IDA: Holding near highs

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks are modestly higher and just 5-points shy of all time highs.  1,850 has been resistance since the end of 2013 and pausing here adds to the importance this key level.

MARKET SENTIMENT
Sideways trade underneath resistance has drained some of the excessive excitement following the strong rebound from 1,740.  A market that appeared invincible last week is giving some second thoughts this week.  But that is how markets work; if this were easy, everyone would be rich.

As traders we need to decide what is more significant, stalling short of resistance, or holding near record highs despite half-full headlines?  Extended and unsustainable markets typically roll over quickly, but maintaining these levels despite weakness on Wednesday is encouraging.  That dip was more than adequate to trigger wider selling if the market was overbought and inclined to selloff.  When that weakness reversed a day later, it demonstrated just how shallow the pool of willing sellers is and that bodes well for the near-term prospects.

While the market is poised to head higher on tight supply, we need to watch demand for signals on where we are headed over the medium term.  If new buyers fail to embrace a breakout to new highs, that could be what sends us back into the heart of the trading range.

TRADING OPPORTUNITIES
Expected Outcome: Headed toward upper end of extended trading range.
While the high-probability trade remains higher, the risk/reward is moving the other direction.  Given how far the market’s come and buyer’s reluctance to keep pushing us higher, likely means we are nearing the upper bound of this move.  If we are indeed entering a 6-month trading range, at most we have a couple dozen points of upside left all while standing on top of a 100-point trapdoor.  For a +24/-100 trade to make sense, we need a huge degree of confidence, something unheard of in free and fair markets.  That means this is a better place to be locking in profits than initiating new positions.

Alternate Outcome:
Pausing shy of 1,8500 and Wednesday’s dip to 1,825 cooled what was getting a tad exuberant.  Consolidating and resting under resistance for another week improves the odds of a sustainable breakout.

Trading Plan:
Either this market is headed higher, stuck in a trading range, or on the verge of collapsing lower.  Se we are at the upper end of a potential trading range, that means 2 out of 3 options would have us pullback from current levels.  Those odds imply this is good place to adopt a more defensive stance.  While it feels good to watch our profits grow, they are only real when we sell.  But even though the odds for a pullback improve by the day, as long as momentum continues higher, we don’t want to short the market yet.  Wait for a breakout to new highs and then short the market when it fails to hold those gains.

Plan your trade, trade your plan

IDA: Bouncing Back

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks recovered a portion of Wednesday’s losses and remain between 1,810 support and the 1,850 highs.

MARKET SENTIMENT
Wednesday’s selloff failed to gain critical mass because most weak owners were flushed out in January’s dip to 1,740.  Anyone that bought recent weakness demonstrated an appetite for risk and volatility, meaning they are less likely to flinch when 2 out of 14 Fed members suggested raising interest rates earlier than previously stated.  When most owners shrug off headlines, selling stalls quickly.

TRADING OPPORTUNITIES
Expected Outcome: In trading range, approaching upper end.
Regaining its footing here likely means the market is setting up to break 1,850.  It might take a few more days of consolidation between 1,830 and 1,850, but holding these levels in the face of worrying headlines shows this market is on firm footing.  The bigger question is what happens after we exhaust the short-covering and breakout buying above 1,850.  Since we are approaching the upper end of a potential trading range, this makes for a more interesting selling opportunity than buying one.  A lot of good news is priced into the market here and it is hard to think of any big headline that could send the market racing ahead here.

Alternate Outcome:
If the recent dip to 1,740 purged enough excess from the markets, we could resume last’ year’s uptrend following a breakout to new highs.  There is plenty of international and bond money leaving those markets and in search of a home.

Trading Plan:
While the immediate trend is higher, we are better off looking for a place to lock-in profits.  A break to new highs would make a great selling opportunity and failing to hold the breakout could create an interesting shorting opportunity.

INDIVIDUAL STOCKS
AAPL failed to hold the 50dma and finds itself under this key level again.  While the stock is stuck in no-man’s land after closing the earnings gap, a dip back under $500 spells disaster technically, while reclaiming $550 would be a big endorsement from the market.  Until then this story could go either way.  Since there is a lot of bullishness already priced in the stock and big buyers like Icahn and Cook have propped up the stock recently, the prognosis suggests further weakness once these whales finish buying.   As a side note, I find it somewhat ironic that people were afraid to own AAPL when Jobs fell ill and resigned the CEO position.  Many were worried about a lack of innovation without Jobs’s vision and leadership.  Yet here we are, three years later without any meaningful innovation from the company, but now the crowd is making excuses for AAPL, claiming the next category killer is just around the corner.

All I can say about FB’s latest acquisition is wow.  Is a smart phone app really worth more than half of the S&P500 companies?  TSLA is grossly over valued, but Whatsapp’s valuation would make even a TSLA bull blush.  Most of the articles written about the deal promote the huge growth opportunities ahead, but when the app already counts a material portion world’s population as active users, it sounds like it is closer to saturation than explosive growth.  The bigger concern for FB shareholders is this move by Zuckerberg reeks of desperation.  If he feels he needs to spend a major portion of FB’s marketcap on a defensive maneuver, it means he feels threatened by emerging social media companies.  Maybe FB doesn’t have as firm of a grip on its users as most investors assume.  At least Zuckerberg’s actions suggest that.

Plan your trade; trade your plan

Stalling under old highs

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks continue consolidating under resistance at 1,850 as we trade between the 50dma and January’s highs.  If the market is entering a 6-month consolidation, we are likely near the upper end of the expected trading range.

MARKET SENTIMENT
Most feel better given the rebound to near all-time highs, but so far buyers are reluctant to continue chasing above 1,850.  Dip-buying and short-covering provided much of the lift from the 1,740 lows, but that buying frenzy is slowing as we approach old highs.  This pause is intensifying the focus on 1,850 as more people start watching this increasingly important level.  The longer we hold underneath it, the bigger deal it will become if/when we break it.  Shorts and breakout buyers are watching this level with interest and moving above it will lead to a new surge of buying, but that will likely be the last round of buying.  Reaching new highs means most of the shorts have already been squeezed and breaking above prior resistance will tempt the last of the hesitant momentum buyers.  Once we reach 1,860, we will largely have exhausted demand from short-covering, dip-buying, breakout-buying, and value-investing.  At that point we need to find a new crop of money to continue pushing us higher.

TRADING OPPORTUNITIES
Expected Outcome:  Nearing upper end of extended trading range
While the near-term momentum is higher and we will see another wave of buying if we break 1,850, no one should expect another 100-point run over the next few weeks.  The best profit opportunities come to those who are willing to take the biggest perceived risks by buying when everyone else is panicking.  Buying the market here is more risky and has less upside, making this a better place to sell than buy.

Alternate Outcome:
The market experienced a fair amount of churn during the 5% pullback.  Chasing off the weak and replacing them with confident owners makes it far easier for the market to continue higher.  Confident owners don’t sell and when no one wants to sell, prices keep marching higher.

Trading Plan:
Buy weakness and sell strength.  As we approach old highs, spend more time thinking about locking-in profits than making new buys.

Plan your trade; trade your plan

Holding near highs

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are modestly higher following the long weekend and continue holding the rebound’s gains.  We remain above the 50-dma, 1,830 support and less than 10-points from all-time highs.

MARKET SENTIMENT
Calm is returning to US and global markets following recent turmoil.  Nothing dramatic happened over our three-day weekend and stocks are still maintaining recent gains.  While the dip to 1,740 was unnerving, there is no such thing as an easy dip to hold.  If dips didn’t scare people, we wouldn’t have them because no one would sell.

This move purged the weaker and less committed, replacing them with more confident owners willing to buy the dip or hold through the volatility and uncertainty.  The market bounced as supply dried up when we ran out of nervous sellers and the confident continued holding.  But that was the justification for buying two weeks ago.  Now that we are 100-points higher, what comes next?

Shorts forced to cover losing positions provided much of the demand, as did swing traders and value investors buying the dip.  With prices returning to record highs, we’ve largely run out of shorts needing to cover, value buyers are less interested, and swing traders are more likely to sell these gains than buy them.  10-points from all time highs, the last surge of buying will come if/when we break 1,850.  That will squeeze out the last of the shorts and give breakout traders a buy signal.  But given how much buying we’ve seen over the last two weeks, this breakout is likely the end of the move, rather than the start of a new leg higher.  Once everyone who was ready to buy, bought, the rebound will invariably stall on lack of demand.

TRADING PLAN
Expected Outcome: Inside trading range, nearing upper bound
Markets trade sideways more than anything else, and given what a strong year 2013 was, it should be no surprise if we pause and consolidates over the next six months.  Sideways markets are best suited for buying weakness and selling strength.  Short-term traders can lock-in recent gains, long-term traders can wait for weakness before adding to existing positions, and shorts can start looking for the headline that will trip us up.

Alternate Outcome:
The dip to 1,740 shook many traders out of the market and turmoil in overseas markets has those foreign investors looking for a refuge.  Recent sellers and international demand could provide the lift that fuels another rally-leg higher.

Trading Plan:
Swing traders should start looking for an exit.  Longer-term investors should dial back purchases as we return to the upper end of the range.  Anyone still out of the market will be better suited waiting since chasing a market that ran 100-points in two weeks elevates the risk of an intermediate pullback.

INDIVIDUAL STOCKS
TSLA is poised to close above $200 for the first time.  The recent rebound off the 50dma is pushing the stock to all-time highs, but the time to buy the stock was weeks ago, not today.  While there are a few dollars of momentum left, expect it to consolidate recent gains near $200, giving a patient buyer time to get in later without exposing himself to extra downside risk by holding through a consolidation.

AAPL is also showing strength and ready to close above the 50dma for the first time since the Q4 earnings call.  Much of the strength came on the heels of AAPL’s aggressive buyback in recent weeks and expectations of a new product.  Hopefully this a new category killer and not another iMaps or iCloud fizzle.  A larger screen phone seem highly likely, but is that enough to get all the Samsung Galaxy defectors to switch back?  No doubt a large screen phone will sell well, but it is more like to be bought by existing AAPL customers upgrading and less likely to be stealing back market share from the competition.  Of course the biggest benefit will be finally slowing customer defections to large screen competitors.

Plan your trade; trade your plan

Pushing toward highs

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks are modestly higher as they continue adding to the recent rebound.  We are about 15-points from all time highs and back within the early January consolidation.  Support is back near 1,810 and overhead resistance is at 1,850.

MARKET SENTIMENT
Whatever the market was afraid of last week is a distant memory as the only thing traders are worried about now is being left behind.  Clearly bears are getting squeezed and doing much of the buying as they cover their shorts for a loss.  The bigger question is if a wider group of investors will support these prices once bears and chasers are done buying.  Having seen this market so decisively bounce back, no doubt it is erasing fears this market is on the verge of imploding.  Whether real or not, that perception makes traders more comfortable buying and holding stocks.  With parts of this world falling apart, the US market’s resilience is looking like an island paradise to international investors.

TRADING OPPORTUNITIES
Expected Outcome: Inside trading range, headed to upper bound
We’ve come a long way from the 1,740 lows and are no doubt closer to the end of this bounce than the start.  Anyone buying the dip here is clearly late to the party because best profit opportunities arise when everyone is filled with dread, not relief.  While momentum can continue carrying us higher, the risk/reward changed dramatically.  We are 15-points from recent highs and 85-points from the lower bound of a potential trading range.  The market will likely consolidate recent gains and the best trade continues being buying weakness and selling strength.

Alternate Outcome:
With as bad as the rest of the world has become, we could see international investors flock to US equities.  This demand could be what fuels the next leg higher.

Trading Plan:
Stocks don’t go straight up, so expect the rate of gains to slow.  At best the market will consolidate recent gains just under or just above resistance at 1,850.  Anyone sitting out of this bounce doesn’t need to chase here and can wait to buy the consolidation or dip after the frenzied buying dries up.  Swing-trades can start looking for opportunities to take profits.  We only make money by selling our winners and selling strength is the best way to avoid letting profits evaporate.  Either sell proactively or use a trailing stop to protect these gains.

Plan your trade; trade your plan

Ignoring bad news

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks dipped at the open, but climbed into the green by midday.  The early low tested and held support at 1,810 and the 50dma.

MARKET SENTIMENT
Early weakness came from a renewal of domestic and international economic concerns, but selling was contained and the market shook it off shortly after the open.  While similar headlines lead to big losses a couple of weeks ago, the market is largely ignoring them now.  If today’s response seems contradictory, it actually makes perfect sense when we think about it.  Those that feared these stories sold during the dip to 1,740.  Those that bought the weakness or held through it demonstrated little concern for these fears and are less likely to sell a recycled spin on the same headlines.  People didn’t change their mind, but the market experienced churn in ownership and is why we ended up with a completely different response today.

While many market participants obsess over headlines, news is less important than understanding who owns stocks and what they think.  After everyone who fears a story sells, the market will largely ignore further developments because anyone who wanted to sell already did.  News might be random, but the market’s reaction to it is not.

TRADING OPPORTUNITIES
Expected Outcome: Inside trading range, headed toward upper end.
Stocks are behaving well following a fairly typical 5% dip.  We recovered prior support and are back above the 50dma.  Emotion driven selling ended as we bounced off the 1,740 lows and we now find ourselves 85-points higher.  It is time to jump on the rally bandwagon again?  Since the market trades sideways 60% of the time, chances are we need to consolidate last year’s gains before marching higher.  If the market is entering a ~1,750 / ~1,850 trading range, we are approaching the upper bound and should be thinking more about locking in profits than adding new positions.  While it is a little early to pull the ripcord, it is definitely late to be chasing.

Alternate Outcome:
Head-and-shoulders and double-tops give a false sense of relief and security before resuming the prior selloff.  While trading bounces can be extremely profitable, don’t get fooled into thinking the coast is clear.

Trading Plan:
Buy weakness and sell strength.  Clearly we are not experiencing weakness, so we should be looking closely for an opportunity to sell this strength.  Recent gains are chasing out shorts and once the bears finish buying back their shorts for a loss, it will be interesting to see if a wider group of buyers steps in, or the rebound stalls as we near prior highs.  A trailing stop under 1,810/50dma is not a bad way to protect gains.

Plan your trade; trade your plan

Holding gains

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks are trading sideways and consolidating the recent rebound.  We are still holding the 50dma and recovered the majority of January’s dip.

MARKET SENTIMENT
Nothing calms nerves like rebounding prices.  Previously nervous owners were rewarded for holding this dip, making them even less likely to sell the next round of weakness.  That lack of selling keeps supply tight and makes it easier for the rebound to continue.  More than just tight supply, the selloff flushed many owners out of the market and they are now prospective buyers as they are forced to chase the bounce higher.

While it is human nature to try and assign a cause to everything we see, markets go up and down for no other reason than that’s what markets do.  It is human nature to bid up prices to unsustainable levels and then sell them down to oversold levels.  So far this volatility seems to be little more than these normal and routine fluctuations.

TRADING OPPORTUNITIES
Expected Outcome: Climbing toward upper bound of an extended trading range
The time to buy the dip was when the crowd was fearful and selling stock at steep discounts.  Buying now is a bit late to the party and if the market is in an 1,750/1,850 trading range, we are approaching the upper bounds and this is a better selling opportunity than buying one.

Alternate Outcome:
Watch for signs of stalling demand, signaling this rebound is nothing but a temporary reprieve.  Likely another round of panic selling requires more spooky headlines, so keep an eye out for anything that could unnerve the market.

Trading Plan:
Buy weakness and sell strength.

Plan your trade; trade your plan

Short squeeze continues

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks smashed through the 50dma and came a long way from last week’s 1,740 lows.

MARKET SENTIMENT
Emerging Market fears evaporated as quickly as the came.  What threatened the developed world last week doesn’t even warrant a footnote this week.  Such is the ways of the market.

While everyone knows the market has periodic 5 and 10% pullbacks, they lose sight of that every time we are in the middle of one.  If everyone calmly held through a routine dip, we wouldn’t have one because the market doesn’t pullback without selling.  While in hindsight every 5% dip seems like a great buying opportunity, reality is they are terrifying events to live through.  The only reason a trader sells a 5% pullback is because they are convinced it will turn into a 10 or 20% correction.  Pullbacks work because they convince so many traders this is no ordinary dip.  That was clearly the case last week when many were dumping stocks over fears of Emerging Markets and a US economic slowdown.  But one person’s fear is another’s profit.

TRADING OPPORTUNITIES
Expected Outcome: Inside trading range, headed to upper bound
While we still have a way to go before this weakness proves it is nothing more than a vanilla pullback, it is shaping up that way.  Recent fears over EM and the US economy are fading as quickly as them came.  Nothing calms nerves like a rebound in prices.  But don’t expect the non-stop rally to continue.  Markets trade sideways 60% of the time and we are likely entering a 3 or 6 month consolidation as we digest last year’s big gains.  Buy weakness, sell strength.

Alternate Outcome:
While most owners are feeling better about their positions, few selloffs go in a straight line and they bounce on their way lower.  We could easily be in the process of forming a head-and-shoulders or double top.

Trading Plan:
Trading range or topping pattern?  For practical purposes it doesn’t really matter since we sell strength in both cases.  The bigger question is how high do we let this run before locking in gains.  Sell before the highs, wait for new highs, follow with a trailing stop, or the easiest, buy-and-hold.  It all depends on a traders risk tolerance and time frame.

INDIVIDUAL STOCKS
AAPL is close to closing the earnings gap, but that might not be so bullish.  Recent strength follows comments from Tim Cook that he spent a big chunk of his US based cash hoard buying stock over the last couple weeks and hinted at new products.  I saw one enthusiastic analyst suggest a $300 iWatch will sell in similar numbers as iPads.  I don’t know what he is smoking, but I want some.  There are few gadgets as geeky as a computer watch and there is nothing that screams enginerd like a calculator watch.  Countless people I know have iPads, yet I don’t know anyone with a geeky watch.  A more realistic sales projection would expect iWatchs to sell as well as Steve Job’s self-proclaimed Apple TV “hobby”.  The iWatch would be an interesting gadget for the Apple fanatic, but nothing more than a rounding error on the financials.  Since few people would throw out their current $2k flat screen TV for the rumored iTV, it would likely have an even smaller contribution to the bottom line.  And if this new thing is a payment processing solution, expect it to contribute generate as much profit as Google Wallet.

Plan your trade; trade your plan

Higher on Jobs

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks added to yesterday’s gains and continued bouncing off the 1,740 lows.  These gains pushed the market back into last week’s 1,770 to 1,790 consolidation.

MARKET SENTIMENT
The January Jobs Report came in 75k under expectations, but failed to trigger another leg lower since most of the traders who would have sold the news already bailed out earlier in the week.  When there is no one left to sell, it doesn’t matter what the news is.

We’ve risen an unthinkable 50-points over a couple of days despite many people’s expectation of a larger selloff.  But that is how the market works; convince everyone it is headed one way before snapping back the opposite direction.  This reaction only seems irrational if we focus on why people are buying disappointing employment.  But that is looking at it from the wrong angle.  People aren’t buying the news, they’re simply not selling it.  Often we oversimplify the market by assuming it moves because of buying and selling, but that’s only half the equation.  The other half is traders choosing not to buy or sell.  Over the last couple of weeks, nervous owners sold to more confident buyers willing to hold this volatility and risk.  These new buyers were unmoved by today’s disappointing employment and we bounced on the resulting tight supply when they chose not to sell the news.

TRADING OPPORTUNITIES
Expected Outcome:  Inside extended trading range, moving toward the upper end of the range
If the market wanted to sell off, it had the perfect excuse.  Missing jobs by 75k is a great reason to hit the sell button if that is what traders were inclined to do.  The fact they didn’t demonstrates current owners are not overly concerned by earlier Emerging Market issues and now a continued dip in domestic hiring.  Those lacking conviction sold over the last two weeks, leaving us with a far more calm and confident core group of owners.

Alternate Outcome:
Most of the buying over the last couple of days was driven by short covering.  While buying is buying, motivations matter because it gives us clues into the sustainability of a move.  If buyers of this rebound are bears and don’t believe in this market, that support will be short-lived.  This bounce will only continue if a wider group of buyers is willing to step in and support prices.  If not, then this is just a dead-cat bounce on the way lower.

Trading Plan:
When the market wants to go higher, we have to respect that.  We reclaimed prior support near 1,770 and overhead resistance remains at 1,800.  The market is likely entering a wide trading range as it consolidates 2013’s impressive gains.  Buying weakness and selling strength is likely the best strategy going forward.  After 1,800, the next level of technical resistance is the 50dma and 1,810.

INDIVIDUAL STOCKS
Tim Cook announced AAPL just bought $14B in stock over the last two weeks.  While many think this is bullish, to the skeptic, that shows the company is propping up its stock with artificial demand.  If the only reason we are holding $500 is because AAPL is buying stock so aggressively, what happens when they stop?  Without this $14B  buy back, the stock likely would have fallen even further post-earnings.    Chances are the stock will eventually make its way to where the market thinks it should trade once this artificial demand dries up.  Tim Cook was promoted to CEO because of his operational talents, not his stock picking skills.  If he’s buying the dip, he’s likely early.

TSLA is continuing its rebound higher after succumbing to recent broad market weakness.  It is acting like it wants to break $200 in the near future.

Plan your trade; trade your plan

Market bounces

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks gapped 10-points higher at the open and climbed another 10-points by midday.  The bounce slowed at prior support near 1,770 where it traded sideways into the afternoon.

MARKET SENTIMENT
Markets are whipping around on obscure economic data.  Monday we plunged on disappointing PMI, today we surged on encouraging weekly jobless claims and comments from the ECB.  While talking heads claim these data points are what moved markets, they were simply the excuse people used to trade their already existing bias.  Over the last couple weeks everyone was looking for an excuse to sell.  Once we ran out of willing sellers, supply dried up and it didn’t take much to trigger a short-squeeze.

While the news is random, the market’s reaction to it is not.  Think of the market like a chained dog, except instead of a chain, we use a rubber band.  When we get to one extreme or the other, it is always possible to keep going in the same direction, but it becomes increasingly difficult and the path of least resistance is to go back the other way.  Markets overshoot and undershoot the “ideal” level as traders overreact to news and price moves.  At least for the time being, selling off to 1,740 appears to be a short-term overreaction.

TRADING OPPORTUNITIES
Expected Outcome: Modestly bullish – expect the market to stay in trading range.
Everyone is looking forward to Friday’s employment report, but most of the worrywarts sold earlier in the week, while those still holding showed a willingness to hold volatility and risk.  This makes them less likely to jump out the window at the first signs of trouble or price declines.

The market is likely entering a sideways trading range between 1,740 and 1,850.  While we could easily dip under 1,740 and even test the 200dma, we are closer to the end of this selloff than the start.

Alternate Outcome:
While the market has priced in some modest economic weakness, there is still room for dramatic downside if it turns out we are slipping into economic contraction or these Emerging Market issues spill over into developed economies.  While selling took a break, watch for anxiety to flair up again.

Trading Plan:
While we could slip on a disappointing Job’s report, there is far more potential for the market to explode higher in a short squeeze.  If we are in a trading range, buy weakness and sell strength.

Plan your trade; trade your plan

Wait and See

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are chopping around between 1,740 and 1,760 as they digest Monday’s plunge.  We remain between the 50dma and 200dma as 1,740 provides near-term support.

MARKET SENTIMENT
Our markets quickly forgot about the Emerging Market Crisis as domestic economic concerns took center stage.  Monday’s plunge was due to lower than expected manufacturing numbers and the market is nervously awaiting Friday’s employment report.  The ADP report this morning was mostly inline with expectations, but it lost a lot of credibility last month when it failed to alert us to the massive miss by the govt’s numbers days later.  While many made excuses for the December employment, it is harder to rationalize away two bad months if we miss a second time on Friday.

While it feels counterintuitive, this is the safest time to own stocks in the last three months.  Risk is proportional to height and falling 100-points from recent highs lowers our exposure.  If we assume this is a routine 10% pullback, anyone who bought the calm and tranquil January highs opened themselves to 10% downside risk.  Now that we’ve fallen 5% from those highs, buying these levels exposes us to the remaining 5% downside.  5% is less than 10%, making this a far safer time to buy than when everyone felt comfortable a couple of weeks ago.  Take comfort in fear and fear comfort.

TRADING OPPORTUNITIES
Expected Outcome: Modestly bullish – lower end of prolonged trading range.
Traders are taking a wait and see as we trade sideways following Monday’s selloff.  Most of the weak and fearful bailed out as we crashed through recent support levels.  The remaining owners are nervous, but waiting to see if the situation deteriorates further before hitting the sell button.  Prospective buyers are watching the market with interest, but holding back, waiting to see if they can get even better prices.  Current owners would rather not sell and prospective buyers are intrigued by these discounts, creating the potential for a nice rebound once these economic fears turn out less bad than feared.

Alternate Outcome:
Everything is always less bad than feared……except when it isn’t.  Most of the 2013 rally was predicated on a slow but steady economic recovery.  If new data suggest a further slowdown, even contraction, anticipate traders repricing the market based on these lower expectations.  While giving up a bit of last year’s exuberance brought us to more reasonable levels, markets rarely stop at reasonable and continue to overdone levels.

Trading Plan:
Expect the chop to continue for the next few days.  Resist the temptation to buy strength or sell weakness as the market will likely reverse hours later.  This is the time to buy weakness and sell strength.  With the market down 5% from recent highs, this is a more interesting buying opportunity than selling one.  While we could continue lower, that only gives us even more attractive levels to buy.  And above all else, stay calm.

Plan your trade; trade your plan

A Little Relief

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks bounced back and reclaimed some of Monday’s losses.  We are stuck in no-man’s land between the 50dma and the 200dma.  By midday the market recovered 1,750, which acted as support back in October.

MARKET SENTIMENT
Gone are the days of easy money as this market gives heartburn to anyone paying attention.  Yesterday’s weak manufacturing numbers are making some question the strength of our economy.  These traders lightened up ahead of what they fear could be another bad Jobs Report.  Monday’s dip was the market lowering expectations and ironically enough, reducing the risk of holding through the employment report.  If we selloff ahead of time, there is less selling potential following a disappointing number is release.    Pricing in bad news creates a positive skew where a disappointing, bu less-bad than feared number could lead to a pop.

TRADING OPPORTUNITIES
Expected Outcome:
Most associate themselves with bulls or bears.  We have a natural tendency to think the market is poised to go one way or the other and trade that outlook.  But most of the time the market goes sideways.  While bears think we are on the verge of a massive selloff and bulls claim this is just another dip on the way higher, where are all the people saying we are entering a six-month trading range?  I don’t remember the source, but I recall someone claiming the market trades sideways 60% of the time. Buy the dip and sell the rebound.

Recent weakness wrung out a lot of the excess that built up in the closing months of 2013.  Pulling back over 5% put fear back in the market and flushed out many owners who envision far steeper declines around the corner.  This selling got rid of many weak owners and replaced them with far more courageous buyers who demonstrated a lack of fear of weakness when they bought the dip.  While no one knows exactly how low we will go, we are closer to the end of this dip than the start.

Alternate Outcome:
While we might bounce any day, not all selloffs go straight down.  The bigger and longer ones step lower with a series of bounces along the way.  If the market bounces watch for weakness following a short-squeeze that pushes us above the 50dma.  And of course the market could plunge on an atrocious jobs number suggests we are in an economic contraction.

Trading Plan:
Expect the market to chop sideways until Friday.  The last couple of weeks of selling lowered expectations, making it easier for the data to come out better than feared.  That will likely lead to a short-squeeze, but if the market is stuck in a trading range, that strength is a better selling opportunity.  But if we miss jobs gains by more than 100k again, look out below.

Plan your trade; trade your plan

Another rout

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks shattered 1,770 support and tested 1,750 in early trade.  They are at three-month lows and trading at levels not seen since early November.

MARKET SENTIMENT
The market had been chopping around since finding support following the Emerging Market selloff, but took a fresh leg lower this morning on weaker than expected PMI.  This violated widely followed support levels stretching back to November, triggering a wave of automatic stop-loss selling.

Like every market move, there are always two possible outcomes.  Either this weakness is an overreaction and we bounce back, or this hints at more selling to come. It’s not surprising to see the market dip under 1,770.  Market makers, brokers, and HFTs make their living on trading volume.  If markets slip under support levels, it sends off an avalanche of trading and these guys can make next month’s alimony payments.  The big question is what happens after we fall under support.  Does this stop-loss selling exhaust itself as we run out of supply?  Or does weakness shake the resolve of previously confident owners, leading to a fresh round of emotional selling?

TRADING OPPORTUNITIES
Expected Outcome:
By midday, most of the automatic stop-loss selling already occurred, leaving many owners dominated by fear and indecision.  This is a classic “pain trade” and clearly it is having the intended effect.  Two weeks ago we were too bullish and it is hard to say the same about this market.  So far this weakness is shaking free short-term traders and late rally chasers, but for most of the buy-and-hold crowd, this is just another opportunity to load up on stocks at better prices.  There are only so many nervous sellers that can be shaken free.  As long as the slow but steady recovery in the US continues, we are likely near the end of the selling.

Alternate Outcome:
If the market is shifting to a half-empty outlook on the economy and fragile recovery, look for a dramatic re-pricing of stocks as prior enthusiasm gives way to widespread pessimism.  Every dip presents a buying opportunity, it is simply a matter of waiting for the right opportunity to get in.  If the market continues obsessing about negative headlines, then we are not at that point yet.

Trading Plan:
Long-term holders should continue holding because that is what long-term holders do.  Short-term traders can get more aggressive with this dip.  With most of the stop-losses already triggered, bears and short-sellers need emotional selling to accelerate.  More bad news will likely push nervous owners over the edge.  On the other side, dip buyers will have a strong tailwind if a little bit of good news triggers a short squeeze.  After 1750, the next likely level is the 50dma.

Plan your trade; trade your plan

Seesaw continues

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
US stocks gapped lower at the open on inflamed Emerging Market concerns that sent European markets tumbling.  This gap lower failed to breach 1,770 support and the market bounced off those early lows by midmorning.

MARKET SENTIMENT
Our markets are jumping all over the place on events happening a world away.  The lira, forint, and rand are all under pressure and sending US investors scurrying for cover.  If you don’t know what those are, don’t worry, you are not the only one.  If US politicians shutting down our govt and threatening to default on our debt was nothing more than a blip on the way higher, why are we allowing currency problems in countries smaller than individual US states to weigh so heavily on our markets?

Most investors are not overly concerned about these Emerging Market problems infecting our economy, but they are afraid of other investors being afraid of them.  They are not selling based on a shift in their fundamental outlook, they are selling the expectation that other people are going to sell these headlines.  Selloffs driven by selling because everyone else is selling are dramatic, scary, and fast, but rarely have staying power.  Once the frenzy subsides, everyone wonders how they could have acted so silly.  But we are clan animals and through our innate survival instinct, when the clan is nervous, we are nervous.  Many global markets were at all-time highs and most investors harbor a fear of heights.  They were looking for an excuse to sell and this excuse is as good as any.

TRADING OPPORTUNITIES
Expected Outcome: Modestly bullish – lower end of expected trading range
Recent volatility shook out most owners who were not committed to their positions.  Those left standing demonstrated comfort holding this risk and volatility.  The more confident the remaining owners are, the less supply we have on the market and the easier it is for prices to rebound.

1,770 is building as a key support level.  If there is one thing we know about support and resistance, markets like to breach them before reversing the other way.  A quick dip under 1,770 would trigger a wave of automatic stop-loss trading.  But unfortunately for those stop-loss sellers, that last dip under support will likely be the final purge before this market overcomes these Emerging Market fears.

Alternate Outcome:
Are we running out of sellers or dip buyers?  Every day the market presents us with two equally compelling scenarios.  The market price is the perfect balance point between these two contrasting outlooks.  Half the market expects us to go higher, the other half thinks we are headed lower.  A dip under 1,770 could do more than trigger one last wave of stop-loss selling, it could trigger another avalanche of emotional selling.

Trading Plan:
The longer we hold these levels, the more likely it is we are near the bottom of this selloff.  While we might dip under support at 1,770, that will likely be a quick lived shakeout that purges any remaining excess and clears the way for another move higher.  But we do have to be careful about these global headlines.  2008 taught us that on rare occasions, things are far worse than markets fear.

INDIVIDUAL STOCKS
AAPL is still struggling with $500 and any hopes for a v-bottom are quickly evaporating as value buyers are not impressed with these new discounts.  No doubt Apple is one of the greatest companies in the world and they have unbelievably loyal customers, but with 20% market share in smartphones, they might not deserve to be the largest company in the world.

TSLA  is adding to recent gains as it tries to recover prior highs.  This bounce is demonstrating staying power and the stock will likely breach $200 in coming weeks.

AMZN fell under the 50dma on disappointing earnings.  Is this the top everyone’s been expecting in this high-flying momentum stock, or just another dip along the way.  To see a larger selloff in AMZN, we need to see a fundamental change in the company’s prospects going forward.  AAPL fell on declining market share.  NFLX’s most recent collapse came after subscribers fled the planned split of the DVD and streaming business.  AMZN will bounce back if the original story remains in tact.

Plan your trade; trade your plan

Anatomy of a bounce

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks rebounded from yesterday’s 1,770 lows, shrugging off another overnight Asian bloodbath.  This is the fourth day the market held 1,770 and likely indicates, at least for the time being, the Emerging Market selloff is no longer a major worry for US markets.

MARKET SENTIMENT
With every headline, there are market participants who think it is a big deal and others that are indifferent.  Over the last week, those fearing developments in emerging markets sold, fearing this was the start of something bigger.  Those that bought from the sellers demonstrated a lack of fear of the same headlines.  Anyone holding the dip also showed a willingness to continue owning in the face of these risks.  Eventually we reach a point where everyone who is concerned is out and anyone left is indifferent.  That is the point where selloffs end.

Yesterday’s Fed Taper and last night’s Asian selloff was the perfect invitation for anyone worried about those events to sell.  The fact we didn’t selloff indicates there are few worrywarts left in and most holding stocks are comfortable owning these risks.  As long as those events maintain the same trajectory, we shouldn’t expect our markets to react since these expectation are now priced in.  Obviously if the situation deteriorates, it will trigger another round of selling, but most likely the worst is behind us.  Better yet, if the situation turns out less bad than feared, emotional sellers gave us another profit opportunity.  Their pain is our gain.

TRADING OPPORTUNITIES
Expected Outcome: Modestly Bullish – buy the dip
The Emerging Market selloff is taking a break and will likely turn into a near-term short-squeeze.  That doesn’t mean the coast is clear and we are coasting to 1,900.  Stay vigilant and look for the market to trade sideways in the 1,770 to 1,850 range for the remainder of the quarter.

Alternate Outcome:
There are still risks abound and this might be nothing more than a technical bounce if the Emerging Market situation flares up or January’s employment shows December’s disappointing numbers were not fluke.  If buying dips were easy, everyone would be rich.

Trading Plan:
Support is buyable for a swing trade.  When the market gets back to the 50dma, we will reevaluate sentiment to determine if this bounce is headed back to the upper end of the 1,850 trading range, or stall and tumble to new lows.

INDIVIDUAL STOCKS
AAPL slipped under $500 for the first time since October as dip buyers are still shying away from what bulls claiming is a fantastic buying opportunity.  Part of AAPL’s problem is everyone who loves the stock already owns it.  Those not already drunk on the Koolaid are wary of the slowing growth and want to see AAPL reinvent another product category before pushing the stock back toward old highs.  At this point is seems like the best outcome for shareholders AAPL becomes another MSFT and trades sideways for the next decade.  Worst case is it follows the same trajectory as the other hot handset makers, PALM and BBRY.

FB shattered expectations again.  The IPO darling, turned Wall Street joke, turned juggernaut, shows just how emotional traders are toward high-flying stocks.   NFLX is another darling, goat, back to darling story, except this is NFLX’s third trip through the rodeo.  Best advice is sell what everyone loves and buy what everyone hates or is afraid to own.

Plan your trade; trade your plan

Down, but holding support

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed emerging market concerns, but are off those early lows in midday trade.  This morning’s dip failed to undercut Monday’s lows and continues trading sideways above support.  If we hold this level for a few more days, we might be establishing a wider 1,770 to 1,850 trading range that could last the remainder of the quarter.  Several months of sideways trade would go a long way toward refreshing this aging bull.

MARKET SENTIMENT
The headline everyone is waiting on is the Fed policy statement due at 2pm EST.  I’m not sure what people expect since the Taper policy was explicitly telegraphed last month.  Plan on another $10B taper and holding ultra low-interest rates.  If that catches anyone by surprise, they are clearly not paying attention.  If some are hoping a 3% “crash” in equities or monetary crises in small countries on the other side of the globe will force the Fed to change their carefully laid out plans, they will be disappointed.

Of course fundamentals and sentiment are two very different things and we all know markets trade sentiment in the near-term.  While we will likely put this emerging market turmoil behind us in coming weeks, that doesn’t mean traders won’t react emotionally to the headlines in the present.  It comes down to how upset the market is when Taper marches ahead despite emerging market worries and disappointing December employment.  But often when the market responds emotionally to news, that creates profit opportunities for those willing to take the other side.

Last year we had a “half-full” market that looked at the positive in every data point or headline.  Could these emerging market woes be a sign the market is shifting to a “half-empty” outlook?  If we see a fundamental shift in the market’s outlook and disposition, that could signal a reversal in trend.  For the time being, four days of selling is anything but conclusive, it is simply something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously bullish – buy weakness
Every selloff in history has been a buying opportunity, the only question is how long it takes to show a profit.  This time is no different.  Currently the market is finding support above 1,770 for the third day.  We didn’t get a V-bottom like we’ve seen following other dips recently, but halting the emotional selloff is constructive.  Buyers are demonstrating a willingness to support the market at these levels and we’ve run out of panicked sellers.  The market is likely establishing an extended sideways trading range in order to digest all of 2013’s gains.

Alternate Outcome:
If holding 1,770 is constructive, falling under it is destructive.  Failing to hold support will elevate anxiety all over again and reignite emotional selling.  Be prepared for another leg down if we cannot hold support.

Trading Plan:
Maintaining 1,770 through Thursday is encouraging and suggests we are putting these emerging market fears behind us.  Quarters typically have personalities and ending this selloff likely means this one is finding a bottom and setting up to trade sideways.  Fail to hold support and all bets are off.

INDIVIDUAL STOCKS
Buyers have not rushed in to save AAPL and the stock is down modestly following yesterday’s plunge.  Bulls argue that AAPL is a software company not a hardware company, but given the market’s reaction to yesterday’s earnings, Wall Street thinks AAPL is little more than a phone company.  The company exceeded expectations on almost every metric expect phone sales.  Everyone agrees AAPL built an impressive and profitable ecosystem, but at its core is the iPhone.  Take that away and everything else falls down.  Maybe the Street is on to something when it focuses almost exclusively on the iPhone sales.

Plan your trade; trade your plan

Relief Rally

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks took a break from three days of selling and are up modestly in midday trade.  Yesterday we bounced off 1,770 support that comes from October, November, and December trade.

MARKET SENTIMENT
The global rout eased as Asian and European markets finished their sessions flat or higher.  This took pressure off US markets and we are experiencing a modest relief rally.  While it is nice to end the emotional, sell first, ask questions later trade that occurred over the last few days, everyone is wondering if this is just a temporary reprieve before another leg down, or if this is the end of the Emerging Market tantrum.

The slide paused as all those who wanted to sell already sold.  Now bulls and bears are watching intently to see what comes next.  Most weak sellers were purged in the relentless, three-day implosion.  Far more bold traders took their place, buying the dip and through those actions demonstrate little fear of this weakness.  The remaining group of owners we have to worry about are those formerly confident holders who are now riddled with doubt and paralyzed with fear.  This morning’s bounce brings them some relief, but no doubt that anxiety will flare up if prices reverse lower.

The recent slide already undercut most stop-losses, so we don’t need to worry about big waves of automatic selling if the slide continues.  The biggest risk is a continuation of the pain trade where owners cannot bear the thought of losing any more money and manually pull the plug.  While this dip feels dramatic, we must realize anyone holding a widely diversified basket of stocks is most likely still sitting on profits from last year’s monster gains.  While theoretically money is a commodity, many traders have a higher risk tolerance for profits than principle.  That means most of the longer-term holders are still quite comfortable and the only ones experiencing an inordinate amount of pain are short-term traders and late buyers of last year’s rally.  Since both of these groups are relatively small compared to the broad market, their emotional selling can only take us so far.  To continue the selloff, we need to flush out longer-viewed traders sitting on nice gains.  That is harder to do and a large part of the reason the emotional selloff didn’t last more than three-days or push us down much more than 4% from the highs.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously Bullish – buy weakness
Anytime emotional selling takes a break, it is a good thing.  This gives owners a chance to regroup and evaluate the big picture.  Buyers also often wait for the selling to stall before jumping in and this pause gives them the opportunity to buy at prices we haven’t seen since October.

We typically get a couple 5% pullbacks a year.  10% pullbacks are less common and  happen once a year or less.  20% pullbacks are rare and only happen every few years.  Straight probabilities suggest this weakness is more likely the 5% variety than a 10% or 20% correction.  When in doubt stick with the trend and the high probability trade.  If buying dips were easy, everyone would be rich.

Alternate Outcome:
Through most of 2013, we ricocheted off each dip’s low.  This rebound is taking its time.  Either this is not the actual bottom, or the market’s character is changing.  Both of these are concerns we need to pay attention to.  Markets rarely implode from the highs, instead they step lower.  So while the market might bounce here, we need to be wary of further weakness if the market is unable to make new highs.

Trading Plan:
We only make money by taking risk.  Buying dips when everyone is fearful of continued selling is never an easy trade, but more often than not it is the right trade.  But at the same time, there are no guarantees in the market and we always need a contingency plan.  If the selloff truly stalled and the market is ready to rebound, we should not retest Monday’s lows near 1,772.  Dipping under this level likely means another round of pain is coming.

INDIVIDUAL STOCKS
AAPL beat expectations on almost every metric but iPhone sales and the stock is getting crushed for it, down about 8%.  Tim Cook and bulls point to supply constraints and other issues that lead to slower sales, but Wall Street is not buying these excuses.  Most likely investors are frustrated by the lack of innovation.  The biggest risk is AAPL’s sentiment transition from great company with explosive growth to rock solid company with above average growth.  The nuance is minor, but to the market it is the difference between reclaiming $700 and trading sideways for a decade.  Many of the greatest companies in the world traded sideways following epic stock runs.  There is no reason to expect AAPL’s stock will be any different.  At this point we have dividends, buybacks, product refreshes, and China Mobile, but so far nothing is moving the needle.  Wall Street wants another new must have device and the stock will likely trade sideways until AAPL disrupts another product category.

Plan your trade; trade your plan

More selling

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks sold off for a third straight day and are testing prior support near 1,770.

MARKET SENTIMENT
Emerging market fears continue embroiling stocks and buyers are unwilling to step in front of this selloff.  This price decline is shaking the resolve of previously confident owners and many are choosing to sell this weakness rather than endure the pain of seeing the market fall any further.

As rational traders, we need to decide if currency issues in Turkey and Argentina will materially affect the US economy and corporate earnings.  In years past we’ve seen our markets tumble over downgrades of US debt and the risks of financial contagion in the Eurozone. Those issues threatened our financial infrastructure and brought flashbacks of the 2008 meltdown.  Obviously we cleared those terrifying hurdles on our way to all time highs last year.  In the big picture current emerging market issues are far less threatening to our economy and will likely pass through the system even quicker.

This selloff is more about sentiment than fundamentals.  We should ignore these relatively minor headlines and instead focus on how other traders are responding to this weakness.  Most traders are not overly concerned about these fundamental issues on the other side of the globe, but there is just enough uncertainty to make them nervous.  Then when they see everyone else panic and run for the exits, it is hard to resist the urge to join the hysteria.  Everyone knows markets go up and down, but it is easy to forget that when we see prices tumble.

The last three days of weakness has flushed out a large chunk of the excess enthusiasm.  Dramatic moves lower chase off most of the holders who are inclined to sell.  Those owners still holding are far more confident in their analysis and not interested in selling no matter what near-term moves the market makes.  It is on the backs of these confident owners that the market will find a bottom and bounce higher.  This periodic purging of weak owners is how markets refresh themselves.  Recent sellers and shorts will eventually push the market higher when they buy back in over coming weeks.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously bullish – buy weakness
Everyone wants prices to pullback so they can get in at lower levels, but every time the market gives us what we ask for, many are too nervous to take the gift.  Profit opportunities come from volatility and this weakness is exactly what we want to see.  Emotional owners are selling at discounts as compared to what they thought stocks were worth last week and that creates profit opportunities for those willing to take a risk.  We buy their fear and sell their greed.

Alternate Outcome:
Every 20% selloff starts with that first 4%.  While the market could bounce at any time, there nothing more effective at shattering confidence than a relentless selloff.  While these headlines seem unworthy of a large decline, the market rarely does what we expect it to do and if the crowd reaches full-blown hysteria, there is no telling what it could do.

Trading Plan:
Buy weakness and sell strength.  Define your risk and take what other traders are giving away.

INDIVIDUAL STOCKS
AAPL earnings are on tap after the close.  The stock is up quite a bit from last year’s lows and it will take impressive results to continue the recovery.  If the company blows away expectations, look for the strength to continue.  If bulls don’t get what they are hoping for, the stock will struggle as it runs out of catalysts to justify high growth expectations.  This earnings will like set the tone for the next three months of trade, so go with the momentum.

Plan your trade; trade your plan

Who’s the sucker

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks undercut prior support near 1,810 and slipped under the 50dma for the first time since October.  The market is testing the lower bound of the recent trading range after failing to break above it earlier in the week.

MARKET SENTIMENT
Markets are nervous following recent Asian and emerging market weakness and this anxiety is flaring up among short-term traders.  Stocktwits’ SPY sentiment survey has seen bullishness drop from 80% in December to 39% today.  Last week’s AAII sentiment survey showed bullishness dip under 40% for the first time since November.  What was record high levels of bullishness just a few weeks ago has cooled off dramatically and is a healthy sign.

When analyzing sentiment, it is helpful to segregate market participants by timeframe.  We have day-traders, swing-traders, position-traders, and buy-and-hold-forever.  Stocktwits is comprised primarily of active day and swing traders.  This group has clearly grown bearish recently, suggesting many liquidated longs and some have even gone short as sentiment on those boards plunged.  We can largely ignore the buy-and-hold-forever crowd since many of these 401k types don’t follow the market daily and a 3% dip over two days is unlikely to send them running for cover.  That leaves medium-term position traders.  How are these traders positioned and what are they think will go a long way to telling us what will happen next.

Many of position traders are fully invested following 2013’s monster run.  Last year they flinched anytime the market showed weakness, but every dip turned into a buying opportunity and anyone who sold kicked themselves for being so foolish and weak.  After getting burned a couple of times, these position traders learned to hold any and all weakness.  When confident/complacent owners hold the dips, they keep supply off the market, making it easier to bounce.  With fewer people hitting the sell button, markets don’t selloff as much, and as we’ve seen in recent months, volatility decreases.

The headline roiling global markets is Asian and emerging market weakness.  Most short-term traders have either been shaken out as the market dipped under their stop-losses, or they used the violation of support as a signal to go short.  No doubt a lot of the selling over the last couple days has come from this highly active group of traders.  The buy-and-hold-forever crowd isn’t selling, so we can ignore them.  The million dollar question is if weakness in emerging markets is enough to shake the confidence and resolve of position traders.  These guys held through Shutdown, Debt Ceiling, and Taper as we bounced off those lows.  If those significant headline issues that hit close to home didn’t make them flinch, why would a manufacturing index data point on the other side of the world all of a sudden turn them into scared sellers?  That’s a good question.

TRADING OPPORTUNITIES:
Expected Outcome: Bullish – at lower end of trading range
Stocks dipped under support and the 50dma in early trade, triggering many stop-losses in the area and tempting bears to short the weakness.  At this point either the selling accelerates as the weakness shatters the confidence and resolve of a wider pool of owners, or supply dries up as we run out of sellers and the market bounces like it has so many times before.

Who’s the sucker here, nervous sellers or excited dip buyers?  Asian markets have been selling off since December, so why it became big news yesterday is curious.  Most likely this was just an excuse for the nervous to sell and the cooling sentiment is a healthy part of moving forward.  Dips wouldn’t refresh the market if they didn’t convince everyone this time it is real.

Alternate Outcome:
Nothing shatters confidence like a screen filled with red.  It doesn’t matter why the crowd is selling, just seeing other people sell makes us nervous.  This dates back to our days in the wild.  When everyone else started running, those that waited around to see what all the fuss was about quickly became lion food.  It doesn’t matter if these headlines are legitimate or not, price is truth and emotional selling often leads to more emotional selling.

Trading Plan:
If the recent trading range holds and selling doesn’t accelerate, this is clearly a buying opportunity.  Continued carnage in the emerging markets is a real risk, but the best profit opportunities always feel risky.  The conservative trade is to wait another day or two for this trade to play out.  A trader with a higher risk tolerance can try picking a bottom if the selloff stalls this afternoon.

Plan your trade; trade your plan

Bouncing around the trading range

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks gapped lower at the open and slipped to 1,825 by midday.  The market is still above recent support/prior resistance near 1,810 and well within the 1,810 to 1,850 trading range.  The 50dma continues marching higher and is catching up to 1,810 support.

MARKET SENTIMENT
Headlines claim this weakness is driven by disappointing earnings and manufacturing data out of China, but take those explanations with a grain of salt.  Journalists are paid to come up with a fundamental reason for every gyrations, whether real or imagined, but the truth is markets often move for no discernible fundamental reason.  Over the last few weeks traders have been reluctant to buy new highs and demand dries up each time we approach 1,850.  So far this dip doesn’t appear to be any more than a continuation of that aversion to buying 1,850.

For a material decline to take place, the market needs to become inundated with excess supply.  That means currently complacent owners hitting the sell button.  So far they have proven unwilling to sell and every move lower stalls when supply dries up.  For the last 12-months each dip has been a buying opportunity and owners quickly learned selling weakness is a poor trading decision.  Now they confidently hold any and all weakness, keeping supply tight and making it easy for the market to bounce on modest demand.  To see more meaningful and sustainable selling, we need to shatter the confidence of holders and send them rushing for the exits.  If the recent announcement of Taper didn’t concern owners, I doubt some footnote about manufacturing in China will all of a sudden trigger a wave of emotional selling.

TRADING OPPORTUNITIES
Expected Outcome: Modestly Bullish – Inside Trading Range
Without a fundamental reason for the market to collapse, today’s weakness is likely another buyable dip.  This sideways churn is refreshing the market and setting the stage for the next move higher.  Unsustainable markets rollover quickly and holding this levels for nearly a month suggest higher prices are in our future.  But the market could dip under recent support at 1,810 in coming days, flushing out the last of the weak hands before bouncing higher.

Alternate Outcome:
Sometimes markets rollover before the crowd understand why.  This happens when the market is most bullish and everyone already owns all the stock they can hold.  Without new buyers, prices fall under their own weight.  If we slip far enough, previously confident owners turn into nervous sellers.  Major market tops occur when the crowd is most bullish and is how this one will likely end too.  While it is hard to know when sentiment gets too extreme, price will always let us know with a pattern of lower highs and lower lows.  Since we are less than 2% from all time highs, calls of a market top are clearly premature.

Trading Plan:
As long as the market stays inside the trading range, continue buying weakness and selling strength.  A dip under 1,810 presents an interesting buying opportunity if the market finds support.

Plan your trade; trade your plan