauses are more prone to breaking down.

The recent pattern is trading down in the morning and rebounding in the afternoon.  We will see if this trend continues, but even if it doesn’t rebound today, closing above 1473 and bouncing back on Monday will still be supportive of a continuation.

MARKET SENTIMENT

The pessimists are already shooting holes in this breakout because of this morning’s selling.  “A one-day breakout that fails immediately is not a positive technical sign.” @bespokeinvest  But I am on the other side, I see early weakness as a sign of strength and continuation.  Rallies are fueled by cynicism and I will be most concerned when we run out of naysayers.

The least sustainable move the market could make is two more strong up-days.  That would suck in all remaining buyers and the market would collapse on the subsequent lack of demand.  While that would have been and ideal setup for a swing-trade, our current dip is more supportive of a continuation.

The market is setting up for a near-term correction, most likely triggered by Debt Ceiling bickering, but the market is not ready for that trade just yet.  Ironically, the Debt Ceiling correction won’t happen until everyone forgets about the Debt Ceiling.  When the market is rallying, the financial news is generally upbeat.  Between the positive price action and improving sentiment, traders will be lulled into complacency.  When the group appears calm, the individual tends to relax too, but the instinct that worked so well for our ancestors is ill-suited for the world of high finance.

TRADING OPPORTUNITIES

Expected Outcome:
As long as we hold 1473, that supports a continuation.  We can’t go up every day and dips are a natural and healthy part of going higher.

Alternate Outcome:
There are two things that will kill this rally, 1) a huge surge higher and 2) complacency.  Keep an eye out for either of these.  The Debt Ceiling debate is around the corner and that could be the catalyst to kick off the corrective wave.

AAPL daily at 1:09 EST

AAPL daily at 1:09 EST

INDIVIDUAL STOCKS

AAPL traded under $500, but just like we described yesterday, the stock has already been-there-and-done-that, so a violation of this level didn’t trigger a second large wave of stop-loss selling.  Dipping to $496 this morning was a non-event and the stock already found support is trying to regain $500.   Success in this game is knowing what the other guy is thinking and how he is positioned.  It isn’t hard, you just have to know what to look for.

Stay safe

Jan 17

PM: Reasonable and measured breakout

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks finally broke 1473 and sent bears running for cover, but the price gain and volume was not enough to exhaust all the available demand and more fuel remains.  AAPL took the day off, but it is an earned and deserved rest after Wednesday’s powerful rebound.

MARKET BEHAVIOR

The S&P500 decisively broke through resistance on higher than average volume.  But while the day was significant, the 0.6% rally was far from overdone and represents a reasonable and measured move.

MARKET SENTIMENT

Bears and pessimists had another bad day.  When there is so much wrong with the world, but the market is rallying, you have to side with the market.  There are countless reasons the market should be weak from too-far, too-fast to the Debt Ceiling, and I can’t think of a single fundamental reason the market should rally 180 points over two months, but that is exactly what happened.

When a technician or fundamentalist looks at this market, all they see are reasons it should go lower, but if you judge the market by sentiment and supply and demand, it is pretty clear that the only place for this market to go was higher.  There is real psychology and economics behind this.  When everyone says the market should go down, they act on this expectoration and sell in anticipation of the market breaking down.  After all the pessimists get out, selling climaxes, supply dries up, and there is no where for the market to go but higher.  A lot of people say it is foolish or even impossible to predict the market, but that is just because they are doing it wrong.  If you know what to look for, the market’s behavior start making a lot of sense.

TRADING OPPORTUNITIES

Expected Outcome:
Thursday’s breakout was not overdone and the pullback from the day’s high shows this breakout was not overdone.  There is still some doubt and cynicism left and that is the fuel to keep the rally going.  But at the same time, don’t be greedy and get ready to take profits.  We’re in this to make money, not top-tick the market.

Alternate Outcome:
Nothing is certain and no doubt there is downside risk.  Every point higher elevates this risk and we need to be more cautious the higher we get.   Recent support at 1473 should provide support in the near term.  If the market rolls over on Friday and can’t hold the breakout, the market is most likely headed lower to at least 1450.  But more often than not, rallies like this end with surge higher on strong volume before reversing. A 0.6% gain and 10% above average volume are far from overdone in my book.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL traded mostly sideways, holding a slim margin above $500.  It missed the broad market’s rally, but given the huge surge yesterday, a rest day today is healthy and expected.  Most of the negative supply chain reports and analyst downgrades are out there and factored into the price.  By this point most bears and bulls have positioned themselves ahead of next week’s earnings.  Unless some new information comes to light, the stock will probably trade sideways into earnings.  The big advantage for bulls is the stock is at the lower end of the recent trading range, reducing the risk of a downside move on disappointing earnings.  Expectations have been dramatically lowered and the stock already cleared out all the stop-losses under $500.  While there are no guarantees in the market, it seems like there is less downside as compared to the upside.

Stay safe

Jan 17

AM: We finally did it

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:44 EST

S&P500 daily at 1:44 EST

AM Update

Stocks finally broke the logjam at 1473 and surged higher on all the autopilot buying.  Can we keep this up or is the market peaking?  Should we be concerned that AAPL is not participating in today’s rally?

MARKET BEHAVIOR

It finally happened, the S&P500 broke 1473 and continued higher through the morning.  This decisively set a new 52-week high and pushed us into levels we haven’t seen since 2007.  We clearly put the post-election selloff behind us and almost everyone with a diversified portfolio is holding winning positions.

MARKET SENTIMENT

The rally easily sailed through resistance at 1473 as early buying came from bears covering shorts and momentum traders jumping on the breakout.  Whenever you have a lot of people watching the same level, it makes for an exciting trade when we finally break through.

Today’s rally puts anyone afraid of the impending Debt Ceiling debate in a very uncomfortable position.  Do they chase the market higher or risk being left behind?  Fear of regret is a powerful emotion and isn’t exclusive to declining markets.  The bigger question is if the early buying from shorts and momentum buyers entices follow-on buying from a deeper pool of investors, namely those watching from the sidelines.

While those worried about the Debt Ceiling have legitimate concerns, they are obviously early.   There are a few week before the Debt Ceiling debate reaches crisis levels and in the market that is an eternity.  Expect the market to continue trading on the imbalance between supply and demand over the near-term.

The trend is higher because supply is scarce.  Those afraid of heights or headlines bailed their positions weeks ago.  The buyers that replaced these worrywarts demonstrated their willingness to own stocks in the face of these issues when they bought in spite of all that is wrong in the world.   Their confidence makes them more likely to hold through volatility and this holding keeps supply tight.  No matter what the fundamentals, when supply is tight, prices go up.

TRADING OPPORTUNITIES

Expected Outcome:
Owners of this rally have a far better decision head of them, lock in profits or hold for more gains.  Those are the trading decisions we love to make.

Markets moved decisively higher on the automated buying triggered by the breakout, but the chase hasn’t reached epic proportions and today’s rally is still far less than a 1%.   While making a new high is significant, the resulting move is reasonable, measured, and still a ways from capitulation levels.  Swing-traders should raise their stops and keep an eye on the exit, but it is still okay to continue holding for the time being.  If the buying accelerates we will need to reevaluate.

Alternate Outcome:
Will real buying follow today’s autopilot rally?  If most traders are more afraid of the Debt Ceiling than being left behind, this rally will stall and collapse.  But that is the rational trade and often emotion gets the better of traders.  Humans are naturally wired to feel more comfortable in the group, and if it appears like the group is not afraid of the Debt Ceiling and moving on, then many traders will forget about their concerns and run to catch up with the safety of the herd.  It is okay to hold stocks here, but watch out for stalling.

AAPL daily at 1:45 EST

AAPL daily at 1:45 EST

INDIVIDUAL STOCKS

AAPL is resting after yesterday’s monster rebound from $484.  It isn’t participating in today’s breakout, but given what it did on Wednesday, we can cut the stock some slack.  It is still holding above $500, but Tuesday’s dip greatly diminished the importance of this level since most of the stop-losses were triggered and are no longer there.

Stay safe

Jan 16

PM: Stocks struggle with 1473 again

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Market recovers early losses and closes at above 1470, but still can’t break above 1473.  AAPL is everyone favorite stock again as it bounced back from the yesterday’s panic selling.

MARKET BEHAVIOR

Stocks closed above 1470 for the fifth straight day and in typical fashion sold off early before rebounding.  The S&P500 is magnetically attracted to 1472, but can’t break above this hard ceiling.  Volume was below average, but in line with yesterday.  The low volume suggests many traders are waiting for the market to make its next move.  This pause is like a dam slowly building pressure, the longer we sit here, the larger the resulting move will be.

MARKET SENTIMENT

It is interesting to watch the market stall every time it bumps into resistance at 1473.  Traders support this market every time it dips, yet they won’t step over that line and buy 1473.  With five-days at this level, it is quickly turning into an endurance event between bears and bulls.  Who has the bigger war chest to either prop up stocks at these levels, or prevent them from advancing any further?

Most often you see a hard-line like this in an individual stock when a major shareholder instructs his broker to buy any time the stock dips to x, or sell any time it rises to y.  But the S&P500 is far too large for any single manager to put a lid on and it is largely a coincidence that so many traders are making identical trades at the same levels.  (Some people might have more sinister conspiracy theories, but I don’t buy into that.)

Other forms of resistance are due to a stock’s ‘memory’.  You see this when a stock is recovering from an earlier selloff and underwater  holders are finally able to get out at break-even   But that doesn’t apply here because at four-year highs, virtually everyone is sitting on a profit.  So who is selling at 1473?  It might be bears expecting a double-top and shorting ahead of the expected pullback.  Maybe it is some conservative traders locking in profits.  It is hard to think of another major group selling here..

But selling is only half the equation.  We could also be hitting our head on resistance from a lack of follow-on buying.  But the thing that’s curious is why is the market is buyable at 1469, but not at 1473?  If a person was expecting a correction and wouldn’t buy at 1473, surely they wouldn’t buy at 1469.  So I still don’t understand why we keep bouncing back to 1473, but can’t break through.  Often the market works in mysterious ways.

TRADING OPPORTUNITIES

Expected Outcome:
With everything else being equal, stick with the trend.  With each passing day 1473 becomes a bigger deal.  If I were a short, 1473.5 makes for an obvious stop-loss, and you better believe everyone else is using that same convenient stop.  Breakout buyers are also eying that exact level.  The more obvious and watched a level, the bigger the move through it will be.

Alternate Outcome:
While the trend is higher and holding this price level for five days is supportive, the inability break 1473 is concerning. There are a lot of buyers sitting in the wings waiting for the breakout, but if it doesn’t happen, the market can slide under its own weight if buying dries up.  The longer we hold here, the more likely it is support will crumble under our feet.  If we don’t break through and hold 1474 tomorrow, I’m going to reevaluate my expectations of an upside breakout.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL made headlines again, this time for bouncing back decisively from yesterday’s plunge.  No doubt a lot of the aggressive shorts that laid into the stock as it broke under $500 were stung this morning when AAPL turned their world upside down.  Easy come, easy go.

AAPL might dip under $500 again, but if the stock recovers to $600 in a few months, does it really matter?  Yesterday’s plunge was scary and shook out most of the weaker hands.  Anyone without strong conviction and confidence in AAPL sold yesterday, so that greatly reduces the chances of it happening again simply because all the sellers are already out of the stock.  For this reason, I expect AAPL will likely hold between $500 and $520 leading into earnings.

Stay safe

Jan 16

AM: $#!+ or get off the pot

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:47 EST

S&P500 daily at 1:47 EST

AM Update

The market is flirting with 1473 and AAPL bounced back from yesterday’s dip under $500.  So far it is shaping up to be a good day.

MARKET BEHAVIOR

Stocks opened lower, rose to 1473, and are pulling back slightly in the early afternoon.  The pattern of weak opens continues, as does hitting our head on 1473.  Is the market resting before making an aggressive assault on 1473 by the end of the day?  Bulls are hoping so, but stalling for fourth day at 1473 is becoming a concern.

MARKET SENTIMENT

Buying dries up at 1473 and the sideways trade continues.  A longer consolidation often means a stronger move when it does happen.  This is because a particular resistance level becomes followed by more and more traders with each passing day.  1473 is quickly becoming a key buy signal for both momentum traders and a stop-loss for shorts.  That concentration of trades around one level sets the stage for an explosive move when we finally penetrate that level.  AAPL’s trade yesterday was a perfect example of this phenomena as the stock broke under $500.

The longer we hold these levels, the more confident both sides become.  Bears are emboldened by the inability to break 1473, while bulls see each failed selloff as a victory.  There is a good mix of bears and bulls in the market, so we don’t have a strong asymmetrical trade to take advantage of.  Under balanced conditions, the side that usually wins is the one that goes with the trend.  The trend is higher and that could ultimately break tie in this stalemate.

But the more balanced sentiment in the market limits the upside potential of a continuation.  Bears and pessimists fuel rallies, and without an overabundance, the rally can’t drive too far.  An upside breakout will draw in many of the sideline watchers and chases out the last shorts, but after that buying exhausts itself, we could fall under a vacuum of new demand.

TRADING OPPORTUNITIES

Expected Outcome:
For those that are long, stay long and wait for the expected breakout.  This is a bad place to be short right now and wait for further signs of weakness before getting in front of this market.  Trading against the trend is a really hard way to make money and I don’t recommend it.

Alternate Outcome:
Failing to break 1474 today would be a red flag and if we can’t grab that level by Thursday, we need to reevaluate our position.  For the longer-term trader this is trivial because it doesn’t matter if you zig and then zag, or zag and then zig.  But for those of us swing-trading these minor moves it makes a world of difference.  If we get turned back from 1473 again, watch for a dip back into the trading range and possibly a test of 1450.

AAPL daily at 1:57 EST

AAPL daily at 1:57 EST

INDIVIDUAL STOCKS

AAPL bounced back and recovered $500.  This doesn’t mean the coast is clear, but it is extremely encouraging to see the selling exhaust itself and reverse.  Anyone who follows this blog knows there was not a lot of supply under $500 and selling would stall once the stop-loss selling ran its course and that is exactly what has happened.

AAPL is buyable here, just like it was buyable three-days ago.  This is a longer-term trade and anyone in this name needs to expect some near-term volatility.  If you find yourself with such a large position that you can’t sleep at night after days like yesterday, then you need to lighten up.

It will be interesting to see if AAPL retests $485 or if this was the last major shakeout before earnings.  The one thing that makes me cautions is so many people viewed this dip as a buying opportunity and that makes the contrarian in me nervous.  But if these new buyers are willing to hold the stock through some volatility, that keeps supply out of the market and we should rally.  Sometimes the contrarian trade is going with the market and this might be one of those times.

Stay safe

Jan 15

PM: A tale of two cities

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks closed positive and the recent support is indicative of a continuation.  AAPL sent waves through the market as it broke $500, but is it setting up a double-bottom?

MARKET BEHAVIOR

The market closed above 1470 for the fourth consecutive day and it was the third time early selling failed to gain traction and bounced back in the afternoon.  The market is one point from setting a new 52-week high, but it continues struggling with 1474.  Volume was below average, but higher than Monday.

Bears cannot recruit new sellers to join them in bringing down the market, but at the same time bulls cannot break through the 52-week high either.  No doubt we will see a resolution to this stalemate in the next couple days.

MARKET SENTIMENT

I see a fundamental difference between bears inability to recruit sellers versus bulls struggling to entice buyers.  It is always easier to get people to sell, especially when headlines are negative and everyone is yelling overbought.  So why are bears having such a hard time shaking anyone loose?   Most likely it is because holders don’t want to sell and are comfortable holding through some near-term weakness.  These longer-viewed investors are keeping supply off the market and preventing any selloff from building momentum.

On the other side, bulls are dealing with reluctant buyers.  There are plenty of people standing around watching, but they hang back, unsure of these new levels.  But unlike bears who have failed to trigger follow-on selling after multiple market dips, bulls have not tried to get their bandwagon rolling yet.  Things could get exciting if the market finally breaks 1475 as shorts are squeezed and momentum buyers jump onboard.  But bulls must make their move before gravity takes over and the market drifts back to the lower end of the trading range.

TRADING OPPORTUNITIES

Expected Outcome:
Holders continued holding in the face of early weakness.  Their resolve to see this thing through keeps supply out of the market and this confidence supports an upside resolution to this consolidation.  How big that move will be is anyone’s guess.  A huge surge higher might not be sustainable, but a more modest one could let this market continue higher for a bit longer.

Alternate Outcome:
Bulls only have so long to make their move before they lose their credibility and the market will at least retest support at 1450.  When all else is equal, gravity takes over and prices slip because there are many reasons people sell, but only one reason to buy.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

This is a tale of two cities.  While the broad market is holding up nicely, AAPL had a major violation of support.  With so many stop-losses concentrated under $500, it was too rich of a target for the market to pass up.  But now the technical driven selling came and went, the question is where do we go from  here.

In the comments of last night’s post I wrote about the psychology of a double bottom and what makes it work.  I’ll copy an excerpt here for those that missed it.

“We are seeing the psychology that makes double-bottoms such a common reversal pattern. The first rebound sucks in the eager buy-the-dip crowd, but because nothing in the market is easy, they get humiliated by the next pullback. A key part of the double bottom is the second bottom undercuts the first because this flushes out the last of the hopeful holders and sets the stage for a rebound.”

“There are no guarantees in the market, we are simply playing a game of probabilities. AAPL’s recent strength brought in bottom-pickers and they are running for cover these last two days. The rest of the ownership is value buyers who bought the stock in the face of recent declines and are willing to sit through some weakness. We could easily see further weakness, but there is a limited number of bottom-pickers remaining in the stock and once they are gone, supply will dry up and the stock will bounce.”

But while I don’t see a reason to bail on AAPL after today’s selling, this is a good time to talk about risk management.  First and foremost, if you are uncomfortable and uncertain, sell and reevaluate.  It is always easier to think clearly when you are outside the market looking in.  And you can always buy back in once you formulate a new plan of attack.

Another useful strategy is to limit your risk in any one trade to 3%.  Don’t mistake this with a 3% position or a 3% stop-loss.  That 3% limit is the amount of your account value you can lose on each trade.   If you have a $100k account, that means you can risk $3k on a single trade no matter how much you have invested.  If you have $50k in AAPL then you can take a 6% loss, but if you only have $10k invested in AAPL, then you can sit through a 30% pullback.

The reason for the 3% loss limit is it lets you live to fight another day.  With this you have to be wrong more than 20 times in a row before your account value will be cut in half.  Between the 3% rule and your calculated stop-loss target, you can figure out how large of a position you can take.  The tighter the stop-loss, the larger position you can take.

Stay safe

Jan 15

AM: Market bounces back, AAPL sellsoff

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:75 EST

S&P500 daily at 12:75 EST

AM Update

The market bounced back from early weakness for the third day in a row, showing bears are struggling to recruit new pessimists needed to drive the market lower.  AAPL is downgraded and dips under the overly-followed $500 level and triggers a wave of autopilot stop-loss selling.  But chances are this is a short-lived event.

MARKET BEHAVIOR

Stocks opened weak, but are recovering in mid-morning trade.  We dropped to 1463 before bouncing back.    While the day is still negative, it is encouraging to see the market find a floor and the early weakness didn’t trigger a larger wave of selling.  This was the third day in a row bears tried to break the market but were rebuffed just hours later.  Bull markets often see early weakness followed by late strength, and that is exactly what we have here.

MARKET SENTIMENT

It could be assumed early weakness is driven by active traders trying to get a head start on the expected pullback.  But this smaller group doesn’t have sustaining power and their selling pressure quickly fizzles after they fail to induce other holders to join the selling.

This pattern is encouraging because it shows the larger group of holders willing to hold through some weakness.  This makes sense because all the negative headlines are already out there and anyone afraid of this market is not holding stocks.  This means those that are holding here are doing it in spite of the pessimism and recycling the same old headlines won’t spook them out of their position.  If most holders are taking a longer-term view of the market, that will send stocks higher because their confidence and conviction keeps supply out of the market during any weakness.

TRADING OPPORTUNITIES

Expected Outcome:
Three failed selloffs suggests the next move is higher.  With all the shorts that jumped in the market over the last few days, there is a good amount of fuel for a short-squeeze when we break through 1472.  The question then becomes how to trade the short-squeeze.  Do we hold for further gains, or lock in those profits before demand dries up?  Good question and I really don’t have an answer.  It is never wrong to lock in profits after a nice run, but it is also a shame to jump off a larger run prematurely.  All we can do is evaluate the situation as it develops and make our decision when we get to that juncture.

Alternate Outcome:
There are a lot of new buyers that jumped in after the market passed 1450 who would be in the red if we fall under this key technical level.  Expect a dip under this widely followed level to trigger a wave of selling that could push the market down to the 50dma.

AAPL daily at 1:00 EST

AAPL daily at 1:00 EST

INDIVIDUAL STOCKS

AAPL makes headlines again as the stock falls under $500 and hits a low of $484.  Obviously AAPL is the next NFLX and GMCR.  This is clearly another case of a high P/E stock that traders put an unrealistic valuation on and obviously the stock’s P/E will contract to more normal levels.  Wait, what’s that?  AAPL’s P/E is already well below that of the S&P500?  How can that be???

Okay, sarcasm aside, reports of AAPLs or Apple Inc’s death are greatly exaggerated.  Today’s weakness is nothing more than a large wave of auto-pilot stop-loss selling triggered by falling under an overly-followed support level.  Some analyst caused the selloff by downgrading the stock and while his might be unfair, most analysts are analysts because they can’t trade, so why is the market so concerned when one of these guys downgrades a stock?  Trade fundamental news, not one person’s opinion.

In the markets you are either early or you are late.  No one ever top-ticks the market except through pure luck.  Obviously buying and holding AAPL here is early in the recovery, but hopefully any buyers who stepped into this stock knew this was a longer-term trade and were willing to hold through some near-term volatility.  No doubt AAPL could head lower from here, but $485 is the safest level to own AAPL in almost a year.  Just as anyone who bought on the iPhone5 excitement how that worked out for them.

Nothing changed in the AAPL story except the stock got a bit cheaper.  Hopefully traders are not letting some emotional near-term volatility change their rational long-term analysis.

Stay safe

Jan 14

PM: A third close above 1470

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The bears just can’t break this market and AAPL is finding buyers at $500.

MARKET BEHAVIOR

The S&P500 slid in early trade, but found a bottom at 1465 and recovered most of those losses by the close.  This marked the third consecutive close above 1470.  Volume was slightly below average as traders were taking more of a wait and see and not overly excited about the early selloff or subsequent rebound.

MARKET SENTIMENT

There are always two ways to look at anything in the market.  One side will say the inability to break above 1472 shows a lack of conviction and follow-on buying and it is just a matter of time before the market doesn’t bounce back from one of these selloffs.  The alternative view of the exact same information is the market is trying to selloff, but failing each time due to a lack of follow through selling and is only time before we break through the 1472 ceiling.

I’m in the later camp.  The market had multiple opportunities to breakdown, yet traders resisted the temptation to rush for the exits.  While most traders are reluctant to buy above 1472, that will change as we break through these levels.  Initially we will surge higher on a wave of stop-losses, but afterward the series of higher-highs will convince the remaining holdouts that they need to get in this rally or risk being left behind.

The challenge bears are having is recruiting new pessimists to their side.  With so many people already bearish over the political fundamental, economic, and global news, if you are not already a bear, it is unlikely you are going to become a bear.  And this is why the market has struggled to trigger anything more than a temporary intra-day dip that recovers before the close.  There are no guarantees in the market, but a third support day tomorrow makes a continuation far more likely than a reversal.

TRADING OPPORTUNITIES

Expected Outcome:
Watch Wednesday’s price-action for signs of support.  This doesn’t have to be a positive day as red days can often be supportive if they are calm, controlled, and rational.  A selloff down to 1460 with a recovery to 1465 would be considered constructive and supportive

A third support day here clears the way for people to buy or add longs.  And this goes without saying, but I’ll say it anyway, don’t short the market here.  The trend is clearly higher and wait for the breakdown before trying to short anything.

Alternate Outcome:
The line is the sand is 1450 and a dip under that will most likely signal the end of this rally leg.  Any selling short of a clear violation of 1450 will simply be a dip to the lower end of the trading range and most likely represents a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL struggled today, but the silver lining is it held the $500 level .  Holding support is highly productive, but we do have to be wary of a break under $500 because that could trigger a wave of stop-loss selling.  But I actually think most of the owners who bought the dip recently are in this for the long haul and won’t let a $15 slide under $500 change their opinion about the upside potential.  If we do see a brief dip under $500 before earnings, expect a quick bounce as selling dries up quickly with so few sellers remaining in the stock.

Stay safe