AM: Should we care about the Fed?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:19 EDT

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.

Source: Yahoo Finance 7/31/2013

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.

TSLA daily at 3:20 EDT

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

S&P500 daily at 3:25 EDT

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.

FB daily at 3:25 EDT

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

S&P500 daily at 2:38 EDT

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.

AAPL daily at 2:38 EDT

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

S&P500 daily at end of day

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.

AAPL daily at end of day

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

S&P500 daily at 1:48 EDT

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.

TSLA daily at 1:49 EDT

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

S&P500 daily at 2:37 EDT

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.

MSFT daily at 2:37 EDT

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

S&P500 daily at 2:02 EDT

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.

TSLA daily at 2:01 EDT

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

S&P500 daily at 3:01 EDT

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

S&P500 daily at 2:13 EDT

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.

AMZN daily at 2:13 EDT

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

S&P500 daily at end of day

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

S&P500 daily at 2:46 EDT

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.

TSLA daily at 2:46 EDT

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

PM: Rip in after-hours

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR
Stocks closed flat for all intents and purposes, but eked out a miniscule gain so technically the streak of up-days continues.  Volume was well below average as holders keep holding and fence sitters keep sitting.

MARKET SENTIMENT
The market finished unchanged following the Fed minutes as it already digested the eventuality of tapering and was unfazed by growing calls from Fed members to slow monetary easing.  But shortly after the close, Bernanke answered questions and there was a huge surge in after-hours trade on his convincingly dovish answers.  Does it really matter if we start the Taper in September or January?  Some people think so, but the effect of Taper diminishes by the day as the market prices it in and is already looking past it.  Soon we will be able to add it to the long list of bearish headlines that failed to kill this rally.

TRADING OPPORTUNITIES
Expected Outcome:
If the after-hours gains hold into Thursday, we will see a nice up-day push us solidly back into the upper half of the Summer’s trading range.  While this a place where some will chase, anyone expecting volatility to persist will start looking for opportunities to sell strength and lock-in profits.

Alternate Outcome:
The rally could be back on and this is just the first step in a towering move higher.  If that is the case, there will be plenty of time to buy back in once the rally blows past previous highs.

Trading Plan:
As we move solidly into the upper half of the 1600s, we need to become increasingly cautious.  The swing-trader can lock-in profits proactively and the directional trader can continue holding while moving up a trailing-stop.  If we break 1670 on Thursday, 1650-1655 is a decent area to expect support and leave a stop.  Shorts can start sharpening their knives, but hold back and wait for the up move to stall before diving in with a trade targeting the 50dma.

Expect volatility to persist and keep buying weakness and selling strength.

Plan your trade; trade your plan

AM: What Taper selloff?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3.16 EDT

AM Update

MARKET BEHAVIOR
Stocks were modestly lower before the Fed minutes injected some life into the market and we broke through June 18th’s intermediate high.  The market is on a terror, closing higher the last four days and eight of the last ten.  Clearly things are not going the way bears were predicting two-weeks ago.

MARKET SENTIMENT
It is amazing how quickly a rising market calms nerves.  Over the last two-weeks Tapering fears gave way to Tapering acceptance and many are ready to move on to the next thing.  While the media is busy dissecting the nuance of today’s minutes, anyone trading last week’s fears is missing the boat.  Free markets are the most efficient information discounting mechanism ever conceived.  Without a doubt Tapering could rear its head again at some point, but the previous bout of uncertainty, fear, and emotional selling is behind us.

This is a good time to look back at the last half-year of market predictions and expectations.  We started the year under the cloud of the Fiscal Cliff and another four-years of Obama’s leadership.  Political opinions aside, the market’s knee-jerk reaction following the election was a swift selloff.  Then there was the Fiscal Cliff, Sequester, weak employment, lethargic GDP, Obamacare, Cyprus, Europe, inflation, China, Japan, Tapering, rising interest rates, and countless other major headlines I already forgot.  All of these fundamental events and expectations were supposed to spell doom for the markets.  When we throw in “too-far, too-fast”, this was the most obvious short of the last decade, so what happened?

The reason we could safely ignore all the above fear mongering is everyone was talking about it.  Anything on the crowd’s mind is already priced in.  While this is easy to say, it is far harder to accept.  When we know things are bad and about to get worse, we naturally become convinced it will send the market lower.  If fundamental data directly moved market prices, this is the way it would work and making money in the market would be easy.  But fundamentals and technicals don’t move markets, only buying and selling does that.  This simple idea trips up more traders than anything else and is why many accuse the markets of being irrational.  When the marked doesn’t do what we think it should, clearly we cannot be wrong, so the market must be wrong.  But the truth is the market behaves perfectly rationally once we understand what makes it move.

When the crowd expects something in the future, it trades it today.  The Fiscal Cliff is a very bad thing, so rather than stick around and get our head cut off, lets sell ahead of time.  When everyone in the crowd does this, all the selling for an expected event happens early and there is no selling left for actual event.  This is how the crowd’s ideas and opinions become priced in and why we can ignore what everyone is talking about.  When the headlines are overwhelmingly bearish we can safely buy the market because everyone already sold, there are few sellers left, and the market is poised to bounce on tight supply.  And that is the story of the first half of 2013.

TRADING OPPORTUNITIES
Expected Outcome:
The market cannot go up every day and after such a strong run, we should not be surprised to encounter a couple of red days.  As long as the selling is contained and we stay above our stops, we can continue holding the rebound.  The most nimble and conservative traders can lock in recent gains, but it all comes down to timeframe and targets.  Selling here is not wrong and neither is holding for further upside.

Alternate Outcome:
The recent strength might be nothing more than habitual dip buying reinforced by months and months of buyable dips.  Every rally ends on a dip that doesn’t bounce and this one will be no different.  Failing to hold the recent break above the 50dma shows we are running out of buyers and will likely retest the lows at 1560.

Trading Plan
The market is above support and advancing nicely, but we cannot expect every day to close higher.  Don’t over analyze individual moves and look for how the market responds to widely followed levels.  Staying above the 50dma is supportive for a continued rebound.  Keep stops under this level and hold for a push into the upper end of the summer’s trading range.  If we close under support, it shows buyers are losing strength and we can short the market with a stop above the 50dma and a price target near recent lows.  Expect trade to remain choppy and take profits early and often because they will likely be gone days later.

Plan your trade; trade your plan

AM: Doubt the doubters

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:24 EDT

AM Update

MARKET BEHAVIOR
Stocks continued the rebound into the start of earnings season and by midday are within a couple of points of recovering all the recent Fed selloff.

MARKET SENTIMENT
Easy come, easy go.  Many traders that rode this Spring’s surge higher, likely held too long and were chased out by the recent Tapering selloff with little to no profit to show for their effort.  Adding insult to injury, the market bounced back shortly after they sold.  Such is the life of a reactive trader.

Much of the recent strength is driven by dip-buying and short covering.  These are temporary phenomena and the persistent uncertainty will likely keep a wider pool of buyers from chasing this market to new highs.  The market trades sideways far more often than it goes up or down, so it seems likely the recent rebound will stall as it approaches the upper end of the range.

Bears had their chance to crack this market wide open a couple of weeks ago and could not get the job done.  The Tapering selloff was the perfect opportunity to send the market sharply lower on fear and uncertainty.  But once the weak and emotional jumped out of the market, we ran out of sellers, found a bottom, and rebounded.  With most of the weak holders already out, new lows driven by emotional selling are less likely.

TRADING OPPORTUNITIES
Expected Outcome:
The volatile trade will continue and it is anyone’s guess how high this bounce will go before it runs out of steam, but clearly June’s Fed collapse is dead.  There are plenty of hidden mines to sink this market, but we largely came to terms with Tapering and redounded in the face of this threat.  This is another example how we can safely ignore what everyone is worried about, because anything the crowd is talking about is already priced in.

The market could surge on a shockingly good earnings season, but that seems unlikely.  It is more reasonable is to expect the Summer trading range to continue and  we should look for opportunities to lock in recent gains before the rebound stalls and rolls over.  Either we sell into strength, or use trailing stops to protect recent gains.

Alternate Outcome:
Markets rarely go straight down and usually have multiple suckers-rallies on its way lower.  Maybe the lows are already in, or maybe we still have more room to fall.  For the opportunistic trader it doesn’t matter.  We lock in profits and wait for the next trade.  If the market is unable to recover 1655, we could see a pullback to recent lows, and if we exhausted the supply of dip-buyers, the market will stumble into new lows.

Trading Plan:
We still have the green light to hold the break above the 50dma.  We might pullback to this level, but if we hold it, look for the market to continue to 1670+.  Failing to hold the 50dma so soon after reclaiming it means we ran out of buyers and a test of recent lows near 1560 is likely.

In choppy markets, don’t fear missing upside by selling too early.  In fact what we need to be afraid of losing profits from holding too long.  When we lock-in profits too early, take comfort in knowing most traders are reacting to these whips and buying and selling at the exact wrong time.  I’d gladly accept smaller profits over losing all my recent gains any day.

We can own this market with a stop under 1625 and take profits above 1660/1670.  If we break 1655, look for a short squeeze to continue the move higher and we will move our trailing stops to 1650.  Breaking under 1625 is shortable with a profit target near 1570.

Plan your trade; trade your plan

AM: Clearing the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:44 EDT

AM Update

MARKET BEHAVIOR
The rebound continues.  Friday’s post-holiday session finally closed above the 50dma and we added to those gains today.  The market is 80-points above the Fed-selloff lows and only needs another 15-points to complete the roundtrip.  Will this point act as overhead resistance, or clear the way for a move higher?  We will know the answer soon enough.

MARKET SENTIMENT
Buy the rebound or sell the strength, that is the question.  People still don’t trust this market and fear the end of QE, but the market’s rebound shows it is far less concerned with these issues.  We don’t want to get hung up on what the market should do.  As traders the only thing that matters is what it will do, and to find those answers we need to understand what other people think and how they are positioned.

The recent Taper induced selloff was driven by fears of QE ending and what it means for the market.  Anyone who believes the market is only rising because of QE will obviously conclude that without QE, the market will collapse.  This was the justification behind much of the selling a couple of weeks ago and once we reach the point of maximum pain, selling begets more selling as previously confident holders start doubting their position and bailout before the losses get worse.  But at some point the selling climaxes and reverses when the market runs out of sellers.  That happened at the June 24th 1560 low.

If we look at how people traded this event, we see most of the traders fearing the Taper used this weakness as an excuse to sell.  The people who bought the dip are opportunistic traders unafraid of a little weakness.  Exchanging weak holders afraid of Tapering and replacing them with confident traders that are not worried about the Taper fundamentally changes the dynamics in the market.  This shows how widely expected events become priced in ahead of time.  As we hear more tapering talk, the market will largely ignore it because most holders no longer care.

I’m not saying the volatility is behind us, just that the recent flush makes further selling on the same news less likely, and the market’s recent strength supports that argument.  Remember, we don’t trade what the market should do, but what it will do.  Often those are very different things.

TRADING OPPORTUNITIES
Expected Outcome:
The market reclaimed the 50dma after the recent selloff, demonstrating continued strength.  As much as people don’t trust this market, it keeps heading higher and the opportunistic trader is taking advantage of it.  Contrarian trading isn’t going against the trend, it is going against the crowd.  When everyone fears Tapering, economic weakness, and market pullbacks, that creates a buying opportunity.

Alternate Outcome:
Rallies bounce until they don’t, but this market is trading a new trend of lower highs and lower lows until we break 1655.  If this downtrend persists, we are part of a grinding correction lower.  While everyone fears the plunge, it is the slow slide that does the most damage as it erodes one and two percent at a time when no one is paying attention.  The best way to defend against this complacency is using hard stops to get us out  even when we are not concerned.

Trading Plan:
We broke the 50dma on Friday and any disciplined short should already be out of the market .  Swing traders bought the breakout last week and are riding this strength higher with a stop under 1630.  Bulls still holding should move their trailing stops up to 1625.  Expect volatility to continue and look to take profits somewhere near 1670, or alternately use a trailing stop to protect recent gains.  As we already know, holding too long will give back all these profits in the next swing.  It is impossible to predict the exact turning points in choppy markets, so we need to be satisfied with what we get.  This is the wrong place to be complacent or greedy.  Remember, most people reacting to these swings are losing money so any positive return this summer is something to be proud of.

TSLA daily at 2:45 EDT

INDIVIDUAL STOCKS
Everything seems to be working except AAPL.  TSLA, AMZN, GOOG, NFLX, and LNKD are all near 52-week highs.  Stocks that are too-high keep going higher and stocks that are too-cheap keep getting cheaper.  Most often the smart trade is going against our gut.  AAPL at $440 was the buy of the decade while TSLA at $100 was the most obvious short in years.  And both trades have been exactly wrong.  Contrarian trading is going against the crowd and we must acknowledge most of the time we think exactly like the crowd.  If we see value, so does everyone else.  When we see outrageous prices, the crowd sees it too.  My best trades have all been the hardest to make while the easy ones lead to some of my biggest mistakes.  Fight the crowd, not the trend.

Plan your trade; trade your plan

AM: Economy continues exceeding expectations

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:39 EDT

AM Update

MARKET BEHAVIOR
Stocks are modestly higher on stronger than expected employment, but still running into overhead resistance at the 50dma, currently around 1625.

MARKET SENTIMENT
Is good news still bad?  Some are making the argument strong employment threatens QE, but so far the market doesn’t appear concerned.  The selloff from May’s highs and last month’s Fed meeting plunge flushed out anyone afraid of Tapering.  Opportunistic traders buying the dip are obviously less concerned about weakness and impending Fed action.  Fewer worrywarts and more confident holders finally means good news is good again.

One of the more interesting developments is the surge in 10-year Treasury rates.  They are up a staggering 1%  in less than two months even as the Fed continues buying $85 billion in bonds.  Two-months ago the mantra was don’t fight the Fed, but this market is oblivious to the Fed’s buying and rates are surging on expectations of the Fed’s eventual exit.  The important takeaway is the Fed does not control the bond market.  I used this analogy before, but the Fed is like a four-year old girl walking the large family dog.  Everything works great as long as the dog is agreeable and listening to the little girl, but this is perceived control, not actual control.  The dog can easily overpower the girl if he spots a rabbit and there is nothing she can do to stop him.  This is exactly what is happening in the bond market.  While the Fed’s $85 billion in monthly purchases are impressive, they are a drop in the bucket of the ginormous bond market and we are seeing just how small the Fed really is when the bond market decided it didn’t want to play along any more.

While many see this as a bad thing, I’ll take the other side.  It shows low-interest rates were not driven by the Fed, but came from an agreeable market willing to accept historically low yields.  The only reason the Fed appeared successful is the market wanted to go where the Fed was trying to take it.  While we have some emotional selling in the bond market as traders fear QE being taken away, the reality won’t be nearly as bad as many predict simply because the Fed was never in control of the bond market in the first place.  Bonds were expensive because that is where the market wanted them and once this Tapering fear-trade passes, rates will come down again, even without the Fed’s buying.  The bond market is setting up a sell the Tapering rumor, buy the Tapering news trade.  While we should expect more near term volatility in the bond market, the eventual start of Tapering is a buying opportunity, not a selling one.

TRADING OPPORTUNITIES
Expected Outcome:
The market remains stable following the recent selloff.  The wave of emotional, panic driven selling is behind us and we held 1600 for most of the last month.  Selloffs are swift and this sideways trade is supportive of the market, making a continued selloff less likely.  The recent dip chased out most potential sellers and we bounced on the resulting tight supply, but arresting the fall doesn’t automatically mean good times are here again.  Traders spooked by recent volatility are reluctant to buy back in.  While supply is tight, demand remains weak and we continue trading sideways.  The best way to trade the summer chop is to buy weakness and sell strength.  Take profits early and often because they will evaporate days later.

Alternate Outcome:
While the market largely digested Tapering, there are countless other landmines out there to be wary of.  We can safely ignore what everyone is talking about, we need to fear the stuff no one is talking about.  I have no idea what they might be, but a simple stop-loss will keep us out of trouble no matter what happens.

Trading Plan:
We remain between 1600 and the 50dma, but are at the upper end of the recent range.  A swing trader can proactively lock in profits and buy back in if we break overhead resistance.  A bull can continue holding with a stop above 1600 and a bear can short stalling at the 50dma with a stop above the moving average.  No matter what our outlook, expect the chop to continue and take profits early and often.

GLD daily at 12:39 EDT

INDIVIDUAL STOCKS
AAPL is not enjoying the market’s strength and the recent rebound is stalling today.  A return to $400 likely means the stock has more downside left and it really acts like it is destined to test $35o in the near future, especially if the iPhone5s lacks the must have features to induce iPhone4s owners to plunk down the $200 or $300 upgrade fee.  Some phone companies are letting people upgrade if they trade in their old phone, but those used phones are resold and will cannibalize lower end AAPL sales.

GLD remains unpopular as it gives back the recent bounce on strong employment.  Protection against economic meltdowns and out of control inflation is falling out of favor and ironically gold is one of the least safe places for people to hide out in this gradually improving economy.

Plan your trade; trade your plan

PM: Happy Birthday America!!!

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

AM Update

MARKET BEHAVIOR
Stocks were quiet leading into the holiday and Friday’s employment numbers.  We remain between 1600 support and 50dma resistance.  Since market selloffs tend to be quick, the longer we hold these levels, the more supportive it is for a continuation of the uptrend.

MARKET SENTIMENT
Restrained trade ahead of a holiday is normal and expected, but there is the potential of a market moving employment report on Friday.  The financial press hypes it up, but ever since the market transitioned from job losses to job gains a couple of years ago, its been less of an event.  But in a conditioned Pavlovian response, people still get anxious in the days leading up to it.

Today’s Yahoo Finance poll shows two-thirds of respondents expect employment to fall short of expectations, with almost a majority expecting a major miss.  The least expected outcome is a major beat, with only one out of eighth bullish on the economy.  What traders expect has little to do with the actual number, but it does directly affect how the market responds.

In a normal world, stronger than expected employment boosts the market, and vice versa.  But in this bizarro world of QE, the market’s reaction is far less intuitive.  If traders are more concerned about the continuation of QE than the strength of the economy, then good is bad and bad is good.  At least that is how the talking heads have spun it, but even more simply, the market rallied regardless of the employment number as we are up nearly 300-points since the November lows.  Rather than say employment is this or that, it is easier and more accurate to say employment has been a non-issue for this market.

Source: Yahoo Finance 7/3/2013

While the employment report’s influence has been diminished in recent years, the market’s lowball expectation is still insightful in understanding sentiment.  Traders remain bearish on the economy and this negative outlook affects their positioning.  As over-bullish as people claim this market is, everything I see shows people still don’t trust it.  If the market expects the worst, then people remain underweight and the negative outlook is already price in.  As low as the bar is, look for the economy to continue exceeding expectations.  The contrarian trade isn’t going against the trend, it is going against the crowd.

TRADING OPPORTUNITY
Expected Outcome:
While a market crash is off the table, expect the summer chop to continue.  There are two ways to trade sideways markets, 1) buy weakness and sell strength or  2) take some time off and wait for the next directional move.  Making money in the market is easy, the hard part is keeping it.  These volatile periods are where most traders give back months of gains as they react impulsively to the market’s head-fakes.  Trade this market proactively or don’t trade at all.  Take profits early and often because they will evaporate days later.

Alternate Outcome:
At some point the market will break out of this range.  Maybe it will be a continuation higher, or potentially the selloff continues.  For the time being, expect the market to remain range bound, but keep watching for the next directional move and be ready to grab on.

Trading Plan:
Not much is going on between 1600 and the 50dma.  If a bull or bear has strong conviction, they can own with a stop under 1600 or short with a stop above the 50dma.  The agnostic swing trader should lock in recent gains and wait for the next trade to develop, either trading above the 50dma or falling under 1600.

Expect some volatility immediately following the employment report, but often the initial knee-jerk reaction is wrong and wait to see how the trade develops in the afternoon to get a true sense of what the market thinks.

Trade your plan; plan your trade

AM: Stalling at the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:37 EDT

AM Update

MARKET BEHAVIOR
Stocks were up for the fifth out of the last six sessions before an afternoon selloff took us into the red.  We remain under the 20dma and struggle breaking above this widely followed resistance level.

MARKET SENTIMENT
Clearly this market ran out of sellers last week and no matter how bearish the headlines or outlook, markets rally on tight supply.  We reclaimed 60-points of the Fed Meeting selloff on the backs of dip-buying and short-covering, but buyers remain reluctant to chase this market above the 50dma.  Lack of sellers and reluctant buyers leave us at this 1620  stalemate.

Major market selloffs occur on a drip of unexpected bad news.  It is hard to say the Fed’s tapering is unexpected or unquantified.  The only thing the market is fretting over is a few months here or there when the Fed starts tapering its bond purchases.  This is completely different from the 2008 meltdown where almost no one understood the risks the financial markets faced and we continued sliding as those vulnerabilities came to light.

Recent high-volume selling purged the market of weak holders afraid of Tapering and replaced them with confident buyers willing to sit through near-term weakness and volatility.  These value buyers’ courage actually reduces downside volatility because they keep supply out of the market during weak periods, making it far easier for buyers to lead a rebound.  While this largely mitigates the risks of a market crash, expect near-term volatility to persist as buyers remain reluctant to chase this market higher.

TRADING OPPORTUNITIES
Expected Outcome:
The sideways chop continues.  The best trade remains buying weakness, selling strength, and taking profits early and often.  In periods like this we cannot sit on profits and watch them accumulate because they will evaporate days later.  Often we will get out too early, but at least we are making money in this chop that is chewing up most traders reacting to these swings.  We rallied 60-points from last Monday’s lows and a pause here is not unexpected.  The nimble trader is taking profits and looking for the next trade.  Maybe that is breaking above the 50dma, maybe it is being turned back by it.

Alternate Outcome:
If the expected trade is sideways chop, then the alternate is a directional move.  We are in a mini-range between 1600 and the 50dma.  Whether it is a swing trade, or a breakout trade, we can trade a move outside this range.  The swing trader would take worthwhile profits proactively while the directional trader would use a trailing stop.

BBRY daily at 2:38 EDT

Trading Plan
A little something for everyone.  A bear can short stalling near the 50dma, the bull can continue holding support above 1600, the swing trader that bought the 1560 bounce can lock in profits, and the cautious can sit out this summer volatility.  A break above the 50dma is buyable and should make shorts cover.  A dip under 1600 should stop-out longs and let bears add to their shorts.  No matter what, continue taking profits and avoid sitting through the yo-yo.  Worst of all, don’t react impulsively to these whips by buying strength and selling weakness.

INDIVIDUAL STOCKS
BBRY‘s slide continues as the obvious over-reaction keeps over-reacting.  People buying Friday’s plunge were hoping for a bounce, but clearly the larger pool of value investors remains unimpressed and is not snapping up “discounted” shares.  This stock will bounce at some point, but that is nothing more than an opportunity for those that over-stayed their welcome to get out at less of a loss.

Plan your trade; trade your plan