AM: Is sideways good or bad?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks stumbled at the open, slipping to 1683 as the lethargic summer trade continues.

MARKET SENTIMENT
Everyone knows markets fall faster than they climb.  A few day selloff can wipe out months of profits and is why we fear them so much, but can we use this typical behavior to figure out this market’s next move?  We spent most of the last month above 1680.  If selloffs occur over a few days, holding these levels for so long strongly suggests this market is not on the verge of crumbling.  In fact, if we look at the other side where rallies take time and are drawn out, a month-long consolidation suggests a continuation is more likely.

Over the last four-weeks we’ve seen plenty of profit-taking, defensive selling, and aggressive shorting, yet the market continues holding near all-time highs.  We’ve gone through modest weakness and had countless ominous headlines regarding QE, yet most holders refuse to sell and that tight supply is propping up prices.  Once we exhaust the supply of proactive sellers, the market will continue higher like it has every other time this year following widespread calls of a top.

TRADING OPPORTUNITIES
Expected Outcome:
There are no guarantees in the market and successful trading is a game of probabilities.  Without a doubt the market could implode any moment, but the fact it resisted selling off for so long suggests the next move is still higher.  We are still stuck in the listless summer trade and should continue taking profits early and often.  Most big money institutions are in a holding pattern until the senior decision makers come back from vacation.  Seeing how strong the year’s been, this fall could be interesting.  Will this be another brutal September, or is the least expected trade, a 12-month rally, the most likely outcome?

Alternate Outcome:
While it is encouraging the market is holding near all-time highs, where are the buyers needed to breakout to new highs?  Markets top for one of two reasons, panic selling following an unexpected development, or exhausting the supply of buyers on bullish headlines.  The clearest sign the market is breaking down is violating key support levels.  Right now 1680 is the level to watch.  Beyond that is the 50dma, quickly approaching 1660.

Trading Plan
There is not a lot to do while we hide out in this 1680 to 1700 range.  A bull can keep holding and bear can stay short, but at this point they are fighting over loose change.  Often the hardest trade is to sit on cash and wait for a better opportunity.  We come to the market to trade and it gets boring real quick when we don’t have money at risk.  (I’m as guilty of this as the next guy)  The real money will be made waiting for the market’s next directional move.  The longer we consolidate, the larger the resulting move will be.

Plan your trade; trade your plan

AM: Selling stalls

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks bounced between 1690 and 1700 as the indecision continues.  While we haven’t recovered 1700, today’s strength looks to end the streak of down-days.

MARKET SENTIMENT
The recent dip opened the door to further selling, but the market didn’t take the bait.  Even with all the QE fear mongering, the best bears could manage so far is a trivial 1.5% slip from all-time highs.  For context, the previous two QE initiated selloffs started with intraday plunges of 2% and 1.4%.  Clearly the last three-day “selloff” was nothing like May 22nd’s and June 19th’s breakdowns and the resulting trade will also look different.  We trade the market, not our biases, and so far the uptrend is holding up nicely.

QE driven selling in May, June, and over the last three-days flushed out most traders afraid of an impending Tapering correction.  It is foolish to expect a major market selloff, yet continue holding stocks, so common sense tells us most Tapering worrywarts are long gone. This proactive trading phenomena gives the market its forward-looking behavior.  Back to QE, at this point even the baristas at Starbucks know tapering is just around the corner, so there is no QE trade other than ignoring all the hype.  Forget QE and move on to the next thing.

Without a doubt ignoring what everyone is talking about is one of the hardest parts of contrarian trading.  (The other is not confusing trend with sentiment.)  When we break it down and look at it rationally, it is fairly obvious everyone predicting doom and gloom is already out of the market.  When most are expecting the worst, the bulk of the selling is already behind us and without new supply, markets often rally.  This single idea drove us from November’s 1340 lows and continues pushing us higher as long as the cynics keep fighting this rally.

TRADING OPPORTUNITIES
Expected Outcome:
If this market was going to break wide open, it would have happened by now.  Today’s support is constructive and suggests we are not done making new highs.  The previous three days of selling was all on recycled headlines and was only temporary.  This rally will end at some point, but it will be on new and unexpected developments, not the stuff everyone is already talking about.

Alternate Outcome:
Markets top for one of two reasons, bad news or good news.  The bad news is fairly obvious so I won’t get into it, but good news selloffs lead to longer and deeper corrections.  Good news selloffs happen when everyone is bullish and fully invested.  At that point there is no one left to buy and nowhere to go but down.    We could see either of these bearish outcomes in the near future and need to keep an eye on both.  The first and most obvious sign the market is breaking down is seeing it fail to hold previous support.  We can continue buying dips, but we must always respect our stops.

Trading Plan:
The modest selloff and recent strength doesn’t support the bear case.  It is better to get out early when losses are small, then push our luck and wait for the pain of mounting losses to force us out.  If a bigger selloff is in front of us, there is plenty of time to jump on that bandwagon when it finally shows up.

Bulls can buy/continue holding a break of 1700.  The recent low of 1685 makes a decent stop.

INDIVIDUAL STOCKS
TSLA is holding post earnings gains nicely, but every sustainable rally needs basing and consolidation.  Without that foundation and pruning of irrational exuberance, the stock is setting up for a bubble style of collapse.  To remain sustainable, the stock needs to check back to the 50dma at some point in coming months.  Maybe we trade sideways until it catches up, or we dip down to it.  I hope it does one of those two because the alternative is a bubble style collapse to $50 over a period of weeks.  That isn’t bad if we get out early, but that is easier said than done.  Just ask anyone who owned AAPL at $700.

Speaking of AAPL, the stock is on track for its third down-day following a brush with the 200dma.  This is a nice place to take profits and maybe that is all this weakness is, but we could also be slipping as few large investors are willing to chase the stock up to recent highs.  Its been a nice run and the only trade on AAPL this year has been buying weakness and selling strength.  Since this is the highest we’ve been since January, this might be a good time to lock in profits.

Plan your trade; trade your plan

PM: The 1% selloff

By Jani Ziedins | End of Day Analysis

PM Update

MARKET BEHAVIOR
Stocks slipped a little further under 1700 but finished off the day’s lows.  Volume was well below average as few bought or sold Wednesday’s weakness.

MARKET SENTIMENT
Tapering strikes again, at least that is what the consensus claims.  The logic goes something like the following.  We recovered all of May/June’s Tapering selloff because of the Fed’s promised to keep printing money.  This obviously means the QE bubble reinflated itself, but I don’t buy it.  It is tempting to simplify the market into a single entity, but it is really complex tapestry of self-interested individuals.   Just because we recovered the Tapering selloff losses doesn’t automatically mean the QE trade is back.  To be exposed to the same risks we need to recreate the exact same ownership makeup we had two months ago.  Everyone who sold the selloff needs to buy back in and every buyer of the selloff needs to sell out.  What are the odds this happened?  Traders are a stubborn bunch and the most difficult thing is admitting we are wrong.  Very few sellers of Tapering bought back in simply because the market bounced.  In their mind they are right and it will only be time before the market finally sees what they see.  These traders continue sitting on the sidelines, hoping and praying the market rolls over to validate their previously emotional decision to sell.  We’ve all done it at some point.  It is far easier to accuse the market of being wrong than admit we are wrong.  Without a doubt the market rebounded decisively from that selloff, but it was not because of people chasing QE.  That trade is dead and buried.

Anyway, that is a really long-winded way of saying don’t pay attention to the QE/Tapering fear mongering.  Most of those weak hands bailed weeks ago and the market already priced in Tapering.  Maybe it is September, or maybe it is January, but does it really matter?  Everyone knows it is coming and those that are afraid of it are already out of the market.  Sell the rumor, buy the news.

TRADING OPPORTUNITIES
Expected Outcome:
The market is going through a modest pullback, hardly 1% off of all-time highs.  I expected support at 1700, but that was obviously a tad optimistic. The market undercut my stops and I sold for a modest profit.  It is not as much as I had a couple of days ago, but it sure beats losing money.  I still don’t believe this is the start of a larger selloff, but there is no point in having stops if we don’t use them.  But rather than take my ball and  leave in a huff, I’m ready to buy back in when the market retakes 1700.

Alternate Outcome:
The market broke support and presents the best shorting opportunity we’ve seen in a couple of months.  A bear can short here with a stop above 1695 or 1700.

Trading Plan:
Buy a recovery of 1700 and short further weakness.   Summer trade can be both volatile and listless as we’ve seen.  Take profits when we have them because they will likely be gone days later.

INDIVIDUAL STOCKS
AAPL continues its struggle with the 200dma.  This is a decent place to lock-in recent profits since this is more a relief rally than something supported by renewed fundamental strength.  If we keep holding under the 200dma for a few more days we can buy back in and ride it up to $500.

TSLA knocked the ball out of the park with its earnings after the close.  How much higher this goes is anyone’s guess, but it needs to find new buyers to continue making gains.  Previously it feasted on a seemingly endless supply of shorts, but it really feels like most shorts have run for cover.  If Thursday’s early pop fizzles into the close, consider jumping out because it shows buyers are getting scarce.  Stocks like this often top on good news when everyone is most bullish and fully invested.  At the very least move up a trailing stop to $140 or $145.

FB continues hanging in there around the $38 IPO level.  The stock that is supposed to nose over will likely continue higher.  It failed when everyone loved it and now it thrives when everyone doubts it.  Go against the crowd, not the trend.

Plan your trade; trade your plan

AM: Buy the dip or sell the weakness?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks dipped under 1700 in the biggest test of this young breakout.  Early weakness pushed the marked down to 1693 before it found a floor in mid-morning trade.

MARKET SENTIMENT
Is this the start of a larger selloff or just another head-fake designed to shake out weak hands and humiliate bears?  We will likely have our answer by the end of the day.  It is no surprise the market tested support and triggered a wave of stop-losses clustered under this psychologically important round number.  What we do not know yet is if the selling will quickly exhaust itself and bounce back, or accelerate lower as weakness shakes loose previously confident holders.

Without a material catalyst driving this selloff, this adjustment is simply balancing supply and demand.  These moves tend to be far more tame than headline driven events that send panic through the market, such as June’s frenzied Tapering selloff.  This rally’s days are numbered, but it will be an unexpected headline that sends everyone running for cover, not generic weakness.

TRADING OPPORTUNITIES
Expected Outcome:
We know markets cannot go up every day, yet it still catches us off guard every time it dips.  Everyone wants a rally to pullback so they can buy more, but when it does many end up selling the weakness instead of buying it.  If this game were easy, everyone would be rich and we know that is not the case.

This morning’s dip under 1695 shook out many disciplined holders, but just because we sold defensively does not mean we cannot buy back in if the market finds support near levels we were watching.  Technical levels are better thought of as regions instead of lines.  The market is an inexact science and support at 1693 or 1695 is close enough to 1700 that if we recover early losses this will count as holding prior support.  Only time will tell, but not seeing losses accelerate after slipping under 1700 shows selling is slowing, not picking up.

Alternate Outcome:
We always need to be careful when the market tests support because the best signs a market is selling off is to see it selloff.  We found a nice bottom at 1693 if it holds, but if the bounce doesn’t hold, we need to get out.  This failure also signals a decent short entry.

Trading Plan:
It is okay to buy/hold the bounce off 1693, but be wary of further weakness and sell/short a violation of today’s low.

INDIVIDUAL STOCKS
AAPL made a new relative high as it broke $470 for the first time in half a year, but if failed to hold these levels for very long.  No doubt profit-takers and short-sellers are hitting the stock following these new highs.  The question is who has the larger war chest, the momentum crowd or the swing-traders anticipating a reversal.  To me this looks like a good place to lock-in profits and buy back in if the stock retakes $470.  We are in this to make money and the only way to do that is selling our winners.

TSLA continues its rout of shorts as it passes the $145 level.  I would be nervous holding this through earnings tomorrow since so much positive news has been priced in over the last three months as the stock more than doubled.  The goal isn’t to own the hot stock, or to pick the top, but to make money.  At some point we need to say enough is enough and take profits.  While the trade is not over, we will likely get a chance to buy this stock at lower levels in coming weeks as it pulls back and consolidates recent gains.

GLD rebounded to the 50dma recently, but is unable to reclaim this widely followed moving average.  Many claims the stock market is climbing on the Fed’s reiteration of support for QE, but the gold and Treasury market tell a far different story.  All the evidence points to Tapering getting priced in and anyone waiting for a Tapering selloff in equities is going to be disappointed.

Plan your trade; trade your plan

AM: Still holding gains

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks opened lower, testing support near 1700 before finding a floor and bouncing.

MARKET SENTIMENT
If we hold these levels, it will be the third day where buyers and sellers support Thursday’s breakout to all-time highs.  Nervous holders and opportunistic bears sold preemptively during July’s consolidation under 1700.  The exhaustion of that selling pressure cleared the way for these recent gains.

The lack of a strong upside move shows cynics are sticking with their positions, whether that is underweight or outright short.    Traders changing their minds is the only thing that moves prices and this modest climb shows participants’ reactions are fairly muted.  As with everything in the markets, there are two valid sides to every story.  The bull says steady price moves are sustainable and support a continuation of the uptrend.  The bear counters by pointing out the apathetic trade shows a lack of engagement and diminishing enthusiasm for chasing new highs.  They both have a good arguments, but this is how it must be because the market price is always the exact balance point between bulls and bears.

If we assume both sides are intelligent and thoughtful, where do we find our trading edge?  We look for clustering of opinions.  This groupthink is the crack in the Efficient Market Hypothesis we exploit on this blog.  No matter how bullish people claim this market is, the consensus remains cautious and reluctant to buy new highs.  Yahoo Finance had another poll showing people still don’t trust the economic recovery with only 23% saying employment is getting better.  This pretty much mirrors a similar GDP poll from last week.  No matter how bullish people claim the market is, most people are afraid of this market and that is fuel propels this extraordinary rally.

TRADING OPPORTUNITIES
Expected Outcome:
While the breakout appears stalled as we trade near support for the third day, this is constructive behavior suggesting a continuation, not a topping.  New highs invite a wave of profit-taking by holders and shorting by cynics.  This selling is short-lived and if the market holds support with this weight on its shoulders, the uptrend will resume as soon as the selling dries up.  This is what pushed us above 1700 and it will continue the move through 1710 and beyond.

Alternate Outcome:
There are always two valid views on every market and at some point the bears will get this right.  Maybe we’ve come too-far, too-fast.  Maybe this lethargic breakout signals exhaustion.  Maybe economic numbers and Fed Tapering will finally catch up with the market.  Maybe there will be an unexpected shock to the system.  Maybe selling will beget more selling as we fall down the rabbit hole of panic selling.  Maybe, maybe, maybe.  Something will happen because it always does, our job is to get out of the way before the market takes us down with it.

Trading Plan:
Keep holding with a stop under 1695.  Wait for a swift break of this level before laying out a short.

INDIVIDUAL STOCKS
Another strong performance by AAPL as it challenges the 200dma for the first time in nearly a year.  Is this the start of AAPL’s resurgence or just more strength to sell?  If the stock breaks $470, this will be the highest mark since early February.  If we believe the stock is stuck in a $400 trading range, this is a great time to lock in recent gains.  If we think AAPL is making a comeback, we should be buying stock on margin, not selling it.

Most stocks rally on fundamental outperformance, even if it seems unrealistic.  NFLX, TSLA, and LNKD are all superstars with outrageous valuations.  The one thing they have in common is uncommon growth and a habit of far exceeding expectations.  For many years AAPL fit this category and that propelled the stock from $200 to $700 over a few years, but is this recent bounce supported by strong growth or beating already high expectations?  Or was this simply being less bad than already lowered expectations?

Today’s buyers will point to the recent veto by the White House on a patent injunction, but the stock barely reacted when this injunction originally came out and it only affects nearly obsolete models like the iPad2 that are on the verge of being discontinued anyway.  Plus this is a double-edged sword for AAPL since it is seeking injunctions against Samsung for similar patent infringement.  While this veto is a win for consumers, it is largely a wash for AAPL.

Earlier we discussed holding the break of the 50dma and taking profits near the 200dma.  It’s been a nice run since earnings, but the only way to make money in this game is selling our winners.  Either we sell into strength or we raise our trailing stops to protect recent gains.  The previous high at $450 is a decent level to expect support.  A more conservative trader could use recent highs at $457 or $465.  The key is keeping our profits and not give them back in the next gyration lower.  The thing that scares me about AAPL’s new highs is the 92% bullish sentiment on StockTwits.  While momentum can carry us higher, that kind of sentiment skew is not sustainable over the medium-term and there will be a shock to the stock price to better balance sentiment.

BBRY surged higher without any clear catalyst, but it still remains under $10.  This is a clear lesson for both sides that stubbornly sticking to entrenched positions rarely works.  Bulls should have cut their losses after earnings and bears should have locked in profits after recent weakness.  Most likely this suge is fueled by short covering and will  fade quickly.  Some speculate there is an impending buyout offer, but it really seems like the BlackBerry franchise is yesterday’s news and between iOS, Android, and the Window’s phone, what does BBRY really have to offer anyone besides a rapidly shrinking user base and a portfolio of patents that recent White House moves diminishes the value of.  But that is over analyzing the situation.  This is a trading stock plain and simply; buy weakness, sell strength, and repeat.

Plan your trade; trade your plan

AM: Finding support at 1700

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks opened slightly lower on disappointing employment numbers, but reclaimed losses by midday.  The market tested 1700 early, but previous resistance provided support and we bounced nicely.

MARKET SENTIMENT
It is hard keeping track of the relationship between news and the market’s reaction.  Is bad still good?  Or is bad bad again?  Are we more worried about QE continuing or economic strength?  The headaches fundamental investors give themselves debating this is too much for me.  Rather than try to outsmart the market, I simply look at other traders to figure out where we are headed.  Markets are a collection of people, not an aggregation of data.  Understanding what they think and how they are positioned turns a previously irrational market into one that starts making sense.

What is too-high keeps going higher.  The consolidation under 1700 invited the paranoid to take profits and tempted the bearish to short.  Once this temporary wave of selling passed, the market rallied on tight supply.  As much attention as we give demand, supply is just as important.   Most sellers and shorts over the last 9-months came to regret that decision as the market relentlessly marched higher.  Get stung a few times and people change their behavior.  In this instance that means sitting through volatility.  While this cannot last forever, buying dips and holding weakness is the trade of the year.  This will change at some point, but until then resolve by holders keeps supply tight and props up prices.  No matter what the news or technicals say we should do, we continue rising on tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  The early test of 1700 was encouraging, but even a dip into the 1690s is normal, expected, and constructive as long as the selling stalls and we bounce back.  Many shorts are still hanging on, hoping for the reversal they know in their heart is coming, but they will be forced to buy this market once the pain of losses gets too intense.  With all the doubters, profit-takers, and shorts, the pain trade remains to the upside.

Alternate Outcome:
Everyone’s been talking about this for months now, but every rally ends and so will this one.  While they are right, in the markets early is the same thing as wrong.  While we don’t want to jump in front of this market, the longer we go, the more careful we must be.  Stick with the trend, but as soon as this market stops acting like we expect, that will be our signal tides are changing.  Maybe this is the top, maybe we continue to 1750 before rolling over, maybe it is this Fall, or maybe it doesn’t happen until next year, but stay vigilant and don’t let recent profits make us complacent.

Trading Plan:
Keep holding with a stop under 1695.  Sideways consolidation clears the way for a sustainable move higher, but we could also see the market leap ahead in yet another short-squeeze.  Fifteen-points is normal, fifty over a couple of days is not.  Move our trailing stops higher as we climb and proactively lock in profits if the rate of gains accelerates unsustainably.  It is okay to doubt this rally and sit in cash, but don’t try picking tops.  Wait for an accelerating selloff through 1700 before going short.

INDIVIDUAL STOCKS
AAPL finally did it, it broke the nearly year-long streak of lower-highs as it eclipsed May’s $457 high.  Is this just the start of things to come, or strength to sell?  It won’t take long to see if momentum buying exhausts itself or if a wider pool of investors use this technical milestone to finally start buying this beaten down name.  Longs should move their stops up to recent support at $450 and expect the 200dma to act as resistance.  The smart trade since January is selling strength and buying weakness.  Bulls can use a trailing stop, but expect the sideways trade to continue until we reclaim previous support at $500.

FB is sticking around the $38 level.  The longer it holds here in the face of profit-taking and shorting, the more likely the continuation is.  While it would be perfectly reasonable to see it dip back to $32 as part of a consolidation before moving higher, holding $38 for another day or two means it wants to go higher in the near-term.  It is tough to hold a stock that came this far, but shorting it is just asking for trouble.

LNKD is crushing bears yet again as it surges 11%.  What is too high usually keeps going and that is clearly the case here.  We can debate the fundamentals up and down, but momentum is on the bull’s side and when we live and die by price alone, it is foolish to argue with the market.

Plan your trade; trade your plan

AM: How we got here

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks finally broke the 1700 barrier and continue trading between 1700 and 1705 through midday.

MARKET SENTIMENT
The media attributes today’s strength to data of some sort, but we know the truth, the market rallied because holders are not selling and supply remains extremely tight.  No matter how traders feel about these levels, it doesn’t take much demand to prop up prices when there is so little available to buy.  Some will ask how long this can last, well it’s been this way since the November lows three-quarters of a year ago.  People often discount the potency of low-volume moves, but as we’ve seen, low-volume rallies often go further and longer than anyone expects.  The whole “candle burns twice as bright” thing is what allows low-volume rallies to outlast the more coveted high-volume moves.

After crossing the psychological barrier at 1700, we need to see how the market responds.  Between the gap at the open and sideways trade since, many shorts are holding on and not covering.  They are hoping prices will retreat and their wishful thinking is blunting a more powerful short-squeeze. Real short squeezes are relentless climbs higher that punish bears and fill them with regret as they kick themselves for not selling earlier in the day.  A gap and sideways trade lets them take a wait and see approach.  Many with 1700 stop-losses bumped that up to 1705 this morning.  This means we still have fuel available to continue the move past 1700 as the market turns up the heat on these stubborn doubters.

TRADING OPPORTUNITY
Expected Outcome:
We are holding 1700 and there is no reason to fight what is working.  The market never makes things easy and technical levels are best drawn with dull crayons.  Dipping to 1695 and bouncing back qualifies as holding 1700, but makes placing stops more challenging.  We want to give the market enough breathing room so we don’t get shaken out, yet don’t leave too much profit at risk.

Alternate Outcome:
The lack of a strong short squeeze either means shorts are falling to a hope and pray strategy, or it means there is no one left to buy the breakout.  While we always give the benefit of doubt to the trend, we need to watch for a rollover.  The bullish thesis is nice gains on breakout buying and short-squeeze.  If we don’t get what we expect, we need to reevaluate our entire outlook.

Trading Plan:
Move our trailing stops to 1695, but be willing to buy back in if the market shakes us out with a swift dip and rebound.  One of the most important aspects of successful trading is recognizing quickly and decisively when we make a mistake.  Acting early is the best way to make ensure we don’t get stuck on the wrong side of a trade.  That goes for both holding positions and buying back in after selling.

We finally have the setup for a double-top, but bears shouldn’t pick a top here.  Wait for a swift break under 1700 that shows demand evaporated before challenging this Energizer rally.  Further, when we do short, take short profits early and often because the market will bounce without a fundamental catalyst that sends formerly resolute holders rushing for the exits.

INDIVIDUAL STOCKS
AAPL is trading sideways for a third day at the $455 level.  While this behavior was constructive for the broad market, sentiment between these two is 180 degrees.  The market is too-high while AAPL is a “generational buy”.  Will this lead to a different outcome following a tight consolidation?  We will soon have the answer.  No doubt much of the hope for a quick AAPL rebound evaporated months ago, but there are still more AAPL bulls than bears.  StockTwits reports 88% bulls to just 12% bears.  Compare this to early June where bears were in the majority, at what proved to be the move’s low.  The crowd got it wrong there and is likely getting it wrong here too.

Plan your trade; trade your plan

AM: Should we care about the Fed?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks are higher, but retreated from an early assault on 1700.

MARKET SENTIMENT
Stocks stalled short of 1700 as buyers were unwilling to chase prices to new highs.  Some might claim this is a double top, but to be a real double top we need to exceed the previous high of 1699.  This triggers the last wave of breakout buying and short covering before demand dries up and we roll over.  Anyone waiting for a double-top should expect higher prices in coming days and reversing soon after the breakout makes an excellent shorting opportunity, but that is then and this is now.  Currently the market is holding up nicely and higher prices are in our future.  Where we go after breaking 1700 is still up for debate, but the market is certainly acting like new highs are on the to-do list.

As overly-bullish as everyone claims the market is, ironically enough, that is the majority opinion.  The masses remain pessimistic and fearful of a pullback in spite of, or because of the all-time highs.  In a Yahoo Finance poll, only 27% think the economy is improving.  That hardly qualifies as widespread optimism and bullishness.  Traders are notoriously afraid of heights and new highs frequently make traders nervous.

When it comes to contrarian investing, the mistake most people make is confusing price-action with sentiment.  When we are at all-time highs, most assume the market must be wildly overly-bullish, but unfortunately for these confused ‘contrarians’, the market’s been overly-bullish for the last 250-points.  What is high often keeps going higher because the crowd remains skeptical and those doubters provide fuel for higher prices.

Some claim one headline or another is responsible for a particular price move, but the reality is only buying and selling can do that.  Today we had a Fed statement promoting ‘modest growth’, a softening of their previous outlook.  These pieces of information only move markets if it causes people to change their mind, and as a result buy or sell stocks.  If it simply reinforces what people already believe, everyone keeps holding and the market continues doing what it was doing previously.  Today’s Fed statement isn’t going to change anyone’s mind and its impact will disappear as soon as news-driven traders take their lumps and move on.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  Most expect a pullback following the breathtaking rebound off June’s lows, but that expectation is what keeps us near all-time highs.  Those with a fear of heights locked-in profits weeks ago and most of that defensive selling is already behind us.  The current crop of holders are waiting for higher prices and their patience is keeping supply tight, making the path of least resistance higher.

The one head-fake to watch for is a quick whip under 1675, triggering a wave of stop-losses and sucking in short-sellers before bouncing back.  We must always sell when prices cross our stops, but that doesn’t prevent us from buying back in if the market rebounds.  Stay open-minded and trade the market without consideration to what we did or thought last week, yesterday, or this morning.

Alternate Outcome:
Traders remain cautious and wary, making a continuation more likely, but anything can take out the market’s legs at any time.  Many expect a pullback after too-far, too-fast, but this market clearly doesn’t care about gravity.  We will top, but it will not be because of something everyone is expecting and positioned for.  There is a hidden landmine lurking out there and it will catch us off guard.  That will finally be the catalyst that sends us lower.  Currently we are rallying as an overly bearish market warms to a gradually improving world, but inevitably we will be surprised by unexpected bad news.

Trading Plan:
Continue holding with a stop under 1675 and wait to see how the market responds to the breakout above 1700.  Quickly retreating under 1700 shows buying exhaustion and is shortable.  If previous resistance turns to support, we move up our stops and wait to see how much further this rally goes.  Obviously if we expect higher prices, this is a poor place to be short and it is best to admit defeat and take a small loss.

We remain in the summer chop.  The average trader can sit out this volatility and wait for a better risk/reward, likely coming this fall.

INDIVIDUAL STOCKS
AAPL is maintaining recent gains and is holdable as long as we stay above the 50dma.  There is not a fundamental catalyst justifying recent strength, but sentiment might have changed enough to finally put in a bottom.  If we break and hold $460, the next bogie is the 200dma and would be a nice place to take profits.

FB broke $38 and made headlines after finally regaining its IPO price.  Some consolidation here is normal and expected, but look for strength to continue as last year’s favorite became this year’s dog.  Prices move when people change their mind, with so much negative sentiment, there is still lots of upside left, but expect a bumpy ride as we struggle with resistance at $38.

TSLA is the momentum flavor of the month, yet bears continue standing in the way of this steamroller.  What goes higher often keeps going higher until everyone gives up fighting it.  I have no idea if that is $140, $160, or $180, but anyone holding out for $300 is getting greedy.  All the recent sellers and shorts following the GS downgrade need to buy and that is providing lift up to $140.

Plan your trade; trade your plan

AM: No news is good news

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
The sideways meandering continues as we started higher, fell under breakeven by midday, and regained positive territory by late trade.

MARKET SENTIMENT
After early volatility, the Summer Doldrums are finally here.  Big money decision makers are on vacation, meaning we are not seeing any material buying or selling.  The market largely came to terms with all the negative headlines from Obamacare to Tapering and we are in a holding pattern waiting for what comes next.

The last couple of weeks had multiple false selloffs that quickly bounced back.  This cathartic process is purging weak hands and tempting aggressive bears to short.  The thing these pessimists need to be wary of is how easy and obvious the bear trade is given “too-far, too-fast”.  The big red flag is the easy trade hasn’t happened after multiple opportunities.  When the market has a perfect invitation to break wide open, yet bounces instead, that is a cheap warning the bearish thesis is flawed.  Fortunately for bulls, most traders are stubborn and hold their position well beyond the obvious exit.  With each passing day, bear’s confidence grows and they are building short positions because this is finally their moment to shine.  Unfortunately for them, while the previous 130-point move exhausted demand, this sideways trade is setting the stage for the next round of short squeezes.  There is nothing wrong making a bearish bet after such a strong move, but when a trade fails to work as expected, that is the time to get out, long before mounting losses force us out.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the more likely a continuation becomes.  Unsustainable buying climaxes within days.  Support here shows buyers keep holding and the path of least resistance is always higher when supply is tight.

Alternate Outcome:
Three-months ago the market went too-far, too-fast, yet here we stand at all-time highs.  The more people fight something, the longer these things go, but no matter what, this rally’s days are numbered.  It isn’t that the pessimists are wrong, just early.  At some point buying will exhaust itself and we will collapse into a correction when everyone least expect it.  The best sign will be stalling after an obvious bullish catalyst.  If this rally fizzles after breaking 1700, that is a great invitation to short.  There will be a lot of money made shorting this market, but the bull thesis needs to fail first.

INDIVIDUAL STOCKS
AAPL is just shy of making its first higher high in nearly a year.  Clearly shorts are providing a lot of this fuel, making a great short-term buying opportunity, but the bigger question is if this rebound is sustainable or just another bull-trap.  Swing-traders should move up their trailing stop and longer viewed traders can continue holding with a stop under the 50dma.  It is hard to imagine AAPL regaining its former glory since so many were burned by the recent selloff, but there is a lot of money to be made buying weakness and selling strength.

FB is making a push for its IPO price.  This has been a perfect sentiment trade.  Everyone loved it when it IPOed, meaning it had nowhere to go but down.  Then it dragged along for over a year and became the butt of jokes, which was the best time to buy it.  There are a lot of people short this name and this rally is not done yet.  Much like how NFLX was reborn, FB is following the same game plan.  Many are hoping AAPL will do the same, but the difference is revenue is growing strongly at NFLX and FB, where it is peaking at AAPL.  Similar technical setup, but the underlying stories are day-and-night.

Plan your trade; trade your plan

AM: Sideways is good

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks are down in early trade, continuing last week’s pattern of tight consolidation under 1700.

MARKET SENTIMENT
Traders are notoriously afraid of heights and hesitant to buy after a strong run.  Ten-percent in a month certainly qualifies as a strong run, but often what appears too-high keeps going.

There is a lot of crowd psychology behind the scenes that gives us insight into what comes next.  Stocks came a long way by steamrolling shorts and seducing momentum chasers.  This surge provided the powerful lift off of June’s lows, but the rebound stalled shy of 1700 a couple of weeks ago.  While short covering and momentum chasing are powerful forces, they don’t have staying power and quickly run out of gas.  This is exactly where we find ourselves and we must look for clues from other groups of holders and buyers for hints of what comes next.

Unsustainable buying often peaks and reverses quickly, but we have not seen that behavior in the recent consolidation.  This means while buying slowed down, we maintained current levels because existing holders are not interested in selling, keeping supply tight.  Traders often think of demand, but supply is equally important in determining price moves.  When the market hit recent highs, many short-sellers and profit takers sold shares, but this is a temporary weight on prices.  Once that selling abates, in combination with confident holders, the most likely outcome is a continuation higher.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the higher the probability this rally will continue.  Proactive sellers had their chance to sell and the market swallowed that supply without flinching.  I have no idea how much further this can go, but recent sideways trade indicates the next move is higher.

Alternate Outcome:
While every dip bounced, there comes a point when we run out of dip buyers and there is nothing to stop the next move lower.  Every selloff starts when traders are most confident and without a doubt recent strength is calming nerves, proving the doubters wrong, and encouraging buyers.  While the next move is likely higher, there are no guarantees in this game.  Even something with an 80% probability  of success should fail one out of five times.  No matter how sound and confident our analysis, we always need to look at the other side, and when all else fails, let our stops pull us out.

Trading Opportunities:
Recent stability suggests the next move is higher.  Shorts should reconsider, or at the very least use tight stops.  Aggressive swing-traders can hold with a stop under 1675.  Everyone else sitting on recent profits should wait for a better risk/reward, likely coming once the summer doldrums pass.  Expect volatility to continue and take profits early and often, especially on the short side.

INDIVIDUAL STOCKS
Deja Vu all over again.  AAPL retook the 50dma on better than expected iPhone sales and continues holding those gains.  Less-bad is rarely cause for exuberant celebration, but it was enough to give the stock some breathing room.  Recent speculation swirls around the iPhone5c, the colorful and cheap alternative to the more expensive flagship model.  Given the success of outdated iPhone 4 and 4s sales, any investor needs to come to terms with a material percentage of 5s cannibalization by the 5c.  Most people don’t need the power of  the latest and greatest and will be happily settle for the stylish younger sibling.  The bigger question for investors is if the hit to the flagship lineup will be offset by reclaiming market share losses to Android.  Technically speaking, all of AAPL’s previous bounces failed to make new highs and we need to trade above $460 to break the bearish trend of lower highs.

TSLA is burning the cynics yet again.  The stock was pounded a couple of weeks ago on an analyst downgrade, but those sellers are suffering regret as we make new all-time highs merely days later.  Stocks like this are not for the faint of heart a violent ride is par for the course.  Ignore the talking-head chatter, but fear signs the company is not living up to wildly optimistic expectations.  Maybe it is a PR snafu like NFLX’s bone-headed attempt to spit the DVD and streaming business, or tapering growth that took down the mighty AAPL.  Enjoy the ride up, but don’t get greedy and stay vigilant.

Sorry for missing a couple posts last week, but something came up that kept me away from my computer. Things are back to normal and look for the daily analysis to resume this week.

Plan your trade; trade your plan

PM: Time to run for cover?

By Jani Ziedins | End of Day Analysis

PM Update

MARKET BEHAVIOR
Stocks had their worst day in nearly a month, but all that highlights is what a benign ride its been.  Volume was below average, but the highest in recent days.

MARKET SENTIMENT
Rather than fear a 0.4% dip, we should embrace it.  Everyone knows we cannot go up every day, yet the first day we see any weakness and all of a sudden the sky is falling.  No doubt this could be the start of something larger and why it is always prudent to take profits after nice runs, but we are still well above support and claiming this is anything more than a normal down-day is trying to pick a top.

After such a strong rebound, we need selling to put fear back into the market and keep everyone honest.  The market doesn’t like being easy or predictable, so it throws in head-fakes along the way.  Of course it is up to individual interpretation to decide if the recent rebound or today’s weakness is the real head-fake.  There are always two sides to every market and only time will tell who is right.

TRADING OPPORTUNITIES
Expected Outcome:
As long as the market remains above support, we must assume the rebound is alive and well.  Countless bears have been carried out in body bags trying to pick a top and there is no reason to add to the body count here.  Recent support is 1675 and we only need to be concerned if we fall to hold that level.

Alternate Outcome:
I’d prefer seeing the market stall after breaking 1700 before placing a short.  A notable absence of buyers in a spot where buyers should pour in makes an easy short.  Stalling prior to 1700 is far less convincing and this could simply be a pause before attempting new highs.  This rally will eventually end like every other one before.  While it doesn’t feel like we are at the top yet, we must remain vigilant.  Slicing through 1675 is clearly bearish and likely means we will retest the 50dma.

Trading Plan:
Everyone wants a rally to pullback so they can buy more, but every time it pulls back, those same traders are too afraid to buy.

Holders can keep holding as long as the market remains above their stops.  Anyone with nice profits can lock them in and wait for the next trade.  Bears can short a violation of support and bulls can buy a bounce off it.  Chances are the summer volatility will continue, so take profits early and often because they will likely evaporate days later.

INDIVIDUAL STOCKS
Following last night’s earnings release, AAPL is higher in what could best be described as a relief rally.  Profits, selling prices, and margins were all down, but the damage was less bad than feared and the stock rallied.  The silver lining was higher than expected “old” generation iPhone sales, but is this really a good thing?  If new customers think old phones are good enough, is that an early indication the previously dependable 2-year upgrade cycle is coming to an end?  If current generation phones are good enough, does that mean we are moving to a 4 to 5 year upgrade cycle typically seen with PCs?  It will be interesting to see how bulls fit this earnings report into their return to dominance thesis.

People often forget how Steve Jobs turned AAPL around.  In the ’90s AAPL was a bloated, do everything for everyone company.  It gave customers what they asked for and the income statement bled for it.  When Steve Jobs returned, he showed up with a machete and cut to the bone, eliminating all but four computers, a pro desktop, a pro laptop, a consumer desktop, and a consumer laptop.  Less is more was always Jobs’ driving vision, but it seems the new AAPL is drifting away from that strategy.

The original iPhone was launched with one carrier, in one color and the only choice customers had was 4, 8, or 16GB of storage.  It stayed that way for the next three iPhone releases before AAPL finally relented and started making a CDMA iPhone  4 for Verizon.  The next year brought white phone, Sprint, T-Mobile, and finally an unlocked phone.  Currently AAPL stocks 30 iPhones 5s to cover all these customer options and people wonder why margins are falling.  Yet investors are clamoring for big phones, cheap phones, and more colors, and if you believe the leaks, they are coming.  Peak margins came when AAPL gave customers 3 choices, but for comparison, lets see how many phones AAPL will need to stock if it adds a cheap phone, a big screen, and three colors.

5 colors * 5 wireless carriers * 3 models * 3 storage sizes = 225 varieties!!!

They might sell more phones, but at what cost?  Everything for everyone rarely works and it looks like AAPL is going to learn that lesson all over again.  The company thrived under Steve Jobs because it did not listen to customers and investors.  Only time will tell what happens next, but it doesn’t look good.

Plan your trade; trade your plan

AM: Holding short of 1700

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks trade sideways, just shy of the 1700 milestone.

MARKET SENTIMENT
All is good with the world.  Tapering is a distant memory and earnings are decent enough to keep us at all-time highs.  Summer volume is traditionally light while many of the big money managers are on vacation.  Low volume can exacerbate volatility when smaller positions start moving markets, but the last couple of weeks was relatively calm.  Holders keep holding and the resulting tight supply is propping up prices.  No one is excited to buy all-time highs, but they have no choice when few are willing to sell.

1700 is a psychological level and will likely lead to a short-squeeze and breakout buying when we push through it.  After that it is anyone’s guess how far we go.  Slow and steady is sustainable, a rapid surge higher is not.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  Holding the 1680 level for nearly two-weeks is supportive of a continuation.  Unsustainable buying typically exhausts itself within days.  Maintaining all-time highs this long shows few holders are cashing in and their confidence keeps supply tight.

Alternate Outcome:
Every rally ends and even as invincible as this one is, its day is coming.  We are more than eight-months into this rebound off the November lows and most of the cynics have grown tired of the humiliation from incorrectly calling a top, but when they are giving up is when we need to be most vigilant.  I’m still waiting for an all new headline that is not priced in.  It probably won’t come for another month or two, but that will finally be the thing that lets air out of this rally.

Trading Plan:
Own this market with a stop under 1670 or 1685 depending on your risk tolerance and outlook. Look for a pop as it crosses 1700, but if the breakout fizzles and retreats instead, buying is drying up and it is time to lock-in profits.  It might even be time to go short with a stop above 1700.  Stay nimble and always be prepared to take profits when the market doesn’t act as expected.

INDIVIDUAL STOCKS
AAPL is reporting after the close.  The bar is dramatically lower and we wait to see if the lower expectations are justified.  This earnings report is one of the last fundamental catalysts left to justify the bull case.  Anything short of shockingly good numbers will likely leave the stock stuck in the lower $400s.   Investor infatuation with AAPL came and went and there is little the company can do short of a revolutionary new product to become a market darling again.  If AAPL’s earnings disappoint, expect the last of the hope to deflate and the stock to tumble into the $300s.

NFLX stumbled following earnings, but given how far this stock came this year and the sheer number of traders gunning for it, down 3% is pretty much a win.  Sideways trade that allows the 50dma to catch up is supportive of a continuation.  It doesn’t matter how overpriced this stock is, it still wants to go higher.

TSLA recovered most of last week’s downgrade.  As we discussed at the time, analyst ratings are just opinion and have nothing to do with the fundamentals.  While this accusation might be unfair, most analysts are analysts because they cannot trade.  Upgrades and downgrades create near-term waves, but their impact quickly fades.  Far more concerning is a wave of highly optimistic analyst upgrades.  AAPL didn’t peak when analysts downgraded the stock, it peaked when many upgraded their price targets to $1,000 and beyond.

Plan your trade; trade your plan

AM: How did we get here?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks coast higher and are within a few points of 1700.

MARKET SENTIMENT
The market is up 16 of the last 19 sessions as it defies all reason and logic.  Is it irrational?  Optimistically naive?  Or simply responding the only way possible given how traders are positioned?

Doubting this rally is the most crowded trade of the year, yet here we stand, 250-points higher and setting all-time highs.  Contrary to popular opinion, fundamentals and technicals don’t move markets, only buying and selling does that.  When too many people share the same outlook, they skew the market.  Traders doubting a move sell, some even go short.  This selling naturally purges cynics and replaces them with believers.  Believers who are willing to hold in the face of weakness and uncertainty.  That resolve keeps supply tight and leaves little room for the market to do anything but go but higher.  To this point patience and faith has been rewarded while those trying to outsmart the market footed the bill.

This rally soundly defeated every worry and concern cynics threw at it.  When is the last time anyone heard Fiscal Cliff, Sequester, or Cyprus?  Even Tapering is already falling off the front page. Ignoring what everyone is obsessing over is the single most difficult part of contrarian investing, but that has been the only trade to make this year.  If markets climb a wall of worry, we need something to worry about to keep propelling this rally.  The only thing I see is stubborn bears clinging to their negative outlook and this will likely let this market coast a bit higher.  After that, there is little worry left since the market already conquered everything else.  If fear fuels rallies, we need to be concerned if the tank is getting low and is something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome:
The wind remains at the market’s back as it overcomes people’s fear of heights, but we are approaching the end of this move.  I have no idea if we will coast up to 1750 or higher in coming weeks, but it feels like the market is setting up for a Fall correction.  Nimble traders can stay long with trailing stops, but don’t get lulled into complacency by the benign headlines.

Alternate Outcome:
The most defiant rally in recent memory keeps going.  As investors sour on bonds and foreign equities, those fund flows can continue propping up US equities for months, even years to come.

Trading Plan:
Stay long this market with a trailing stop under 1680.  While of no technical significance, traders think in round numbers and 1700 is a major psychological milestone.  It could act as resistance, but look for a pop once we break through due to short-covering and breakout buying.

This market could be setting up a double-top, but let the momentum carry it a bit higher before attempting a short.  The top will only come after people stop talking about it.  Watch the headlines for the next big fear that is not priced in and be ready to ride that wave lower.  Don’t jump the gun and be prepared to wait a couple of months for the right opportunity.

And as always, after a nice run like, there is nothing wrong with taking profits and waiting for the next high-probability trade.

INDIVIDUAL STOCKS
Everyone is piling on the hate for MSFT and they deserve it after a lousy quarter, but it is foolish to assume tablets will replace computers.  We don’t need to look any further than our own driveways to see the logic people use when making purchases.  I’m making up numbers here, but something like 95% of all car trips are with a single occupant, yet  most cars have four seats.  What’s up with that?  One-seat cars would be faster, more fuel-efficient, better for the environment, and significantly less expensive.   How come no one buys them?  We don’t buy things that work most of the time, but ones that fit all our needs.  We buy cars for the  handful of trips a where we need all the seats and the same will happen with PCs and tablets.

Tablets are great, but can they replace computers?  Certainly not in their current incarnation where the most useful applications are nothing more than simple calendars and to-do lists.  People love their tablets, but I have yet to meet anyone who gave away their computer and moved exclusively to a tablet.  Tablets are an add-on, not a replacement to the utility of a PC.  In fact, I think Windows is the biggest threat to GOOG‘s Android and AAPL‘s iOS.  These are mobile operating systems designed specifically for low-power tablets, but in the very near future we will have full-power tablets capable of running Windows well.  When most of the cost of a tablet is in the screen, case, and battery, stepping up to a full power processor will be a minor upgrade and a far simpler solution than the PC/tablet combo people currently use.  Give me the portability of a tablet and the power of a desktop, I’m sold.  In a world where tablets are PC’s, is anyone going to buy GOOG’s and AAPL’s one seat-car when they could step up to MSFT’s four-seat model that covers all their needs?  Looking forward five-years, most likely our phone will be our primary computer.  Tablets and desktops will simply be docking stations for our full-powered phones.  In a world of no compromises, MSFT is still the king of productivity and dedicated mobile operating systems will soon be as obsolete as the 8-track.

The key to making money in the markets is seeing what comes next.  If we want to trade the future, who is best positioned to exploit full-powered tablets?  While the Surface is rough around the edges, that is clearly the direction tablets are going.

Plan your trade; trade your plan

AM: The tapering rally

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
We surged to all-time, intraday highs in early trade.

MARKET SENTIMENT
There is what the market should do and what the market will do.  Too often traders get the two mixed up.

Another rough day for bears as they scramble for cover.  Somewhere along the way the widely expected Tapering collapse turned into the Tapering rally.  Who would have guessed, but that’s what we get for thinking too much about what the market should do instead of focusing on how other people trade it.  The market is nothing more than a crowd of people trading their opinions and biases.  When all the nervous sell and pessimists short, we run out of sellers and rally on tight supply.  There is no magic to this, it is simply Supply and Demand 101.

We started the year with a laundry list of items justifying a market selloff.  Obama’s reelection, Fiscal Cliff, Sequester, Debt Ceiling, negative GDP, Europe/Cyprus, and countless others.  Tapering was the latest worry and the market was bent out of shape over it for a few days.  But since it was such a widely expected event, we knew it was mostly emotional selling and it would exhaust itself quickly, which is exactly what happened.

While not completely past Tapering fears, new all-time highs are quickly eliminating most anxiety.  After traversing all those dark clouds the first six months of the year, it finally feels like we are getting to a place where the sun is shining.  After we Tapering, I cannot think of anything the crowd is obsessed with and that makes me nervous.  While we can safely ignore what everyone is talking about, we should fear what no one sees.  I don’t know what it is and when it will happen, but there is trapdoor out there somewhere and it will catch us by surprise.

TRADING OPPORTUNITIES
Expected Outcome:
Little doubt this early strength was driven by short-covering.  This leads to a flurry of buying, but expect the rate of gains to taper because most traders have a natural fear of heights and are reluctant to buy all-time highs.

Alternate Outcome:
Markets climb a wall of worry and if we are running out of things to worry about, then the rally will run out of fuel.  We are not there yet because plenty of recent sellers will chase the market higher, but once they buy-in, demand will taper off.

Trading Plan:
Move our trailing stops up and see where this will go.

Plan your trade; trade your plan

AM: The Tapering rally

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks rallied following yesterday’s dip, the first red-day in nearly two-weeks.

MARKET SENTIMENT
Bernanke told Congress Tapering will begin before the end of the year and the market rallied on the news.  No doubt this positive reaction is leaving many dumbfounded because June’s plunge was predicated on fears of Tapering.  Just a few weeks ago the world was ending because of Tapering, but now it’s a good thing?

Hopefully this reaction doesn’t come as a surprise to regular readers of this blog.  Anyone afraid of Tapering sold in last month’s emotional selloff, meaning those still holding this market are not worried about tapering.  When Bernanke didn’t just hint or suggest, but full on said Tapering will happen by the end of the year, it was met with a yawn by the markets.  All the Tapering selling happened weeks ago, meaning there was little selling left for today’s announcement.  As people trade their biases and outlook, they price in those expectations.  This is the exact reason markets “sell the rumor and buy the news”.

The market only appears irrational when we don’t understand how it works.

TRADING OPPORTUNITIES
Expected Outcome:
While the market briefly violated 1675, it held support in principle.  The market is too sloppy to draw technical lines with a straight edge.  Crayons are better tools because technical levels are regions, not lines.  This makes things a little more difficult for a trader because our stops are  specific points and we are forced to pick an exact level to get out.  This is why it is usually prudent to give ourselves a little cushion under support when picking our stops.  We expose ourselves to a little more downside risk, but we reduce the chances of getting shaken out prematurely.

What is encouraging is the market briefly violated a widely watched level, but reclaimed it by the close.    The weakness invited holders to bailout, but they hold strong instead.  This strength suggests all-time highs and 1700 are easily within reach.  How much further is anyone’s guess and we need to be careful because the risk/reward changes with every point higher.

Alternate Outcome:
As tapering fears disappear, that makes me nervous.  I largely ignore the crowd’s worries because they represent buying opportunities, but as we keep eliminating one worry after another, I get nervous.  By its nature the market is a paranoid beast and it cannot go long without fixating on the next impending catastrophe.  Since the market moved past Fiscal Cliff, Sequester, Cyprus, and now Tapering, it is ready for a new obsession, one that is not priced in and will take the market by surprise.  The trend is higher in the immediate future, but keep an eye out for the real selloff everyone’s long been waiting for, but more recently started forgetting about.  It is coming.

Trading Plan:
We can own the market with a stop at 1675 and look for a move above 1700 but how much further is anyone’s guess.  The risk/reward is not very favorable, so we must be careful.  For those that locked in nice gains recently, there is no reason to force a trade.  Remember, it is easy to make money in the markets, the hard part is keeping it.

Plan your trade; trade your plan

AM: On the ninth day we rested

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks are lower, flirting with near-term support at 1675.

MARKET SENTIMENT
We know the market cannot go up every day and a few down days here and there is a healthy part of continuing higher.  The question for traders is if this is simply a test of support, or the start of another swing to the lower end of the trading range.

 

Today’s weakness is an invitation for swing-traders to short the market and pressure the few remaining paranoid holders that haven’t locked-in profits.  If this selling cannot build momentum to the downside, it shows bulls still have the upper hand and most of the proactive profit-taking and short-selling is already behind us, clearing the way for a continuation higher.  On the other hand, if this rally is built on a weak foundation of little more than short-covering, we could see the rebound collapse past 1650 and challenge the 50dma at 1635.

Four-days is the magic number for holding a big advance.  The first three-days is propped up by short-covering and breakout buying.  While this group of speculators is small, they heavily influence near-term moves when they plunge in and out of the market simultaneously.  Once that tsunami of short-term trading comes and goes, we see how the longer-viewed investors trade the market.  These are the big-money guys with deep pockets and they steer the larger trends.  Failing to hold 1675 today shows larger investors are not supporting this advance and we will likely drift lower until we reach a level they are willing to buy.  Maintaining 1675 shows the big guys are believers.

TRADING OPPORTUNITIES
Expected Outcome:
The next few days will tell us a lot about the sustainability of this rebound.  Finding support in the face of early weakness suggests new highs and 1700.  Failing 1675 and closing materially under it shows big money is not a believer in these levels.  Right here the market is largely in no-man’s land and could break either way.  The best way to trade situations like this is wait for the market to make its move.  Continued weakness is an invitation to short, recovering gives the green light to buy.

Personally I’m a big fan of selling into strength because it gives me the mental clarity to evaluate situations like this without the emotional baggage of fear and greed.  No one can consistently top-tic the market, so traders must decide between selling early or selling late.  I’m an early kind of guy, but there is no wrong answer and it largely depends on a trader’s personality and trading plan.  As long as we stick to our plan, both strategies work well.

Alternate Outcome:
While we sit here waiting for the market to show its hand, we must prepare for the inevitable head fake.  Often the market will crash through support and trigger a wave of stop-loss selling before exhausting supply and bouncing.  That is the biggest problem with trading the obvious technical levels everyone else is watching.  Tight stops are the best way to deal with head fakes and if we get caught in one, be flexible enough to do a 180 and go the other way if the market clearly refutes our initial expectation.  When the market has a perfect setup to do what we think it should do, but it goes the other way, that is a powerful trading signal and we need to exploit it.  The 1560 bounce in June is a perfect example of this type of counter intuitive reversal.

Trading Plan:
Wait for the market’s next move.  Holding 1675 is bullish.  Stalling and closing materially under it means we ran out of buyers.  The market remains volatile and is still in the trading range, so keep harvesting worthwhile profits early and often because they will likely be gone days later.

INDIVIDUAL STOCKS
A wild and crazy ride in TSLA, down nearly 20% since yesterday morning, but that is par for the course in these hugely speculative names.  A downgrade by GS is the excuse for this selloff, but obviously the stock was frothy and needed to blow off steam.  For the TSLA bull, analysts ratings are nothing but personal opinion and rarely have a sustainable impact on stock prices.  This stock will tumble like every other high-flyer before it, but it will happen on a major sentiment shift driven by changing fundamentals in the company, most often a deceleration in sales and earnings.

Plan your trade; trade your plan

AM: Holding recent gains

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stock cling to recent gains and by early afternoon are on pace for their eighth consecutive up-day.

MARKET SENTIMENT
While gains the last couple days are trivially small, they are insightful.  Everyone knows the market came a long way over a short period of time.  Paranoid holders are taking profits and aggressive bears shorting in anticipation of the inevitable pullback from too-far, too-fast.  But where is this pullback?  Without a doubt profit-takers and shorts are leaning into this market, but their selling cannot dent the rebound.  If their selling doesn’t stop the market, what happens when profit-taking tapers off in coming days?

Stocks run up for one of two reasons, insatiable demand or reluctant sellers.  Holding recent levels shows many are comfortable owning stock and not rushing for the exits.  Greed and complacency, or confidence and optimism, it doesn’t matter what people call it, the fundamental nature of markets dictates prices do not fall when supply is tight.  As long as most holders keep holding, expect the rebound to continue.

TRADING OPPORTUNITIES
Expected Outcome:
Recent support suggests a continuation, not a pullback.  Maybe it only goes higher for a couple of days, but at this point it is better to own stocks and is a bad place to be caught short.  Three-days at these levels is encouraging and suggestive, but the fourth-day is usually the lynchpin because most of the profit taking and short selling has come and gone.  Once that weight is lifted, the rally resumes, humiliating the too-far, too-fast crowd.

Alternate Outcome:
It is well within the realm of possibility we pullback to the 50dma after such a strong run.  Consolidation is an important part of moving forward and chasing high markets is a dangerous game.  Violate near-term support at 1675 and things get interesting.

Trading Plan:
Shorts should  bail out early because higher prices are likely in coming days.  Unsustainable demand exhausts itself quickly and holding recent gains shows the short trade is not working.  Whenever something doesn’t go as planned, that is our cheap get out of jail card.  The worst is trade letting small losses compound before the pain finally forces us out.  If we fail to hold 1675 through tomorrow, the short trade starts looking interesting again, but wait for that signal first.

Bulls can buy back in or start adding to their positions later today or tomorrow if we continue holding 1675.  A trailing stop under this level will keep us out of trouble if the market rolls over.

Plan your trade; trade your plan

PM: Holding recent gains

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks are quietly churning sideways following yesterday’s impressive gains and record closes.

MARKET SENTIMENT
After such a strong run, it is unreasonable to expect the rate of gains to continue indefinitely.  While momentum can carry us higher, at some point the market needs to consolidate recent gains before it resuming the rally.  This might be as simple as trading sideways for a few days, or alternately a more dramatic pullback to support.

Weak hands bailed on Tapering fears and bears piled on the shorts in what looked like the widely anticipated QE selloff.  As dramatic as the plunge felt, selling exhausted itself quickly and we rebounded on tight supply.  All those aggressive bears dreaming of mountains of profits quickly found themselves on the wrong side of the market.  Their pain was the markets gain as they were forced to pay premium prices on the surge higher driven by their desperate buying and holders’ reluctance to part with their shares.

Now that most shorts are safely out of the market, we need to figure out who is the next incremental buyer.  Value investors and dip-buyers don’t buy all-time highs, so we can cross them off the list.  There is the momentum crowd, but many of these guys are already in the market.  Recent sellers are kicking themselves for being so impulsive and selling at the exact wrong moment, but the human ego is full of stubbornness and pride, meaning it is hard for these traders to pivot this quickly.  At this moment, there are few buyers left to keep this surge going.

But buying is only half of the equation.  If no one is selling, it doesn’t take much demand to prop up prices.  Confident holders propelled this Teflon market higher all year and they could easily do it again.  Nothing boosts holder’s confidence like seeing their accounts swell.  Those that held through recent weakness and volatility were rewarded for their patience and this reinforces the resolve to keep holding no matter what.  While some call this complacency, often it works because it keeps supply tight and that is supportive of prices.

The wildcard is recent dip buyers.  Do they keep holding, or cash in for quick profits?  If their profit taking overwhelms the limited supply of new buyers, prices will decline and that weakness will violate stops, causing other short-term traders to hit the sell button.  That continues until we fall to a level where value investors can no longer resist and scoop up discounted shares by the truckload, effectively putting a floor under the market.

While no one knows what the market will do next, we can watch to see how it behaves and that will give us insight into which force is taking control and what it means for the next move.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s sideways trade allows the market to digest recent gains.  Holding these levels for a few more days in spite of all the profit taking and shorting all-time highs demonstrates the market’s strength and the next move is likely higher.  But while the next move might be higher, any investment decision must weigh the risk/reward of every trade.  Not only do we need to consider the probability of a successful outcome, we must also weigh the potential upside compared to how much risk we are taking.  Given how strong the recent move was, it is hard to rationally expect the market to keep going at this rate for another 100-points.

While we can keep going higher, this feels like a good place to take profits and wait for the next trade.  Holding these levels for a few more days gives us the green light to jump back in.

Alternate Outcome:
The market is a handful of points from making all-time intraday highs, which leads to another wave of short covering and breakout buying.  Recent volatility put Tapering fears in the rearview mirror and the market is already looking forward to what comes next.  Continued improvement in corporate earnings and economic indicators will keep this market marching higher.  While the rate of recent gains is unsustainable, we can should buy continued strength and support at these levels and profit from the grind higher.  The recent volatility cleared the deck, leaving a more stable and confident crop of holders, making a continuation far more likely than a correction.

Trading Plan:
After such impressive gains prudent traders are either locking in gains or moving up their trailing stops.  Thursday’s low of 1665 or previous resistance at 1655 are both acceptable levels for a trailing stops depending on a trader’s outlook and tolerance for sitting through a pullback.

An aggressive short could use a violation of today’s or yesterday’s intraday lows with a stop above today’s highs. Trading sideways at these levels for a few more days shows the market is digesting recent gains and poised to resume the uptrend.  Support through Tuesday is an invitation to buy back in.

INDIVIDUAL STOCKS
AAPL‘s attempted rebound is taking the day off as the stock pulls back to the mid-$420s.  This is normal and expected behavior and we shouldn’t read too much into it….yet.  Continue watching how the stock responds to the 50dma to identify the next trade. Buy a break above and short a retreat from.

AMZN continues its surge higher on the back of shorts who insist it is grossly overvalued.  While they might eventually be proven right, the stock is scorching premature bears and anyone else standing the way.  Some people need to be right and they will continue losing money on their shorts, but for the rest of trying to make money, these stubborn bears are giving it away to anyone willing to take the other side.  Reality might set in one of these days, but that is what stops are for.

Reread the above paragraph, except replace AMZN with TSLA, NFLX, and LNKD.  Between the broad market and these high flyers, it looks like it is bear season the way these guys are getting killed.

Too often traders forget what is too high usually keeps going higher and what is too cheap usually keeps getting cheaper.

Plan your trade; trade your plan

PM: Back to all-time highs

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR
Stocks closed at all-time highs following Bernanke’s dovish comments Thursday evening.  While dramatic, the rebound from the 1560 lows has been on light volume.  Today’s volume was the swiftest of the month, yet it failed to register above average levels.

MARKET SENTIMENT
The two-faces of Ben Bernanke.  His comments a few weeks ago sent the market into a wild tailspin.  Today people are jumping for joy following his comments on Thursday evening.   One could accuse him of market manipulation and some are doing just that, but the comical thing is Ben stuck to the same exact script the entire time.  Full steam ahead on bond purchases, but mindful of signals to start withdrawing monetary stimulus.  A month ago people panicked and sold all their positions on those headlines.  This month its been nothing but buy, buy, buy.  No wonder people call the market irrational!

As traders, it is our job to make sense of this mess.  Any regular reader of this blog knows why the market rebounded so swiftly.  The weak sold in the panic driven selloff, confident buyers unfazed by a little volatility and uncertainty snapped up those discounted shares, eventually we ran out of emotional sellers, supply dried up, we had nowhere to go but higher, and here we are, completing a 200-point round trip over just a few weeks.

That was then and this is now.  It is fun to talk about what happened, but money is made by knowing what comes next.  It is often helpful to think of the market like a spring.  Sometimes it is all coiled up, ready to pop.  Others it is overextended, poised to snap back.  Applying that analogy to this market, it is hard to claim we are a coiled spring after a 130-point move in less than a month.  That certainly diminishes the potential of further explosive upside from here.  Without a doubt momentum could continue, but the risk/reward changes dramatically with every leg higher.  At this point we might have 25-points of upside left versus 50-points of air underneath us.  That is obviously a less than ideal trade.

The reason further upside is more limited is most of the shorts already covered as we crossed nearly every technical stop-loss they could use.  While this market rose on the backs of confident holders who kept supply tight, the fuel was provided by shorts scrambling to cover and forced to pay premium prices to end their misery.  Now that most of them are out of the market, this rally needs to find new buyers, a challenge since most traders have a fear of heights and are reluctant to chase breakouts.

TRADING OPPORTUNITIES
Expected Outcome:
While the momentum is clearly higher, there comes a point in every rally where prudent holding for worthwhile gains crosses the line into unrealistic optimism and greed.  I have no idea if we are there yet, but after such a strong run, it is hard not to take some profits and wait for the next trade.  We are in this to make money and the only way to do that is selling our winners.  Today was a painful day for shorts as the gap open chased off many, but the stubborn stuck around hoping for the gap to close and were pinched by the afternoon rally to all-time closing highs.  By all measures we are running out of shorts to keep pushing us higher and this rally will stall without a new crop of buyers.  Obviously value investors don’t buy all-time highs and anyone who sold two-weeks ago is still too shell-shocked and/or stubborn to reverse course so quickly.

Clearly momentum is higher, but every trader needs a point that is good enough.  Anyone who sells into strength will always sell too early, but that is the way most successful traders do it and maybe they know something the average trader doesn’t.  The great thing about selling early is the market always gives us a chance to buy back in.  All we need to do is keep our eyes, and minds, open.

Alternate Outcome:
Many holders are nervous as we rally this quickly and push to new highs, leading them to take profits ahead of the inevitable pullback.  But the fact this market held up so well in the face of profit-taking and shorts doubling down, shows there is still plenty of life left in this rally.  We have not seen that high volume surge higher that traditionally signals exhaustion, so we must continue watching for strength and entry opportunities from this unshakable rally.

Trading Plan:
We should assume this market remains range bound until it proves otherwise.  Only breaking to new highs and holding them will convince us otherwise.  Since we are in the upper end of the trading range, look to sell strength and lock-in recent gains.  We always get out too early on the way up, but no one can consistently top-tic the market and it is a fool’s errand to try.  The best we can do is take worthwhile profits and look for the next trade.

How the market responds on Friday will tell us a lot about the next trade.  Stalling and failing to hold recent gains shows the market is struggling to find new buyers.  This creates a shorting opportunity with profit targets back at the 50dma and 1600.  Setting new highs on insatiable demand shows this rally has legs and we will buy the breakout with a tight stop under previous highs.

Friday will be an important day in testing the mood of the market and the resilience of this rebound.  How it trades will set the stage for the market’s next move.

Plan your trade; trade your plan

 

AM: Another bad day for shorts

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks gapped higher at the open following Bernanke’s accommodative comments Wednesday evening.  We broke into territory not seen since early May and sit 1% shy of all-time highs.

MARKET SENTIMENT
Hope, fear, and opportunity.  That was the title of my evening post on June 20th.  That was one extreme, and today is approaching the other as we rally 100-points from those lows a few weeks ago.

Some come to the markets to express their opinions, others are here to make money.  During choppy periods like this, those are mutually exclusive groups.  Anyone trading with an agenda and bias is getting slaughtered by this volatility.  Bulls who bought all-time highs were forced out in the recent pullback. Enthusiastic bears who jumped on the Tapering selloff  had their world turned upside down by this rebound.  It is always critical to identify the market’s phase (up, down, or sideways) because that determines our response to strength and weakness.  In directional markets we buy strength and sell weakness.  For sideways markets we switch gears to buying weakness and selling strength.

Bears are providing much of the lift as they run for cover, but not all shorts covered as some desperately cling to hope this gap will fizzle and close.  If we talk about the pain trade, ten-points higher will hurt bears far more than ten-points lower will zing bulls.  One group is at wit’s end and barely hanging on, the other is energized by recent strength.  While we can top at any moment, the pain trade favors a continuation higher.

Many assume the gap higher was driven by a surge of Johnny-come-latelys buying the QE trade, but I have my doubts.  This market came a long way and traders are notoriously fearful of heights and shy away from breakouts.  More likely the gap was driven by holders renewed confidence and resulting reluctance to sell.  Shorts under pressure to cover had to offer a premium prices to free up those shares they desperately need.  While these two scenarios produce the same result, the motivations behind the scenes tell us a lot about the sustainability of the move.  This morning StockTwits traders were suspicious of the gap.  Ironically enough, bears were the cocky ones, doubling their shorts on this obviously unsustainable surge higher. Bulls were far more quiet, wondering if they should lock-in profits before the gap fills.  The impressive thing is the market digested all this early profit-taking and averaging-up by shorts with hardly more than a 0.1% decline from the opening highs.  Holding strong in the face of this early selling bodes well for more near-term upside.

TRADING OPPORTUNITIES
Expected Outcome:
Clearly the selloff is dead as we blew past last month’s Tapering collapse and avoided making a new bearish lower-high.  While I think the Summer trading range continues, holding the gap’s gains through the day indicates there is more upside left in this move before it stalls.  I believe in the pain trade and look for the market to turn up the heat on bears desperately hanging on.

Alternate Outcome:
While this rebound is not working as planned for bears, continued strength and new all-time highs could actually set up a bearish double-top.  Markets cannot go up forever and this one will top just like everyone before it.  The key to counter-trend trading is patience and waiting for the perfect entry.  Impulsively shorting this gap is nothing more than picking a top and is never a high probability trade.

Trading Plan:
Proactive traders can sell strength take profits anytime over the next couple days.  Any bulls betting on a continuation should at least move up their stops to 1655 to protect recent gains.  Shorts should not throw good money after bad and stay out of this market until this upward momentum stalls.  Anyone on the sidelines should stay there and wait for the next trade, the best way to lose money is chase stocks in a choppy market.

INDIVIDUAL STOCKS
AAPL’s bounce continues but it is approaching the 50dma, which will likely provide overhead resistance.  At this point it is too late to buy the bounce and early to short the strength.  Wait to see how the stock responds to the 50dma and buy the break above or short bumping its head on it.

TSLA keeps making new highs in spite of all the calls of it being overpriced.  While the bears might eventually be proven right, they are clearly early and in the markets early is the same thing as wrong.  While I see more upside before this momentum trade fizzles, anyone calling $300 has been drinking too much of Musk’s kool-aid.

BBRY continues struggling as the value investors don’t see anything that interests them.  When a stock is propped up on nothing more than hope from the desperate, what is cheap usually keeps getting cheaper.

Plan your trade; trade your plan