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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P500 started Thursday with another abysmal gap lower. Trump called off his scheduled meeting with Kim Jong Un before the open and that sent stock futures into a tailspin. That mirrored Wednesday’s horrible open following a flareup of Trump’s trade war. Consecutive days of bearish headlines followed by horrid opens, can it get any worse?
As bad as we started, the S&P500 is actually ABOVE Tuesday’s close! How could two horrible days end in gains for the index? No wonder so many people feel like the market is “rigged”. When the market doesn’t do what we think it should, obviously the only plausible explanation is someone is manipulating it.
Of course that is far from the truth. There is there is no evil wizard hiding behind the scenes tricking and deceiving us. People who think the market is fixed simply don’t understand why it is doing what it is doing. There is no trickery. There is no boogie man. It is nothing more insidious than a simple misunderstanding.
When humans didn’t understand why the Sun came up every day, they assumed is was being controlled by the Gods. The same logic occurs in the stock market today. When people don’t understand why the market does something, they blame it on some evil conspiracy that has rigged the market against them. It couldn’t possibly be that their analysis is flawed.
Luckily for regular readers of this blog, most of us understand what is going on and were not fooled by these bearish headlines and weak opens. As I’ve been saying for a while, this market is strong, not weak. There have been plenty of bearish headlines swirling around this market for months. Yet this market is consistently oblivious to them. Bears claimed it is only time before the “sheep” wake up and send stock prices tumbling. But the critical flaw in the Bear thesis is market selloffs are brutally quick. They happen so rapidly most people don’t have to react. Yet here we are, holding 2,700 support for two full weeks. What selloff gives us two weeks of warning before plunging? None. That’s how I knew the last two weak opens were not sustainable and were bound to bounce. If we were going to crash, it would have happened a long time ago. This market is strong, not weak. That meant recycling trade war and North Korean headlines were not going to make any more of a difference than the first time they occurred.
Everyone knows markets move up and down. This is one of the most fundamental principles of the stock market and it is plainly obvious to anyone who glances at a stock chart. We all know stocks mostly go sideways and most of the ups and downs don’t really mean anything. Yet most people forget this most basic concept in the heat of battle. If most day’s gyrations are meaningless noise, why do we always try to find a meaning in today’s price-action? Why do we automatically assume today’s bump in the road is the start of the next big move when most bumps in the road never go anywhere?
With the benefit of hindsight, we can confidently say Wednesday’s and Thursday’s gap lower opens were nothing more than meaningless noise driven by a handful of reactive traders trying to “get out before things get worse”. Their impulsive selling was clearly a mistake and just a few hours later they are poorer for it. As I’ve said countless times before, this is a strong market, not a weak one. If we were going to crash, it would have happened by now.
While the path of least resistance is most definitely higher, the easy gains are behind us. There is no way we could keep the sharp rebound from May’s bottom going indefinitely. We knew a cooldown and consolidation was inevitable. We also know gains slow down the further into a move we get. Applying that to this market, it seems pretty obvious that prices want to go higher, but that we should expect the rate of gains to slow down and for there to be more back and forth. And guess what? That’s exactly what’s happened.
Those of us that were paying attention during May’s dip and rebound have collected our fast money. But that trade has come and gone. Now we are into the slow money portion of the rebound and should expect the gains to accumulate much slower and be accompanied by a bunch of back and forth. Those of us that believe in this market should stick with our buy-and-hold positions and enjoy this slow glide higher. Anyone who has less conviction should simply sit this one out and wait for a better trading opportunity. Without the conviction to sit through dips like Wednesday and Thursday, that inevitably leads to reactive selling and poorly timed trades.
FAANG stocks are acting well and these tech highfliers will continue leading this market higher. But just like the broad market, we should expect the rate of gains to slow down as we fall into the slow summer sessions.
Bitcoin still looks broken. $9k support two weeks ago gave way to $8k support last week, which has since given way to S7k support here. Hopefully everyone sees the pattern here. We are in a bear market and the downtrend is still alive and well. Expect prices to undercut the $6k lows over coming weeks. This bubble isn’t done bursting and that means lower-lows are ahead of us.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P500 started Tuesday with modest gains, putting us near the highest levels since March, but a late selloff pushed the market firmly into the red. The question is if today’s bearish reversal means anything, or if this is just more meaningless noise tricking over-active traders into making poorly timed trades.
Headlines have been relatively benign, allowing stocks to remain above 2,700 for nearly two-weeks. There has been some back-and-forth regarding Chinese tariffs, but to this point we seem to be avoiding a larger trade war. As expected, there have been some small bumps along the way. One day a positive development pushes us up 10-points. The next day a hiccup sends us tumbling 10-points. But so far last month’s resistance has turned into this month’s support.
Holding 2,700 this long is encouraging. Stocks tumble from unsustainable levels quickly. Maintain these levels for nearly two-weeks tells us we are standing on solid ground. There have been more than enough unnerving headlines and weak price-action to send us tumbling, but confident owners refuse to sell and that is keeping supply tight.
We’ve seen several dramatic dips over the last few months, largely driven by uncertainty surrounding Fed rate-hikes, rising interest rates, a looming trade war, and a potential scandal in the White House. While this uncertainty has created some near-term volatility, prices haven’t undercut February’s lows and this price-action looks more like basing and consolidating last year’s gains than standing on the precipice of another plunge lower. As I’ve been saying for months, if this market was fragile and vulnerable, we would have plunged a long time ago. This resilience against a larger selloff tells us this market is strong, not weak.
I’ve been encouraging readers to buy the dips over the last few months and that lead to some very profitable trades. But now that we are at the upper end of the trading range, should we be concerned about another dip? Two-weeks ago I was cautious and told readers the easy gains were behind us and that was a better place to be taking profits than adding new positions. As so far that has been wise advice since we have been trading sideways ever since. The sharp gains from the May lows made us vulnerable to a dip and the risk/reward was skewed against putting new money in stocks. But two-weeks later and the picture is shifting. The market resisted dipping back into the trading range and is holding up quite nicely despite the headline headwinds. That tells me the path of least resistance is still higher.
Unfortunately the easy gains are behind us. The best profit opportunities come during the scariest moments. Now that the fear and uncertainty has passed, the discounts have disappeared. Even though the market is acting well and the path of least resistance is higher, further gains are going to be harder and slower. It took little more than a week to bounce more than 100-points from May’s lows, but it could take all summer to rally the next 100-points.
The best short-term opportunities arise from emotional overreactions. Unfortunately this calm isn’t giving us much to trade. But just because we don’t have a short-term trade in front of us doesn’t mean we cannot make money. The path of least resistance is higher the best slow-money trade is buying-and-holding these near-term gyrations. The market is acting well and don’t let the bears scare you out of good positions. If this market was fragile and vulnerable, we would have crashed a lot time ago.
The tech trade is alive and well. Most of the FAANG stocks are near all-time highs and even GOOGL is well off its lows. I told subscribers weeks ago that people would be kicking themselves for not buying the tech dip and no doubt that is what a lot of people are doing. It is human nature to beg for pullbacks so we can jump aboard the hottest trades, yet when the pullback happens, those same people are too afraid to jump in.
Even though the easy profits are behind us, the Tech Darlings are acting well and will lead this market higher. But just like the broad market, further gains will be hard and slow. The path of least resistance is higher and smart money is still sticking with these stocks.
Bitcoin is a completely different story. Last week’s $9k support has turned into this week’s $8k support. And thus far it is giving every indication that $7k will become next week’s support. I hope you see the trend here. Cryptocurrencies are still very much in a downtrend and we should expect lower prices. It takes most bubbles between 6 and 24 months to finish bursting. If bitcoin is like most bubbles, that means the worst is still ahead of us and we should expect lower-lows over the next few months.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
On Thursday the S&P500 closed mostly unchanged, losing a trivial 0.1%. This was the sixth consecutive close above 2,700 as last month’s resistance turns into this month’s support.
In Tuesday’s free blog post, I told readers May’s rebound could go one of two ways. Either we hit our head on the upper end of trading range and stumble back into the mid-2,600s. Or prices stabilize above 2,700 following Tuesday’s dip and test of support. Two days later and we are still holding 2,700 support and things look good for this market. If we were overbought and vulnerable to tumbling back into the heart of the trading range, it would have happened by now.
The lack of follow-on selling when we tested 2,700 earlier this week tells us most owners are confident and not interested in selling. Plenty of bad news has been making the rounds between oil topping $70, gas approaching $3, interest rates passing 3%, trade negotiations breaking down, and Trump’s North Korea summit on the verge of collapse. There have been more than enough reasons for this market to tumble, yet here we are still holding above support.
The thing to remember about headlines is if no one sells them, they stop mattering. All of the above headlines have been reoccurring themes that keep popping up over the last few weeks and months. The thing about recycled headlines is they get priced in. Anyone who fears these stories bailed out a long time ago when these issues first came up. Those nervous sellers were replaced by confident dip-buyers who demonstrated a willingness to own these headline risks when they bought. And it should be no surprise these confident dip-buyers are not flinching when these headlines come back around. As I said, when no one sells the news, it stops mattering. That is why prices are holding up so well despite the headline headwinds.
A market that refuses to do down will eventually go up. And while the path of least resistance for this market remains higher, the easy gains are behind us. A couple of weeks ago I encouraged readers to buy the dip. Risk is a function of height and falling near the lowest levels of the year made May’s dip one of the safest times to buy stocks this year. But now that the easy money and quick gains are behind us, the ride is going to get slower and harder. The market’s resilience this week tells us it still wants to go higher and 2,800 is very much in play. But it will be a grind getting there that could take a couple of months. If buying the rebound off 2,600 support was the fast money trade. Buying 2,700 support is going to be the slow money trade and it could take most of the summer to reach 2,800. That means lots of up and down between here and there.
Last month I told readers people would be kicking themselves for not buying the Tech Highflier dip and no doubt a lot of people are now kicking themselves for not buying it. People had been begging for a pullback so they could jump aboard this year’s hottest trade. Yet when the market granted their wish, most were too afraid to by the dip they were asking for. Even though prices are nowhere near as attractive as they were a few weeks ago, the Tech Meltdown is over and these stocks are leading the way higher. Most of the FAANG stocks are back near their highs and will only go higher as the broad market climbs this summer.
The same cannot be said for Bitcoin. I wrote a couple of weeks ago that $9k support risked turning into stalling if we held that level too long. The problem with staying near support too long is it makes a violation inevitable. When BTC couldn’t rally beyond $9k, falling under it was the only option left. And now last week’s $9k support has turned into this week’s $8k support and we are on the verge of falling to $7k support next week. The rebound off $6k earlier this year boosted sentiment, but this dip is threatening to erase all of those good feelings. I don’t think the lows are in yet and that means lower prices are still ahead of us.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
On Tuesday the S&P500 experienced the first real giveback since the May rebound kicked off. Economic headliners were mixed, but that’s all it took to knock us from the highest levels in a couple of months.
Last Thursday I warned readers to be more careful now that we were approaching the upper end of the trading range. Risk is a function of height and this was the highest we’ve been since early March. Recent gains made this a better place to be taking profits than adding new positions. And Tuesday’s pullback to 2,700 support validated those warnings.
The question is what happens next? It was nice to see buyers show up once prices slipped to 2,700. Market crashes are brutally quick and while we are not in the clear yet, one day of support is constructive. If this market was grossly overbought, we would have tumbled far more dramatically from the highs. Tuesday was a more measured pullback and that tells us this market is not overly vulnerable.
Hold 2,700 for another day and everything is looking pretty good and the path of least resistance remains higher. But if we slip under 2,700 Wednesday, be prepared for a wave of technical selling to weight on the market. The way it responds to this violation of support tell us what comes next. If the selling intensifies, expect the weakness to carry us back into the heart of the trading range. That puts 2,650 and the 200dma in play. But if we dip under support, supply dries up quickly, and we reclaim 2,700 before the close, then things are looking strong and the May rebound continues.
At this point the odds are 50/50 if support holds or fails. For a good trade, we want better odds than that. The this opportunity doesn’t get real attractive unless we dip back to the 200dma and bounce. That’s where the discounts create a safer and more profitable trade. If prices don’t dip and we hold current levels for a few more days, that tells us the market wants to go higher. In that case 2,800 is in play and we need to be patient.
I don’t know what the market will do next, but I have several trading plans ready to go. It won’t be long before the market tells us what it wants to do next and those of us that are ready will be positioned to profit from it.
After holding $9k support for several weeks, Bitcoin finds itself under this widely watched support level. As I warned readers two weeks ago, there comes a point where support turns into stalling. That is what happened here. The inability to move beyond support made a violation inevitable. The latest rebound from the $6k lows helped rebuild sentiment, but expect most of those positive feelings to disappear if we stumble back into the $7k range. It often takes bubbles six to twelve months to find a bottom. If that happens here, that means lower-lows are still ahead of us. I’m skeptical of BTC at these levels and it needs to recover $9k as soon as possible to prove me wrong. Otherwise expect nervous selling to return and push us back under the $6k lows.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
On Thursday the S&P500 extended last week’s rebound off 2,600 support and now finds itself well above the 50dma and 2,700 resistance. What a difference a few days makes. Last week traders were fleeing ahead of the expected collapse, this week those same traders are scrambling over each other to get back in.
Not a lot changed over the last week. The Fed is still planning on raising rates. Treasuries hover near 3%. Trump’s Trade War is still hanging over us. Last week these things were going to wreck our economy. This week no one remembers them. Are these things important? Should we ignore them? What is a trader supposed to do?
As I’ve been saying since early February, the big selloff was over but the drop in prices did enough damage that we wouldn’t rebound to the highs anytime soon. If we weren’t going any lower, but weren’t going higher either, what’s left? Sideways. And that’s exactly what’s happened since the February selloff bottomed. Rebounds fizzle and the breakdowns bounce. Bulls and bears trading these as larger directional moves have been getting humiliated by the reversals. But their loss is our gain and it has been highly profitable for those of us buying the weakness and selling the strength.
Now that we are at the upper end of the range, has anything changed? Nope. Rather than chase the relief higher, we should be growing more cautious looking for a place to take profits. Risk is a function of height. Last week we were near the lows of the year. Rather than run from the market, we should have been buying those discounts. And now that prices are significantly higher, rather than rush in, we should be growing cautious as the risk/reward swung the other direction. Trading is not hard once we learn what to look for.
I’m most definitely not calling this a near-term top. It would be foolish to short this strength for no other reason than we reached the upper end of the latest trading range. But the risk/reward is no longer in our favor and that means moving to a defensive posture and taking profits. Only after cracks start forming should anyone even consider going short.
Nothing has changed from last week to this week. That means keep doing what has been working. Buy weakness and sell strength.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
On Tuesday S&P500 closed flat after spending most of the day in the red. Prices dipped in anticipation of Trump’s announcement to leave the Iranian accord and reimpose sanctions. This injects further uncertainty into the already unstable Middle East. Not knowing what is going to happen next is a big reason oil has rallied above $70.
But as much noise as the media made over Trump’s widely anticipated announcement, the market largely brushed it off. Prices dipped more than 0.5% as the knee-jerk reaction was to sell the announcement, but anyone who has been paying attention knew the market expected this and it wasn’t a big deal. After the headline sellers finished selling, prices rebounded and I doubt many people will give this a second thought on Wednesday.
Last week it felt like the market was on the verge of collapsing. We undercut the 200dma and 2,600 support, but instead of triggering a wave of selling, that was the capitulation bottom and prices have rebounded back to the upper end of the recent trading range.
The thing about markets like this is both bulls and bears are right. Wait a few days and the bull will be right when prices rebound. A few days after that the bear will be right when we stumble back to support. While both sides keep getting proven right, the painful irony is both sides are also bleeding money from poorly timing their trades.
Bulls buy the strength when it confirms their bullish bias. Unfortunately buying strength in a trading range is jumping in at the exact wrong time. Same goes for the bears who short weakness moments before prices rebound. The biggest challenge in the market isn’t knowing what is going to happen, but getting the timing right. Unfortunately most bulls and bears are getting crushed in this sideways market because they are making the right move at the wrong time.
Last Thursday I wrote the following in my free blog post, the same day the market scared the hell out of everyone by crashing through the 200dma and undercutting 2,600 support:
“As I’ve been saying since February, we are in a trading range. That means buying weakness and selling strength. Stick with what is working until something changes. Did something change today? Nope. That means today’s weakness was a buying opportunity, not a chance to bailout “before things get worse”. Maybe we slip a little further, but that’s not a big deal. Remember, risk is a function of height. The lower prices go, the less risky it is to buy. If this market wanted to crash, it would have happened months ago. There have been more than enough excuses to send prices tumbling. Instead, every time we slip to the lows, supply dries up and prices rebound. This is a resilient market, not a weak one. And the only people losing money are the ones overreacting to these gyrations.”
Read the full post if you want to learn how I came to that conclusion, but less than 24-hours later the market exploded higher. As I said before, predicting the market isn’t hard, the trick is getting the timing right. And often it takes more than good timing too. Many times the market tests our conviction and convinces us to abandon our well thought out trades moments before proving us right. I don’t mind losing money on a bad trade because that is the cost of doing business. But there are few things more frustrating than losing money on a winning trade. I wish there was an easy answer for this, but recognizing the difference between conviction (right) and stubbornness (wrong) is the art of trading and only comes from experience.
But that was last week’s trade. What most people want to know is what is coming next. Even though the market is approaching the upper end of the latest trading range, I actually think there is a little more upside left in this rebound. The market likes symmetry and last Thursday’s dip under support was fairly dramatic. We should expect the rebound to be similar and it doesn’t feel like we are at dramatic levels yet.
The resilience of this rebound was confirmed by Tuesday’s strength in the face of Trump’s headlines. The midday selloff could have easily spiraled out of control and sent us tumbling back to support if this market was weak. Instead of accelerating lower, supply dried up and we rebounded. Prices tumble from overbought levels easily and quickly. Resisting the temptation to selloff Tuesday afternoon tells us the market is solid, not fragile. At the very least I expect a retest April’s highs. That said, even though the near-term path of least resistance is still higher, this is a better place to be taking profits than adding new money. In trading ranges we buy weakness, not strength. Those with profits should start looking for an opportunity to lock them in.
Long gone is talk of a Tech Meltdown. Weeks ago I told readers people would be kicking themselves for not buying those discounts and it didn’t take long for those discounts to evaporate. For months people were begging for a dip in their favorite stocks. Yet when the dip finally happened, most people were too scared to buy. Of course if this were easy, everyone would be rich. The thing to remember is most people lose money in the stock market, so that means doing the opposite of most people. If most people are selling great stocks, that means we should be buying them.
There is a lot less near-term upside left in most FAANG stocks because they have returned to their highs. but this trade is still alive and kicking and that means sticking with it over the medium term.
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Jani
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