Through adversity comes opportunity

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
We go from boring, sideways trade to one of the most exciting days of the year.  Today’s 2% decline was the fourth largest of the last 13-months and volume was off the charts as we smashed through prior support and the 50dma.

MARKET SENTIMENT
They say a picture is worth a thousand words, so check out the adjacent chart.  Today we plunged through support and finished at the lows of the day.  Looking back over the last year, we can see multiple examples of similar dramatic crashes through support.  The most noteworthy thing is each of these prior down-moves was the final gasps of a selloff.  If we use history as a guide, today’s huge volume selloff could very well mean the worst is already behind us.

Today’s move lower was a pain trade, plain and simple.  We didn’t get blindsided by a shocking headline and most traders had a hard time pointing to the one thing that triggered this selloff.  The best journalists and talking heads could come up with was recycling old headlines about taper, interest rates, Ukraine, sanctions, Israel, and Argentinian debt.  There was nothing new today that hasn’t been talked about ad nauseam over the last few weeks and months, meaning today’s selloff wasn’t really being driven by these recycled headlines.

What if the true root cause was simpler?  What if today’s huge move was nothing more than normal market gyrations that got carried away?  Breaking support sent technical traders running for cover and once they started selling, others followed their lead even though they didn’t know why they were selling.  This is the herd mentality that was ingrained in our species by evolution.  When everyone else in the clan started running, our ancestors started running too because anyone left standing around was about to become lunch.  And so while no one could explain why the market sold off today, they sold alongside everyone else anyway.

TRADING OPPORTUNITIES
Expected Outcome:
We all know the best trading opportunities come from going against the herd but it takes a lot of courage to buy when everyone else is selling.  The market never found its footing today and finished at the lows of the day, but if we look back at previous pullbacks in this bull market, big down moves that broke support and finished at the bottom of the day’s range is fairly bullish.  While we might dip under today’s low by a few points over the next few days, if the aggressive selling doesn’t continue on Friday, the worst is likely behind us.

Alternate Outcome:
If it was too easy to buy the dip, then we haven’t found the bottom.  Everyone knows this is a buy-the-dip market, but we also know this cannot go on forever.  If we don’t find a bottom near Thursday’s lows, then we have to endure more pain before this is over.

Trading Plan:
If we find support Friday, the selloff is dead and everyone should buy the dip.  If we crash another 20-points in early trade, get out of the way because this thing will keep on going.  While we have the monthly employment report Friday, the market will largely trade the direction it wants to go regardless of report shows.

Plan your trade; trade your plan

BTFD

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
A fairly dramatic day.  We gapped higher at the open on stronger than expected GDP numbers, but sold off minutes later and tested 1,960 support.  The Fed rescued us midday with a rosy outlook, but those gains also failed to stick.  For as much as we moved around, we ended almost exactly where we started.  Volume was the highest in a month as many traders reacted to every headline and gyrations.

MARKET SENTIMENT
It was an interesting session with two energetic upside moves that failed to stick.  It’s hard to hang a bullish hat on that kind of performance, but can we infer we are on the verge of collapse?  Not yet.  All today’s price-action tells us is those with cash didn’t want to chase these bullish headlines.  While that limits our upside potential in the near-term, it is the other side of the house that determines if we keep declining.  Right now the market’s fate rests in owners’ hands.  Do they sell at a discount or do they assume we’ll bounce like every other time over the last year-and-a-half and keep holding?  A lot of people are throwing the complacency term around like it is a negative thing, but complacent owners don’t sell and it is really hard to get a correction started without supply.

TRADING OPPORTUNITIES
Expected Outcome:
So far this price-action looks like a vanilla Buy-The-F’n-Dip.  Of course with every BTFD, the challenge is figuring out when we’ve bottomed.  Given today’s weak follow-on buying, it doesn’t feel like we’ve reached the bottom yet.  1,960 is technical support and often the market likes to fool us by violating support before turning around and going the other direction.  If we breakthrough 1,960 but the selling stalls shortly after, that gives us an interesting entry point.

Alternate Outcome:
Every dip, correction, or crash is buyable, the only question is how long to wait before jumping in.  While most of the recent dips were buyable within days, we will eventually find ourselves faced with a longer and deeper dip.  Nothing shatters confidence and complacency like seeing everyone else rush for the exits.  Wait for the selling to stop before buying any dip.

Trading Plan:
Don’t be surprised if we slip under 1,960 in coming days.  But if the selling stalls shortly after, bears should consider locking in profits and bulls can buy-the-dip.  On the other hand, if selling accelerates and we blow through 1,950, hang on because the next stop is 1,930 and 1,900 if that one fails to hold.

Plan your trade; trade your plan

Nervousness returns

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks continued yesterday’s rebound in early trade, but stumbled midday and sold off into the close on elevated volume.  The market held Monday’s lows and remains comfortably above 1,960 support.

MARKET SENTIMENT
Talking heads attribute Tuesday’s reversal to increasing sanctions on Russia, but giving up less than 0.5% hardly qualifies as an emotional rush for the exits.  While the West is incrementally stepping up pressure on Russia, both sides are co-dependent on each other and it is unlikely either side will act rashly.  While it was enough to make buyers think twice today, these developments are largely priced in and unlikely to pressure the market.

But just because the Russia thing is old news doesn’t mean we cannot selloff for other reasons, namely typical supply and demand fluctuations.  The market is building a trading ranged between 1,690 and 1,690 and no matter what the headlines, the market seems content hanging out in this area.  Prospective buyers are not confident enough to chase prices to new highs and owners are uninterested in selling bearish headlines for a discount.  Apathetic buyers and complacent owners leaves us range bound.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold support, the more likely the next move will be higher.  Markets tend to breakdown quickly and holding 1,960 for a month in the face of significant geopolitical headlines surely doesn’t qualify as a meltdown.  If the market holds 1,960 yet again on Wednesday, expect us to make new highs again in the short-term.

Alternate Outcome:
While owners are confident here, nothing shatters confidence like seeing everyone around them start selling.  While a modest, intraday dip under 1,960 is nothing to worry about, if the selling accelerates after violating support, we have further to fall.  If bulls cannot defend the 50dma and 1,950, then 1,900 and the 200dma are in play.

Trading Plan:
We are in no man’s land.  Those with long or short positions can stick with them, but use stops to prevent small losses from turning into big ones.  Those outside the market should wait for further confirmation before placing a trade.  Closing above 1,960 on Wednesday is bullish and crashing through it is bearish.

Plan you trade; trade your plan

Finishing flat

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks recovered early losses to finish flat.  Volume was below average, even by summer standards.

MARKET SENTIMENT
Last week we failed to breakout; today we failed to breakdown.  Seems those with cash don’t want to buy new highs and those with stock are uninterested in selling weakness.  Until someone decides to do something we will continue trading sideways in this developing trading range between 1,960 and 1,990.

Wile bears are pointing to a dozen different reasons we should selloff, the market already knows them and doesn’t care.  Free-markets are exceptionally efficient at pricing in new information and events in Ukraine and Palestine are ancient news.  While either of these situations could deteriorate dramatically, it would take something even more shocking than downing a civilian airliner to get the market’s attention.

While there is little doubt this market will pullback at some point, the hard part is figuring out when.  Some are making seemingly bold predictions of a 20% pullback in the next 12-months, but what happens if we go up 30% before the expected correction?  Knowing what the market will do next is easy, getting the timing right is where all the money is made and a “sometime over the next 12-month” prediction isn’t worth the paper it’s written on.

TRADING OPPORTUNITIES
Expected Outcome:
Given the opportunity to both breakout to new highs and test support in recent days, the market instead chose to do nothing.  It seems like it wants to consolidate in this 1,960 to 1,990 trading range over the near-term.

Alternate Outcome:
This morning’s bounce could be little more than an automatic buy-the-dip reflex, but if we are running out of dip buyers, the market will let us know when it fails to hold 1,960 support.

Trading Plan:
The market is not giving us a lot to trade.   Since we are still in an uptrend, we should give bulls the benefit of the doubt, but as far as risk/reward goes, it feels like a coin-toss and we should wait for better odds.

Plan your trade; trade your plan

Challenging record highs

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Stocks tested recent highs near 1,985, but failed to set a new closing high.  The last few weeks of sideways trade allowed the rapidly rising 50dma to catch up and we are now less overbought than the last time we found ourselves up here.

MARKET SENTIMENT
While we are back near the highs, market participants are far less giddy this time.  Conflict in Israel and Ukraine are keeping traders on edge, but the truth is these headlines are already old news as far as the market is concerned.  Anyone who fears these situations already sold.  Those who bought during this uncertainty showed an appetite for risk and willingness to hold the volatility.  And of course as we’ve seen in previous dips, the vast majority of owners have no interest in selling no matter what the headlines shout.  While all the talking heads try to scare us with this or that, without sellers this market will continue to defy gravity.

But that is the near-term assessment.  Over longer time frames it is hard to think of the catalyst that will drive the next bull leg higher.  Typically markets climb the proverbial wall of worry.  This is when prices are oversold as traders fear the worst.  Then there is a gradual thaw and markets rally as traders change their mind and slowly buy back in.  But we find ourselves with the opposite condition, everyone is fat, dumb, and happy.  With everyone so content, there are fewer and fewer people left to change their mind and buy in at ever higher prices.  While the momentum is clearly higher, we are on thin ice.

TRADING OPPORTUNITIES
Expected Outcome:
We are a few points from record highs and the resulting short-covering and breakout buying that will push us toward 2,000.  After that, it is anyone’s guess what comes next.  Maybe it is one last surge in a double top.  Maybe we’ll pullback modestly and continue consolidating.  Or will we surge higher and never look back?  Only time will tell as we watch to see how traders respond to the breakout.

Alternate Outcome:
Many traders expect us to hit 2,000, but often the market gives us the opposite of what the crowd expects.  Today’s failed breakout could be all we get before retesting support at 1,950.

Trading Plan:
It is too early to be short this market since it is completely ignoring bearish headlines.  No matter what people think it should do, it keeps going higher and we must respect that.  1,950 is turning into a major technical support level and breaking through that will force us to reevaluate our outlook, but until then assume the uptrend is intact and plan your trades accordingly.

Plan your trade; trade your plan.

Buy the dip?

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks plunged on a double dose of international headlines.  The S&P500 gave up more than 1%, making this the biggest selloff in multiple months.  In spite of anxious selling, we are still above 1,950 support and curiously, the volume was the lowest we’ve seen in three days.

MARKET SENTIMENT
Clearly this was a sell first, ask questions later kind of day, but the relatively light volume is noteworthy for such an outsized move.  There are two ways to interpret this.  Either there are still a lot of hopeful owners left to drive out of the market, or alternately, most owners are not interested in selling these headlines and today’s move was driven by a small minority impulsively reacting to headlines.

As for the individual headlines, anyone paying attention over the last few years knows there are periodic flare-ups between Israel and the Palestinians and tensions have been coming to a head in recent days.  This shouldn’t be a big surprise and it is unlikely to lead to a material disruption in the US economy or earnings for US listed equities.  While these stories are never pleasant, we’ve been here before and few people will change their economic forecast based on these events.  That means this headline is largely a non-issue for US markets.

What happened in Ukraine is quite a bit different.  Shooting down a civilian airliner is anything but routine and it clearly escalates the tension between the East and West.  While many feel this will deteriorate the already fragile situation, I’ll take the other side.  This tragedy could actually defuse things.  If it turns out Russia or Pro-Russian separatists were involved, that creates an indefensible position for Putin and he will have little choice but to dial back his rhetoric.  This was an appalling act and there is no way he can defend the people who pulled the trigger, killing nearly 300 innocent people.  Putin could very well distance himself from the separatists following this cowardly act and without their major ally, their resistance will likely fizzle.

But even if tensions remain elevated in Ukraine, the market came to terms with these risks months ago when the situation first developed.  Honestly I think we should be more fearful of what is going on in Iraq than who fired the missile today.  If the market doesn’t care about what is happening in Iraq, then this Ukraine story won’t matter in a couple of days either.

TRADING OPPORTUNITIES
Expected Outcome:
While these clouds will likely pass once most traders realize they will have limited impact on corporate earnings, we could see near-term weakness as traders continue selling before thinking.  But given how quickly the market blew off more serious headlines out of Iraq and Portugal, I doubt today’s weakness will last more than a couple of days and this creates yet another buying opportunity.

Alternate Outcome:
The market has largely been ignoring escalating geopolitical risks.  At some point hoping for the best will no longer work and we could be in the middle of that if the situation Israel and Ukraine continues to deteriorate.

Trading Plan:
Support lies back at 1,950.  While we might dip under this key level if selling continues early Friday, closing above it is supportive of this market.  It tells us the wave of reactive selling has stalled and we likely have another buyable dip on our hands.  But if we slice through 1,950 and keep going, all bets are off and a test of 1,920 support seems likely.

Plan your trade; trade your plan

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks closed above 1,980 for the first time in a couple of weeks, leaving us within a few points of all-time highs.  While the market trades sideways, the upward sloping 50dma and 200dma are quickly gaining ground.

MARKET SENTIMENT
The market no one wants to trust keeps holding strong.  Many traders admit they think stocks have come too far, but they are reluctant to sell because every time they sold over the last year and a half, they watched the market rebound higher without them.

This is the foundation of the “next greater fool” theory in investing.  The logic goes, “I know this is overvalued, but I will buy it anyway because I know someone else will come along later and pay even more for it.”  Traders have a natural fear of heights, but this resilient bull market is making many are more afraid of being left behind than losing money.  This is why so many continue chasing all-time highs and not selling bearish headlines, even though they don’t trust this market.  But like every game of musical chairs, if you stick around too long, you’ll be the one that gets left out.

TRADING PLAN
Expected Outcome:
We are four points from triggering another short-squeeze.  While there is no reason to trust this market, it is giving us every indication it wants to go higher.  Even if we are setting up a bearish double-top, we still need to set new highs first.

Alternate Outcome:
At some point we will run out of dip-buyers.  Maybe that day is tomorrow.  Maybe it won’t happen until next year.  But every dip that gets bought brings us one step closer to the one that doesn’t.  Failure to set new highs this week will be an ominous sign.

Trading Plan:
Both bulls and bears should expect new highs in coming days.  The only disagreement will be what to do next.  Bulls should use a trailing stop to protect recent profits.  Bears should wait a couple of days before jumping in front of this bounce.

Plan your trade; trade your plan

Running out of sellers

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks bounced between 1,980 and 1,965, but spent most of the day in the red and finished in the middle of this range.  Volume was above average and the highest we’ve seen in a couple of weeks.

MARKET SENTIMENT
We were having a good morning until Janet Yellen started speaking to Congress.  From there we plunged more than 15-points as she shared her views of a fragile recovery and asset bubbles in the market.  That was enough for some traders to hit the sell button and send the market lower midday.

To figure out where we go from here we need to understand who was selling, buying, and holding this move.  It really doesn’t seem like Yellen shared anything new in her testimony, so fundamental traders are unlikely to change their outlook based on what she said.  That means most of the activity came from reactive traders responding to the negative commentary and technical/momentum traders selling the weakness and dip under Monday’s close.  But following the initial wave of reactive selling, supply dried up as a wider group of owners chose not to join the liquidations.  This group held through multiple conflicts in the Middle East and Easter Europe, brushed off Portuguese bank defaults, as well as every other bearish headline to hit the wires recently.  From that frame of reference, it seem unlikely Yellen stating the obvious would convince them to sell today either.

TRADING OPPORTUNITIES
Expected Outcome:
Holders keep holding and until something changes, expect the resulting tight supply to prop up prices.  Today’s volume was elevated as reactive traders dumped shares, but those buying the discount showed a willingness to jump in front of these headlines and weak price action.  If these dip-bueyers are more confident than the reactive sellers they replaced, expect supply to get even tighter in coming days.  Swift selloffs are swift and holding 1,950 for four days is anything but swift.

Alternate Outcome:
If we violate support near 1,950, that means we ran out of dip-buyers and there are few things that rattle nerves like a screen filled with red.  Breaking technical support could trigger a larger wave of stop-loss selling and send us to 1,925.

Trading Plan:
We are stuck in no-man’s land between recent highs at 1,985 and lows at 1,950.  Holding last week’s bounce for another day show buyers and owners are comfortable with these levels and we exhausted the supply of sellers.  But fail to hold 1,950 on Wednesday makes a test of the 50-dma likely.  Plan your trades accordingly.

Plan your trade; trade your plan

Extending bounce

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks extended Thursday’s bounce off of 1,950 with modest gains on light volume.

MARKET SENTIMENT
While not many traders participated this low-volume move higher, what is more important is confident owners chose not to sell the rebound.  As long as owners are willing to hold no matter what the headlines proclaim, it is really hard for a correction to take hold without supply.  And that is why, much to the chagrin of bears, this market continues to climb on weak volume in spite of all the ominous headlines.  No supply means no selloff.

While we all know this cannot go on forever and at some point this bull market will stall, the challenge is figuring out when.  Predicting what the market will do is easy, all the money is made getting the timing right.  While there are countless indicators pointing to how high investor sentiment is, in the near-term these indicators are bullish because it means people continue throwing money at the market.  Only after we get too close to the sun will we finally come crashing back down to earth.  Until then, let the good times roll.

The best way we know this is not the top is twofold.  First last week gave the market the perfect excuse and setup to trigger an extended selloff.  But instead of gathering momentum and sending spooked owners scrambling for the exits, everyone shrugged off the headlines and viewed the weakness as yet another buyable dip.  The second indicator is how wound up short-term traders, bears, and the financial press became over a 1% dip.  Bullish sentiment on Stocktwits SPY stream plummeted from 66% to 41% in a week!  That shows there is still a healthy amount of fear and skepticism in the market.  And now these aggressive bears will need to buy the market to cover their premature shorts, adding more fuel to the fire

TRADING OPPORTUNITIES
Expected Outcome:
Selloffs are breathtakingly quick and this is the third day we’ve held 1,950 support, suggesting last week’s dip was little more than a test of support.  While I’m no raging bull, this market is giving every indication it wants to test 2,000.

Alternate Outcome:
One of these days we will come across a dip that shouldn’t be bought.  While the final score might be 99-1, bears will ultimately have the last laugh.

Trading Plan:
Last week’s selloff appears dead and bears should cover shorts before they turn into losses.  Nimble short-term traders can position themselves for a short-squeeze to 2,000.  Long-term investors already in the market should stay in the market but hold off on making new purchases for a couple of months because we will likely see better prices.

Plan your trade; trade your plan

A bullish loss

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed European banking worries, but recovered a big chunk of those losses by the close.  Volume was elevated as fundamental traders responded to the headlines and technical traders bailed on the break under 1,960 support.

MARKET SENTIMENT
While the S&P500 closed down 0.4%, this was about as bullish of a day as we could ask for.  Between the scary headlines and a violating support, owners had every excuse to stampede for the exits.  Instead they did the opposite, absolutely nothing.  The lack of selling tightened supply and there was nowhere for this market to go but higher from the opening lows.

When the market doesn’t do what it is supposed to do, that is a clear indication our analysis is flawed.  Bears had the perfect setup for a cascading selloff between spooky headlines and technical weakness, but when most owners didn’t flinch, it shows bears under estimated the resolve and confidence of bulls.

Even more bullish is the fact that over the last several days many weak-kneed traders sold these down-days, leaving far fewer potential sellers in the market.  Those that bought the dip demonstrated a willingness to own in the face of this weakness and are unlikely to flinch if we see another modest dip.  But a peculiar thing happens when everyone is willing to hold another dip, we don’t get one because when no one sells, there is nothing to push the market down.

TRADING OPPORTUNITIES
Expected Outcome:
Having chased most of the worry-worts out over the last few days sets up a solid foundation of confident owners from which to continue the prior up-trend.  While this rally will eventually end like every rally before it, when the market resists the perfect setup to selloff, it means the rally is not over.

Alternate Outcome:
Buy the dip is the most worn out trade of the last few years.  By the time everyone know something, it is already on its way out.  If we bounced on one last gasp of dip-buying, expect the selling to resume once the dip-buyers run out of money.

Trading Plan:
The market is giving every indication it wants to go higher in the short-term.  Dip-buyers can buy the dip and bears should lock-in any profits they have before they disappear.  If we undercut today’s 1,952 low, all bets are off and the selloff will likely continue.

Plan your trade; trade your plan

Finding support

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks found support above 1,960 and recovered most of Tuesday’s decline, but today’s up-volume was significantly lower than the selloff.

MARKET SENTIMENT
Confident owners chose not to not join the short-term traders pushing the market down the last couple days.  The lack of follow-on selling by a wider group of owners cut off supply and the market bounced as we ran out of sellers.

While the wave of selling ended rather quickly, we need buyers to push us back up to record highs and it often takes several days of support for prospective buyers to regain their confidence.  This period of no one selling and no one buying is what gives us the sideways chop that shows up as a base on the chart.

TRADING OPPORTUNITIES
Expected Outcome:
Baring a catastrophic open Thursday, the selloff died rather quickly.  But that isn’t a surprise.  In a complacent market, confident owners don’t want to sell, keeping supply tight and preventing downside moves from building momentum.  While it is easy to say the selloff is dead, if buying dips were easy, everyone would be rich.  We should expect the market to bounce around for a couple of days, even undercutting Tuesday’s 1,960 lows, before resuming the push to 2,000.

Alternate Outcome:
Today’s bounce could appear to be be the obvious buy-the-dip trade.  The problem with obvious trades is they rarely work.  If this was a false bottom, expect the selling to resume in short-order.

Trading Plan:
Closing above 1,960 Thursday and Friday tells us this market is headed higher.  If selling accelerates after breaking 1,960, expect the slide to continue.  Trade accordingly.

Plan your trade; Trade your plan

Testing 1,960

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, testing prior resistance at 1,960.

MARKET SENTIMENT
As dramatic as a 1% selloff from all-time highs feels, it is an indication of just how complacent we have become.  Times have been a little too easy when two down-days make us feel like the sky is falling.

While conventional wisdom says complacency is bearish, that is the long-term prognosis.  In the near-term it is highly bullish because confident owners refuse to sell their stock no matter what the headlines say.  The resulting tight supply drives prices up to dizzying heights.

Weakness over the last two-days was driven by short-term traders trying to time the market.  They saw last week’s pop to record highs as a little too much and decided to sell it this week.  Some of these are swing traders locking-in profits, others are bears shorting a market that’s gone too high.  While these short-term traders are very active, they have shallow pockets.  They can move markets for a few days, but after that it takes follow-on trading by big money to extend a move.  Here short-term traders are afraid of an imminent market pullback, but the vast majority of shareholders are comfortable with these dips because they learned long ago that they always bounce back.  And so far they have been right.  Without a fundamental catalyst to shatter the market’s confidence, there is little reason to expect this time will be any different.

This market will breakdown like every other one before it, but it will take some unsettling news that sends fear through the hearts of previously confident owners.  While that could happen at any moment, these last few days have been little more than short-term traders selling stock since no one can point to any one thing driving this selling.  Without that, there is nothing to send the larger herd rushing for the exits.

TRADING OPPORTUNITIES
Expected Outcome:
The market has only been down more than two days in a row four times this year and all but one of those one of those streaks included a down day of less than 0.1%.  This is a complacent market and the dips keep getting smaller before the selling stalls and the dip-buyers rush to the rescue.  We found support at 1,960 Tuesday and if we hold this level over the next couple days, the selloff is dead and the market will likely bounce to 2,000 in coming weeks.

Alternate Outcome:
While complacent owners are extremely bullish, running out of buyers is just as bearish.  If buyers are afraid of these record highs, they will let prices slip to more attractive levels before coming to the rescue.

Trading Plan:
Long-term holders should keep holding.  Nimble swing-traders can buy support at 1,960 if we continue holding it.  Shorts should lock-in profits if we don’t crash through 1,960 Wednesday.  If we slice through 1,960 and cannot find a bottom, we will likely fall to 1,640.  Fail that and we are headed to 1,620.  But rather than be the start of a bigger correction, this is just another buyable dip and shorts should lock-in profits instead of get greedy.

Plan your trade; Trade your plan.

One step back

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks pulled back from record highs, giving up a fraction of a percent, but are still holding above recent resistance near 1,960.  The market continues to levitate 50+ points above the 50dma, something it last tested back in mid-May.

MARKET SENTIMENT
Noting boosts investor optimism like a long string of new highs.  Fear of heights and calls for a correction have been drowned out by frenzied dip-buying.  In the first six-months of the year the S&P500 has only experienced three occurrences with three down-days, two of those barely qualify with losses of 0.1% or less.  And we  still have yet to string together more than three down-days.

While that is a worrying sign, the good times continue until they don’t.  So far owners remain reluctant to sell shares no matter what headline pops up.  Their conviction that every dip is buyable prevents us from having a dip.  While we all know this cannot last forever, it almost always goes on longer than anyone dreams possible.

The biggest prop behind this market is the sheer size of all the money on the outside the market looking in.  These regretful investors made a hasty decision to bail out during the financial crisis and now that everyone around them is making money, the pressure is on to overcome their fears and pick up some of this easy money.

TRADING OPPORTUNITIES
Expected Outcome:
Finding support above 1,960 for a couple more days suggests this market is headed to 2,000.  Breakdowns happen quickly and holding these levels shows buyers are willing to continue buying these levels and few are selling and locking in gains.

Alternate Outcome:
It’s been a good run since they May breakout and swing-traders will likely lock-in profits if we dip under technical support.  That selling could trigger wider selling and push us back down to the 50dma.

Trading Plan:
It is waaaay too late to buy this strength.  Anyone out of this market should wait for a pullback.  Bears should also avoid jumping too aggressively on any weakness since every other dip this years has been enthusiastically bought.  At this point we just wait for the complacency to pass and allow the next wave of emotion to create a trading opportunity.

Plan your trade; trade your plan

Disaster Averted

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks plummeted out of the gate, but recovered most of those losses by the close.  Early weakness pushed us under prior support at 1,950, but the selling stalled minutes later as we bounced off 1,945.  Volume was surprisingly light for such a wild ride.

MARKET SENTIMENT
Bears who claim this market is complacent are 100% correct, unfortunately for them that complacency is working to the bull’s advantage.  After a horrific open, bears had the perfect setup for an extended and bloody two or three percent selloff.  What happened instead?  Owners shrugged and continued holding, abruptly stymying the wave of selling.  What was supposed to result in a mad rush for the exits was met with a yawn as complacent owners stayed put.  Without supply flooding the market, it was inevitable we would bounce and that is exactly what happened.  The notion of complacent owners is further evidenced by the low volume that showed how few people reacted to Thursday’s dramatic open.

Conventional wisdom says complacency is bearish, but as we saw first hand today, in the near-term complacency is quite bullish.  Only over time does complacency become a problem after most prospective buyers are already fully invested and there is no one left to buy.  As we keep making new highs, clearly that is not the case yet.

TRADING OPPORTUNITIES
Expected Outcome:
Holding 1,950 through Friday will show bulls are still in control of this market.  Failing to maintain this level means we are quickly running out of dip-buyers.  While no one knows for sure which way this will go, the market will tell us real quick what its intentions are.  Breakdowns happen shockingly fast, so if this pause stretches across multiple days, that tells us Wednesday’s selloff was little more than a head fake.

Trading Plan:
1,950 is quickly shaping up as the line in the sand for both bulls and bears.  Hold above this level, then bears should cover their shorts.  Break under it and bulls should take some profits off the table.

Plan your trade; trade your plan

What’s the next move?

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks bounced from yesterday’s selloff after finding support near 1,950.  This rebound recovered two-thirds of Tuesday’s decline on average volume and puts us within a few points of all-time highs.

MARKET SENTIMENT
Bulls are breathing a sigh of relief as dip-buyers rush in after only a single day of selling.  It sure feels like this is the easiest market ever.  Anytime stocks go down, buy more.  Repeat over and over until obscenely wealthy.  The problem with obvious trades is they rarely work for long.

If we looked strictly at active market participants, they are for the most part invested in this market and under normal conditions we would be setting up for a normal and healthy down-wave.  The wildcard is investors still sitting out following the 2008 carnage.  Are they finally warming up to this stock market that does nothing but go up?  While these participants are usually the last to the party and suggest we are getting closer to a top, their buying in the near-term keeps the good times rolling.

Since buy-the-dip has become such an obvious trade, it is not surprising we bounced Wednesday.  The bigger question is if this bounce is sustainable or just one last gasp of hope before returning to the 50dma.  While no one knows for sure, the market will let us know which way it wants to go real quick.  An absence of buyers on Thursday tells us to expect more selling in the near-term.  But if we hold 1,950 into Friday, it means owners are not selling and without excess supply, prices will hold steady.

TRADING OPPORTUNITIES
Expected Outcome:
While this buy-the-dip trade is getting a bit too obvious, as long as people are willing to throw money at record highs, we’ll keep marching higher.  Picking tops is tricky business, but if 1,950 support barely lasts 24-hours, that shows demand is weak and we have lower prices in our future.

Alternate Outcome:
If this were easy, everyone would be rich.  Markets move higher as they turn cynics into believers.  There are still a lot of people who don’t believe in this market and those are the next round of buyers when they become more afraid of being left behind than they fear heights.

Trading Plan:
If bulls cannot defend 1,950, owners should consider locking in profits and bears can jump on the short side.  Use recent highs as a stop-loss.

Plan your trade; trade your plan

Is it time to panic?

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Today brought a fairly substantial reversal in fortunes as we tagged a record high in early trade before collapsing nearly 20-points to 1,950 support.  The 50dma is still 50-points underneath us and the 200dma is way back near 1,825.

MARKET SENTIMENT
Today served as a wakeup call for laxidasical bears who were growing accustomed to a never-ending climb higher.  There was no obvious catalyst to this selloff and the biggest piece of the news showed the housing sector improving more than expected.  Seeing the market reverse from fresh highs on good news is rarely encouraging and enough to give us pause.  The big question is if this is the start of something larger or just another buyable dip on the way higher.  As we find ourselves in the middle of summer vacation trade, these lighter volumes can lead to increased volatility due to smaller trades carrying more influence.

Anyone who thinks bulls will panic and rush for the exits is going to be disappointed.  Complacent owners expect this weakness to bounce like it has every other time.  The greatest trade of the last two-years has been buying the dips and the masses are finally waking up to this trend.  This is how a paranoid market that flinched at every mention of Sequester, Fiscal Cliff, Cyprus, and Taper transitions to one that barely budges as war breaks out in Eastern Europe and the Middle East.  Reactive selling at any point over the last two-years invariably lead to regret as those sellers watched the rally leave them behind.  There are only so many times you can fool a person before they wise up.  The problem for many is the more popular something becomes in the market, the less likely it is to keep working.  While everyone’s been calling for a correction since early 2013, eventually they will be right and we are closer to that day than ever before.  While no one can predict where this market will top, it is riskier to own when everyone feels safe and with the market near record highs and the VIX near record lows, it is hard to claim this market is fearful.

TRADING OPPORTUNITIES
Expected Outcome:
Trends continue until they don’t.  While it is clearly premature to call the bull market dead, we all know markets go up and down.  With 20 of the last 27 trading days ending in the green, it isn’t unusual for us to pause and see a few days of distribution.  We have support back at 1,925, 1,900 and the 50dma.  It wouldn’t surprise anyone to see us retest these levels.  And a bull should be hoping for this since a little backfilling makes a continued rally more sustainable.

Alternate Outcome:
Every dip has been a buying opportunity and will continue to be a buying opportunity as long as chasers have money to throw at the market.  We already know owners no longer flinch at headlines or weakness, so it will take an exhaustion of demand to defeat this bull.  Figuring out when everyone has bought in and there are no more buyers left is one of the hardest things to do in the market.  Since a trend continues countless times but only reverses once, it is more likely this dip will bounce like all the others before it.

Trading Plan:
While today’s reversal felt dramatic, we are only 1% from the highs and a long way above the 50 and 200dma.  Given markets move two-steps forward, one-step back, even a bull should wait a couple of days to see how far this step back goes.

Plan your trade; trade your plan

Holding the highs

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
An uneventful day with only 5-points separating the highs from the lows, ultimately finishing unchanged.  The market is 60-points above the 50dma and aside from Friday’s elevated quadruple witching, volumes have been below average.

MARKET SENTIMENT
Stocks are at record highs and the VIX near record lows.  There has never been a more comfortable time to own stocks and this complacency has many owners holding regardless of headline risk.  This lack of interest in selling keeps a lid on volatility and every five- or ten-point selloff stalls and bounces when no one joins in the selling.  With so little supply hitting the market, it is extremely easy for the market to continue climbing higher.

But the lack of concern means we are closer to the end of this move than at the start of a new leg higher.  Sustainable rallies are built on the back of fear as they climb the proverbial wall of worry.  When no one wants to own the market, it allows the bold trader to buy stock at steep discounts.  But as the masses become comfortable owning stock, they will only sell if someone offers them a premium price.  This bouncing between discount and premium is what gives us the typical gyrations in the market.

Given where we are and where we came from, it is hard to claim sellers are dumping shares at a discount here.  Since humans naturally look at the recent past and expect the trend to continue, many traders are sitting on their stocks expecting the good times to continue well into the future.  And they will be right as long as we keep finding new buyers willing to pay even higher prices for stocks.  This is the basis for the “next greater fool theory”.  Many people continue holding stocks even when they know they are too high because they assume someone else will come along shortly who will pay even more money than they did, and so far they’ve been right.  But how long will the music keep playing?

TRADING OPPORTUNITIES
Expected Outcome:  Keep inching higher until something catches the market by surprise.
Everyone knows the VIX will not stay at 11.  What no one knows is why it will spike or when that will happen.  Will insurgents blow up a key pipeline in Iraq?  Will economic indicators start heading south?  Will a geopolitical event thrust uncertainty into western economies?  Will it be a natural disaster?  I have no idea what it will be or if it will happen next week, next month or next year. Knowing what will happen is easy, all the money is made getting the timing right.

Alternate Outcome:
There is no reason we cannot have another 30% year before the inevitable fall.  So far the right trade has been ignoring all the calls for a pullback and it will likely continue this way…..until it doesn’t.

Trading Plan:
It is more profitable to buy discounted stock and sell it at a premium than the other way around.  While buy-high, sell-higher can work in individual momentum stocks, the broad market is so large it rarely gets as carried away by the momentum trade.  We go a little too high and then we go a little too low and then we go a little too high again.  Repeat until either rich, broke, or confused.

It is hard to find discounts up here to justify the risk/reward of initiating new positions, but those sitting on profits can use a trailing-stop to protect their profits if things start to break down.  As for the shorts, you will be right at some point, the key is not getting killed between now and then.

Plan your trade; trade your plan

What bad news?

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are holding the recent breakout following a modest test of 1,925 support last week.  Volume remains light in the traditionally slow summer vacation months.

MARKET SENTIMENT
We are holding record highs in spite of negative headlines coming out of Iran and the potential for more political gridlock in DC.  With multiple days to digest these headlines, they are largely priced in and we shouldn’t expect further selling based on what we already know.  Markets crashes typically arrive with a sell first, ask questions later reaction to spooky headlines and the fact we held 1,925 support for a 4th day suggests this market is indifferent toward these concerning headlines.  Barring an unexpected deterioration in the situation, we should expect the uptrend to continue.

These headlines rattled nerves, but didn’t cause many people to hit the sell button.  Five-years into this bull market and nearly three-years since we’ve seen anything resemble market panic, investors have become very complacent.  While we all know this cannot last, in the near-term complacency is bullish because it means most owners are unwilling to sell no matter what is going on around them.  Their confidence keeps supply tight and makes this death-defying really possible.

TRADING OPPORTUNITIES
Expected Outcome: Higher in the near-term
Confounding the skeptics and finding support tells us there is little that will rattle this market.  While history reminds us this cannot last forever, in the near-term this “hold no matter what” attitude among stock owners keeps pushing us higher.  At this point it doesn’t seem like we will find a headline that sends owners running for the exits and instead this market will only top when we run out of optimistic buyers.

Alternate Outcome:
Markets rarely get things right the first time and this leads to over and undershooting.  Fears of Sequester and Fiscal Cliffs were clearly overblown.  This time we are largely ignoring civil war in Eastern Europe and the Middle East.  Under appreciating the risks involved in these situations leaves us vulnerable to a worse than expected outcome.  The higher we go, the harder we fall.

Trading Plan:
Anyone sitting on profits should have an exit plan.  Maybe that is proactive selling into strength or it is a trailing stop, but don’t let complacency cause you to let these profits evaporate when the market rolls over.  Bears waiting for this market to crack need to be patient.  These headlines out of the Middle East were the perfect catalyst, but since the weakness already bounced back, admit defeat and wait for something bigger.

Plan you trade; trade your plan

Holding support

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are bouncing around today as they digest overseas headlines.  We are one percent from recent highs and nearly 50-points above the 50dma.  Prior resistance near 1,925 is acting as support and we are holding this technical level for a 3rd day.  Volume has been below average every day for nearly a month, but this is typical of light summer vacation trade.

MARKET SENTIMENT
Without big money’s steady hand, summer can be volatile as smaller traders have more influence.  This is especially true when the market is trying to digest worrisome headlines coming out of Iraq and a potential flare up of political discord in DC.  While we are only a few points from all-time highs, the market is anything but relaxed.

Ignore the headlines and buy the dip has been the rally call of last couple years and many are sticking to that game plan here.  Buyers showed up to defend 1,925 and so far are preventing any further selling.  Their cause is aided by confident owners unwilling to sell fearful headlines, keeping supply tight.  Last year the market jumped at the sight of its own shadow as we had temporary selloffs on headlines of sequester, fiscal cliffs, Arab spring, and taper to name a few.  This year prospects of war in Ukraine and Iraq are met with cautious optimism.

While it is encouraging to see the market hold up in the face of these headlines, the best profit opportunities come from irrational market moves.  While participants are nervous over these geopolitical headlines, no one is fearful enough to sell their stock at a discount.  After nearly two years of watching every dip bounce back to new highs has trained owners to hold no matter what.  With so few sellers, the future of this market rests on the buy side.  As long as buyers keep soaking up what little selling we have, the market will continue higher.  But every rally reaches a point where everyone who wants stock already has all they can hold and the market stalls on a lack of new money.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold up in the face of these headlines, the less likely they will take us down.  Markets tend to roll over quickly and avoiding a precipitous drop as these headlines break means they are well on their way to being priced in.

Alternate Outcome:
Owners are demonstrating comfort with the risk/reward at these levels.  With such a little discount being offered to hold this risk, the market is telling us it doesn’t expect these events to deteriorate in any appreciable way.  That leaves buyers vulnerable to a worse than expected outcome that is clearly not priced in.

Trading Plan:
The best profit opportunities arise from emotional and irrational moves in the market.  Since no one is offering us a discount to hold this risk, there is little reason for us to own these headlines.  The same goes for shorting the market.  We had the scary headlines and the market didn’t flinch, meaning it will take something larger to crack this market.  At this point it seems we are in no-man’s land and where the market goes from here is a coin-flip.  If I were forced to pick sides, holding these levels suggests we will continue higher, but any degradation of the situation in Iraq could set of a mad rush for the exits.  With such a poor risk/reward, the best trade is to wait and see what comes next.

Plan your trade; trade your plan

Consolidating Gains

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks slipped modestly as they consolidate near the 1,950 level.  Early weakness brought us down to the low 1,940s, but dip buyers propped up the market and are defending these levels.

MARKET SENTIMENT
Unsustainable breakouts tend to rollover quickly when follow-on buying fails to materialize.  If we continue holding 1,940 for a fourth day, that suggests buyers still see value at these levels.  Of course we need to be extra cautious during the summer’s low-volume since smaller trades have a larger impact and we often see increased volatility.

Recent strength defies the skeptics but from a sentiment POV it makes perfect sense.  We’ve transitioned from a fearful market in 2013 to a greedy one in 2014.  While this rarely ends well, these moves go higher than anyone expects before breaking down.  By itself complacency is bullish because it means most owners are unwilling to sell no matter what the headline or price action.  They refuse to sell because they are confident any dip will bounce and so far they have been proven right.  In a self-fulfilling prophecy, lack of selling keeps supply tight and makes it easy for the rally to continue.

TRADING OPPORTUNITIES
Expected Outcome:
Markets move in waves and the risk of a pullback are highest following a strong move higher.  At best we digest these gains and trade sideways, at worst we retest recent support back near 1,900.  Either way the risk/reward to initiating a new position here is stacked against us.  Give the market a couple more days before rushing in.

Alternate Outcome:
Anything can happen during summer’s light volumes.  The pain trade has clearly been higher as everyone expecting near-term weakness is either out of the market or short.  These bears and cynics are scrambling to buy a piece of this market before it gets away from them and that reactive buying keeps pushing us higher.

Trading Plan:
We trade when the odds are in our favor and buying up here is little more than chasing performance. While this move could easily run toward 2,000 over the next few weeks, the market needs to catch its breath and we will have the opportunity to buy in a few days after the risk of a pullback fades.  If we cannot hold 1,940, then things get interesting.

Plan your trade; trade your plan