AM: Strength continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:58 EDT

AM Update

MARKET BEHAVIOR
Stocks continue the rebound as we approach recent highs.  Will the series of ups and downs continue, or is the market finally ready to march higher?

MARKET SENTIMENT
The expected pullback remains elusive.  Even bulls are cautious near all-time highs and that wariness on both sides is what keeps propping up this market.  No doubt there are chasers running in, but the majority is reluctant to fully embrace these highs because common sense tells us we’ve come too-far, too-fast.

People often look down on dumb money that impulsively rushes in and out, but many times smart money over analyzes the situation and misses the trade.  Smart money is taking profits here after such a long run, but we keep marching higher, what gives?  To figure this out we need to understand what other people think and how they are positioned.

Those that expect near-term weakness are taking profits and holding back on new purchases, but the market is unfazed by this selling and reduced demand.  Without a doubt the market will pullback at some point, but we have to acknowledge the strength in this face of this selling is impressive.  Cautious smart money will eventually be right, but making money in the market is all about timing and no matter how smart we are, if we get the timing wrong we lose money.

Many traders are light this market ahead of the expected pullback.  If they already sold, that selling pressure is removed from markets and makes it easier to head higher.  Big money is bullish on this market but hates buying new highs.  They often wait for the dips to stock up and that is why every dip finds a floor.  Swing-traders and dip-buyers do not have the resources to keep supporting this market for this long, meaning real money is standing behind this move.

TRADING OPPORTUNITIES
Expected Outcome:
We can trade our opinions or we can trade the market and this market simply refuses to breakdown.  Without a doubt this market will selloff at some point, but it is not giving any signals the breakdown is imminent.  In fact it is far more resilient than most expected and that is extremely bullish in of itself.

I don’t feel comfortable with the rally, but the hardest trade is usually the right trade.  Without a doubt this rally is living on borrowed time and will breakdown at some point, but the trend remains higher and will likely continue for a while longer.

Alternate Outcome:
I’ve been bearish on this market for six-weeks and while its largely moved sideways in that period, the lack of a breakdown make the continuation more likely.  But “more likely” is not a guarantee and we need to continue watching for the inevitable selloff.  Markets have a habit of convincing us we are wrong just before proving us right.  Its taken me a while to come back around to the rally, and I very well could be changing my mind just the selloff begins.  But I’m okay with that because as a small trader I can reverse my position in a moments notice.  I don’t mind being wrong, but I can’t stand staying wrong.

Trading Plan:
The rally is intent on taking out 1,600 and that will continue the pattern of higher-highs.  It is possible buying stalls after new high as the up and down continues, but the rally is not in jeopardy until we break the 50dma at 1450.  I will be more cautious if the rebound stalls short of news highs at 1597.

AMZN daily at 12:58 EDT

INDIVIDUAL STOCKS
AAPL is up modestly following Tuesday’s earnings.  It appears some buyers are encouraged by they lack of a selloff and feel more comfortable with a potential negative catalyst removed from the stock.  But they are ignoring the trend and are bottom-picking, something that hasn’t worked well for many AAPL bulls.  A popular definition of insanity applies here, doing something over and over yet expecting a different result.

AMZN is higher ahead of earnings.  Even though the valuation is sky-high, Bezos knows how to play the market and I give him the benefit of the doubt when it comes to wooing shareholders.  If earnings disappoint,  there is a lot of air under this stock and plenty of time to get in on the short side with far less risk.

Plan your trade; trade your plan

PM: Can the rally continue?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks closed unchanged on average volume.  This was the fourth-day buyers showed up in sufficient numbers to support these levels.

MARKET SENTIMENT
It is really hard to get excited about the market here, but that is what makes it work.  Everyone expects a pullback, even bulls preface their bullishness by saying they expect near-term fluctuations.  What this means is those fearing a major correction already out.  Swing-traders took their profits and are ready to short this market.  Even bulls are waiting for weakness so they can add to their positions.  Most of the selling already took place and we have a growing pool of money outside the market ready to come back in.  This is why the inevitable selloff still eludes us.

TRADING OPPORTUNITIES
Expected Outcome:
Good old supply and demand.  Sellers threw everything they had at this market and here we stand, 1% shy of all-time highs.  If this was the best bears could do, there is nowhere to go but up.  I don’t understand it, but that’s the way the market works.  If this made sense anyone could do it.

Sell in May and go away has been a thing for the last several years and many of traders expect another weak Summer.  But if that is expected, it makes it less likely to happen.  Maybe this year we rally through Summer and have a larger correction in the Fall.  Certainly a possibility we have to consider

Alternate Outcome:
Until yesterday the Expected Outcome was a selloff but it just hasn’t worked out that way.  Buyers continued buying this month and we found solid support at 1540 and the 50dma.  I still don’t trust this market, but it nullified many of my criticisms and I must acknowledge and respect that.  I don’t have to own the market here, but bulls deserve credit for putting up such a good fight.

Just because I stopped fighting this market doesn’t mean I embraced it.  I remain paranoid of our precarious position and 1540 and the 50dma are the key levels to watch.  As long as we hold above these the rally is on, but another test and violation of support is unlikely to bounce back.  Stay with what is working, but keep a close eye on the exits.

INDIVIDUAL STOCKS
AAPL’s increased dividend and share buyback program failed to impress and the stock finished flat on the day.  Most interesting is how little the stock moved following earnings.  Results were a mixed bag and both bulls and bears got a little of what they wanted.  But we have to award the draw to bears because momentum is clearly on their side and another fundamental catalyst came and went without reigniting the stock.

Realistically speaking the most bulls can look forward to is a minor refresh of the iPhone5 and a retina display coming to the iPad mini.  What else is there to bring this stock back to life?  Look for selling to continue and even accelerate into the mid to lower $300s.  This will be the last flush and finally put a floor under the stock.  The most loved stock needs to become the most hated and today’s uninspiring earnings moved us one step closer.

GLD daily at end of day

GLD is making a comeback, but the obvious bounce is rarely the real bounce.  Everyone is buying the dip and that is why the price is coming back, but what happens when dip buying dries up?  This occurs often enough on Wall Street that it earned the name “dead cat bounce”.  I cannot say how long or high the bounce will go, but we will retest $130 before this is over, making this a better selling opportunity than buying one.  I’m not a gold bull or bear and don’t have a particular opinion one way or the other, I am simply looking at it from a crowd psychology vantage.  The speed of how quickly dip buyers embraced the selloff makes me suspicious.

NFLX traded flat after blowout earnings.  There are still a truckload of shell-shocked shorts praying for this gap to slide back down, but unfortunately the market gods are far more inclined to humiliate the hopeful and desperate than help them.

AMZN reports earnings Thursday and this one is a coin flip   With such an outrageous valuation the stock is standing on a trapdoor and any bad news will send the stock reeling.  But Bezos and Co are masters at pulling rabbits out of hats.  Can they do it again?  Buying or shorting earnings is like betting on black or white.  The safer and higher probability trade is waiting for the news and then trading the subsequent move.

Plan your trade; trade your plan

AM: Buyers continue supporting this market

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:24 EDT

AM Update

MARKET BEHAVIOR
The rebound is taking a break as we trade sideways just shy of 1580.

MARKET SENTIMENT
Bears need the market to breakdown to validate their thesis we are over-bought and running out of buyers.  Bulls on the other hand need to prove buying won’t stall out again at the upper end of the trading range.  Finally swing-traders expect us to stay in the trading range and are preparing to take profits.  Right now that puts the swing-traders on the bear’s side, making it two-on-one.  If the rally can continue to new highs against bear shorting and swing-trader profit taking, it shows there is still a healthy supply of buyers willing to step in at these levels.  Many expected last week’s selloff to be the end of the rally and sold in anticipation.  Many of these sellers are buying back in after the market held up and are the ones pushing us higher.

TRADING OPPORTUNITIES
Expected Outcome:
Holding the bounce for a fourth day shows buyers are still willing to own this market and the recent rebound was more than just a flurry of dip buying.  If we see a material selloff over the next day or two all bets are off, but so far the market acts like it wants to go higher.  How much higher is up for debate.  Maybe we rally and bump our head on 1600 again before falling back into the trading range.  Maybe there has been enough consolidation to sustain an upside breakout.

While I still don’t feel comfortable with this market, it looks like it wants to go higher and we have to respect that even if we chose not to buy it.  The thing bulls have to be wary of is the higher we go, the harder we fall.  Every rally pulls back at some point and the longer we put off taking our medicine, the worse it will taste.

Alternate Outcome:
I’m still waiting for a market breakdown.  A weak close would breath life back into the bear thesis, but I have to admit continued strength is not what I expected and thus invalidates a large part of my bearish analysis.  This market will top at some point and we simply need to wait for it.  These things go further and longer than most expect so resist the temptation to jump in front of this rally.

Trading Plan: Closing above 1580 today shows bulls are still in control.  Failing to hold 1570 shows bears and swing-traders are weighing on this market, but the real selloff won’t begin in earnest until we set a material lower-low under 1540.

INDIVIDUAL STOCKS
AAPL is down modestly after earnings in an anticlimax ending to a widely anticipated event.  We heard a little for bulls with increased cash distributions, but bears can point to declining margins and earnings.  A clear lack of a win for bulls keeps bears in control and expect lower prices as one more catalyst came and went without bring the stock back to life.  Bulls finally got their cash hoard event and the stock is unmoved.  The only thing left is a radical new product and everything points to incremental updates to the iPhone5 and other existing products this year.  I expect the stock will print $350 over the next eight weeks as formerly hopeful holders become demoralized and abandon their once cherished AAPL.

NFLX is holding yesterday’s breakaway following blowout earnings. Few believe in this company, yet it keeps beating expectations and continues rallying on the backs of shorts.  We could see the stock retreat to $200 but this is a buyable dip and the direction remains higher.

Plan your trade; trade your plan

PM: Hard to fight this bull

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks rallied to 1579 and continued the three-day win streak following a bounce off the 50dma.  Volume was average and an improvement over yesterday’s light volume rally.  Of course volume was boosted by midday drama and panic selling when a hacker tweeted on the Associated Press’s Twitter account an attack on the White House.  The market initially sold off ~1% before rebounding minutes later when the story was refuted.

MARKET SENTIMENT
We’re back in the hunt for new highs after a two-week dip to the 50dma.  All that was wrong in the world is now right, or at least that’s what the buyers think.  Our job is figuring out if these buyers know something the rest of us don’t, or are dumb money arriving just before the curtain falls on this rally.

Another sustained bounce off of 1540 is impressive, but only if it holds.  There is no such thing as a triple-bottom, but no one told this market that.  We’re not out of the woods yet and we need one more support day on Wednesday to show this rebound is more than just dip-buying from a small group of swing-traders and short covering from premature bears.

If the market holds, we have to respect that and the resulting strength can be attributed to widespread expectations this market is on the verge of pulling back.  Even bulls say they expect a near-term weakness before resuming higher.  Everyone recognizes the nearly straight up move is unsustainable, but it will continue until people stop talking about a pullback.

TRADING OPPORTUNITIES
Expected Outcome:
If the market holds recent gains on Wednesday and finishes strong, we must give the credit to the bulls and this Teflon rally.  I have no idea how much higher this can go and I don’t need to participate in the rally if I don’t feel comfortable with it, but no matter what my personal bias is, continued strength indicates the next move is higher.

Alternate Outcome:
Market weakness on Wednesday will send up warning flags buying is waning and we could be near the end.  Unsustainable dip buying can prop the market up for a few days but it takes real buying to continue a move.  If follow-on buyers fail to show up tomorrow, we will start the widely expected pullback.

INDIVIDUAL STOCKS
AAPL’s earnings came and went.  The stock rallied after hours on a new buyback and increased dividend, but outlook tempered enthusiasm and the stock finished flat in extended trading.  Given all the back and forth between bulls and bears, the least expected outcome was no move on earnings.  I still chalk this up as a win for bears because another fundamental catalyst came and went without reversing the nasty down trend.  Look for the slide to continue until at least $350.

AMZN daily at end of day

AAPL and Steve Jobs are famous for ignoring customer opinions and instead tell them they don’t know what they  want.  This works brilliantly when faced with new products categories customers doesn’t yet understand, but it is a disaster if you get it wrong.  AAPL insists customers don’t want five-inch smartphones, but someone should tell all the people drooling over the Galaxy S4.

AMZN reclaimed the 50dma for the fourth time in recent months.  There are only so many times a stock can tempt fate before coming up short.  I wouldn’t want to hold or short this into earnings, but if earnings disappoint, there is a lot of air under this stock.

Plan your trade; trade your plan

AM: 100,000 views!

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:28 EDT

AM Update
CrackedMarket crossed 100,000 views this morning and the enthusiastic response from readers far exceeded my wildest expectations.  Everything I know about the markets I owe to other traders’ generosity and willingness to share their insights and experiences.  I’m grateful and flattered I have the opportunity to give back to the community in my own small way.  Thanks!

MARKET BEHAVIOR
The range bound market continues the recent bounce and is challenging 1580 by midday.  (addendum: we just had a wild mini-flash crash as the market plunged nearly a percent and then right back up over a matter of minutes.  It seems AP’s twitter account was hacked and the hacker tweeted the White House was attacked and Obama was hurt.  All untrue.)

MARKET SENTIMENT
Either this is the last gasp of a dying market, or there are far more buyers at these levels than even the bulls expected.  Paradoxically everyone’s expectation of a brief pullback after such a long run is what keeps the rally alive.  Prospective buyers eager to get in this market buy any weakness and this type of dip-buying is sustainable because these are investors with longer time horizons.  The dip buying we are wary of is late followers jumping on an over-crowded bandwagon.

Sustainable buying is sustainable and unsustainable buying is unsustainable.  As silly and obvious as that sounds, it is extremely insightful.  The longer we hold these levels, the more likely the rally will continue.  Unsustainable buying dries up quickly and the market crumbles on the lack of demand.  Holding 1550 for a month and a half demonstrates ample supply of investors willing to buy at these levels and  easily overcomes all the pessimism and profit taking thrown at it.

TRADING OPPORTUNITIES
Expected Outcome:
Unsustainable bounces only last a few days before collapsing under their own weight.  Holding these levels through Wednesday is more than a few days and demonstrates ample demand and willingness of investors to buy these levels.  I’m still wary of this market and a breakdown over the next twenty-four hours is most likely the end of this run.

No one can predict the future and we must trade the market we are given.  There are plenty of reasons for this market to top here, but there are just as many for it to continue.  I’ve been bearish on this market for a month and the market keeps holding up.  I have to respect that.  It is okay to be wrong, it is fatal to stay wrong.

Retesting 1540 over the next few days is likely the end of this rally, but holding strong through Wednesday means new highs are likely.  But none of this changes the fact the spring is coiled to the downside and holders need to be disciplined in their use of stops to get them out ahead of trouble.

Alternate Outcome:
Markets refresh one of two ways, the most common and efficient is through a sharp pullback.  This shakes out weak holders and clears the way a move higher.  But the second way is a long sideways grind that bores traders out of their positions.  They achieve the same result, but in different ways and over different time frames.  The longer the sideways trade, the greater the upside potential.

INDIVIDUAL STOCKS
We are just a few hours away from AAPL’s earnings.  Will this finally be the fundamental catalyst that turns the stock around?  Will we get the buybacks and dividend increases everyone is hoping for?  Or will we finally see disappointing iPhone5 numbers that justify the selloff from September’s highs?  The market is better at predicting the news than the news is at predicting the market.   We will soon find out if the market was ahead of the news on this one.

NFLX daily at 1:28 EDT

One last selloff will make an interesting buying opportunity, but remember this is now a trading stock, not a long-term hold.  AAPL no longer has a monopoly on the personal device market, exploding sales, and eye-popping margins.  AAPL is competing in a completely different market than two years ago and no matter what anyone else says, AAPL’s entire fortune is tied to iPhone sales.  Without hardware sales, there is no iTines, App Store, or any other residual income.  These additional services are not diversification, but further reliance on hardware sales.

NFLX exploded this morning and continues humiliating bears.  These things go further and longer than anyone expects.  We trade stocks, not valuations so don’t get in the way of this freight train.

Plan your trade; trade your plan

PM: Light volume saves the day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks continued the bounce on unusually light volume.  Over the last few weeks the biggest volume days have all been marred in red ink, while subsequent rebounds only attracted modest groups of buyers.

MARKET SENTIMENT
It is hard to get excited about this market.  Every dip and rebound simply ends in another dip and rebound.  At some point we will break out of this range, but it already dragged on longer than either bulls or bears expected and we are still stuck in the middle.  Bulls are happy to buy the dips, but back away when the market approaches the upper end of the range.  A similar but opposite reaction from Bears.

If only volume was as insightful as some people make it out to be.  I’d love it if all we had to do was follow the volume, but unfortunately it isn’t that easy.  The conventional view of our current situation is high-volume selling represents institutional money bailing out because they are the only ones with accounts large enough push volume this high.  If big money is getting out, we don’t want to stick around either.  But what if high-volume selling is actually bullish?  What if it represents the churn in ownership necessary to refresh the rally?  Capitulation bottoms always happen on huge volume because it is the last of the weak hands getting flushed out.  Could that be happening here?

Earlier in this rally low-volume buying lead to further price gains, but that was under that market’s personality and recent volatility and flat trade indicate this market’s personality is different.  Can we still assume light volume equals higher prices?

In reality volume is just one of many pieces to the puzzle and we have to look at the entire picture.

TRADING OPPORTUNITIES
Expected Outcome:
We ended the day above 1560 and holding this level into Wednesday shows there is still life left in this bull.  Markets roll over fairly quickly as they run out of new buyers.  Weakness on Tuesday or Wednesday will show that, but four-days of buying is more than the typical dip-buyers can muster and shows wider follow-on buying from a larger pool of investors.

Alternate Outcome:
I am still wary of this market and a fourth test of 1540 is unlikely to bounce, but we have to trade the market we are given and often that means admitting we are wrong and changing our view of the market when confronted with new information.  Finishing above 1560 on Wednesday shows there is still life in this bull and we will make a run for 1597.

MSFT daily at end of day

INDIVIDUAL STOCKS
Sometimes the stupidest ideas make for the best trades.  I was widely ridiculed a while back for suggesting MSFT was a better buy than AAPL.  Everyone knows MSFT is garbage and AAPL is a crown jewel.  But therein lies the problem.  MSFT was priced as garbage and AAPL a crown jewel.  Obviously AAPL was overvalued and MSFT undervalued and that is exactly how we make money in the markets.  Any ‘idiot’ who put this pairs-trade on at the start of year (buy one and short the other) made 8% on the MSFT long and 26% on the AAPL short.  So much for conventional wisdom.  Our goal isn’t to recognize what everyone already knows, but see what they don’t.  Obvious trades don’t work and counter intuitive ones do.

Speaking of counter intuitive, NFLX popped 25% in after-hours, smashing expectations and sending shorts running for cover.  The obvious short keeps going higher and confident bears are losing money by the truckload.  Chances are they will eventually be right, but we’ll have to put that on their tombstone because they won’t survive long enough to see it.  This game humbles everyone and we must always expect the unexpected because the expected is already priced in.

Plan your trade; trade your plan

AM: Stuck in the range

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:28 EDT

AM Update

MARKET BEHAVIOR
Stocks found support at 1550 after early weakness and are back above break-even by midday.  The market is not revealing its next move this morning, but maintaining these levels aids the bulls case.  Weakness typically develops quickly and if we don’t stumble over the next couple days, the next move is higher.

MARKET SENTIMENT
Indecision continues as bulls and bears are unable to push us out of this trading range.  Breakout buying and breakdown selling fizzles soon after we move outside the trading range.  Broadly speaking there are two groups in the market, fast money and slow money.   Fast money is small and nimble with short timeframes and high turnover.  Slow money is major institutional investors with huge piles of money and holding periods that stretch a year or longer.

There are only two things that move markets, buying and selling.  Holders and watchers don’t move prices until they decide to act.  How this affects the market is fast money has far more influence over the short-term because they are always trading, but slow money moves markets over longer-terms with their extraordinarily deep pockets.  We see a lot of volatility within our current range as fast money runs out of money and influence when they swing between all-in and all-out, but the directional moves fail because big money does not act on the breakout/breakdown.  Until big money figures out what it wants to do next we are stuck.

Does big money still have piles of money sitting around to throw at this market or are they are already fully invested.  One leads to a continuation, the other a selloff.  From what I gather, big money is optimistic about the market, even if they see a near-term dip in our future.  When it takes big money weeks to move in and out of positions, they are less concerned about minor fluctuations in prices.  Even if they foresee near-term weakness, they won’t adjust their buying and selling much and are still long this market.  If they are already in, how are we going to breakout to the upside?

TRADING OPPORTUNITIES
Expected Outcome:
The market remains stuck and directional traders are simply waiting for the next opportunity.  We had a breakout up to 1597 fizzle and retreat to 1536 a few days later.  The market bounced at the 50dma and we are left wondering if this is another buyable dip or the last chance to get out.

I still don’t trust this market and am watching for a retest and violation of support at 1540.  Our current bounce could carry us up to 1570, but dip-buying has become too obvious and is bound to fail at some point.  I can’t say for sure if this is the one, but it is coming soon enough that I want to stay out of the way.

Alternate Outcome:
Markets breakdown quickly and holding these levels for a few more days shows the market has the strength and support to continue higher.  If we don’t selloff by early Wednesday, the market’s next move is higher.

INDIVIDUAL STOCKS
AAPL is just biding time until tomorrow’s earnings release.  Even bulls concede growth in existing products is waning and are no longer hopeful for blowout numbers.  The fear is AAPL will miss the already lowered mark and give further disappointing guidance.  But with such low expectations, we could see the stock bounce if it turns out less bad than feared.  The stock still needs one last flush to crush the hopeful, a selloff after earnings will speed the revival.  A bounce on earnings simply prolongs the pain.

Plan your trade; trade your plan

LA: Can bulls hold on?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR
The market remains range bound even though we widened the window in recent weeks.  March traded primarily between 1540 and 1560.  A couple breakouts and breakdowns later, that range stretched from 1536 to 1597.  Twenty-points of volatility exploded to sixty since the start of the second quarter.  Increased volatility on the heels of a steady six-month rally hints at a shift in market personality and often signals the trend is on the verge of changing.

MARKET SENTIMENT
This rally was supposed to pullback January 3rd after the massive and “unsustainable” Fiscal Cliff pop.  Yet here we are nearly four-months later and a hundred points higher.  Like a broken clock, the naysayers will eventually be proven right if we wait long enough, are we finally getting close to that point?

Our job is not to know what the market will do next, but what it is more likely to do.  This is a very subtle, but important distinction.  No one knows what will happen tomorrow, but we can combine herd psychology with an understanding of what other traders think and how they are positioned.  There is no way to know what the news will be, but with some insight we can make an educated guess about how the market will respond.   Remember, while the news is random, the crowd’s reaction to it is not.

This market largely ignored any and all negative headlines on our climb to all-time highs.  Should we expect that to change anytime soon?  Some expected US markets to breakdown on China data two-weeks after it ignored the most sluggish employment report in nearly a year.  Really?  This market went from fearing every headlines six-months ago to completely ignoring them.  I don’t know what tomorrow’s headlines will be, but I do know this market doesn’t care about them.

This cannot go on forever and at some point the market will pullback; it always has and it always will.  If it won’t implode on a negative headline, what’s left?  Too optimistic.  Once all the chasers are in, no one is left to buy and the market will fall from a lack of demand.  This is the topping scenario we are watching for.  Unfortunately identifying the number of chasers left is far more ambiguous than trading some concrete and timely economic data point.

Previous market tops since the 2009 lows were abrupt, headline driven selloffs.  The selling was aggressive, but short.  Within a week or two we found a bottom and resumed the up-trend after a brief basing period.  If this market tops differently, will the resulting selloff be different too?  Something to keep in the back of our mind as we watch this market’s next move unfold.

TRADING OPPORTUNITIES
Expected Outcome:
There are plenty of reasons for the rally to continue here, namely the number of people still expecting a pullback.  But I just don’t feel comfortable owning it here.  In a rally of this age, the market no longer gets the benefit of doubt and it needs to prove itself, until then I will remain cautious.

Market selloffs take occur quickly and holding 1550 through Wednesday shows bulls still have the upper hand.  From there expect the next move to be higher.  But if the market runs into resistance at 1570 and rolls over, another test of 1540 is unlikely to hold.  Like a cat, a rally only has so many lives and we’ve used several of them in recent rebounds.  We are getting closer to the dip that doesn’t bounce with every passing day.

Alternate Outcome:
Rallies often go longer and higher than anyone expects.  That is clearly the case here and it could continue proving the cynics wrong.  Many traders locked in profits over the last six-weeks of nearly flat trade and these are the next buyers ready to chase the next leg higher.  The most obvious sign the rally still has legs is seeing it head higher.  Regaining and holding 1570 is impressive and breaking above 1600 will put all this head-and-shoulders nonsense behind us.  But no matter what the market does, there is no reason to own what we don’t understand and trust.  Most traders know how to find good trade, but they end up giving back all those profits by forcing an ill-conceived trade when they get a little too cocky.

INDIVIDUAL STOCKS
AAPL’s make or break moment is just around the corner.  Even if the company modestly beats expectations or announces a dividend increase, the resulting strength is a selling opportunity, not a buying one.  This stock was built on 30%+ growth and unless it puts up those kind of numbers, it won’t regain its former glory.  The stock is now a dividend/value investment and one last selloff will chase off the leftover growth holdouts.  Without a doubt AAPL has a future and is a money printing machine, but the same can be said of MSFT, INTC, and CSCO.  How many growth investors are still hanging out in these 1990 growth stocks?  The same maturation is happening to AAPL.

It wouldn’t surprise me if GLD saw more selling this week.  We’ve seen the dead-cat bounce as anxious dip-buyers snapped up discounted shares.  The unfortunate thing for them is what is cheap, usually gets cheaper.  It is far easier to buy the overdone selloff than throw on a short, meaning this is the wrong place to buy.  Buying when there is blood in the street is a good way to get killed.  The key to successful dip-buying is having the patience to wait until the blood is dry.

Plan your trade; trade your plan

WR: Who is buying the dip?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR
This was the largest weekly loss since the election, even beating out the final week of 2012 when Fiscal Cliff fears climaxed.  Volume was also the highest of the year as holders wavered in their resolve and were selling by the truckload.  The market finished just above the widely followed 50dma/10wma.  The largest weekly gain immediately followed by the biggest selloff shows the market’s personality is chaining from the steady and predictable first quarter rally.

MARKET SENTIMENT
Was this week’s high-volume selloff the capitulation point before resuming the up-trend?  Without a doubt that is one of the possible outcomes.  Losing 60-points over a handful of days is more than enough to flush out weak hands.  Buyers replacing the sellers are clearly not afraid of this market and proved willing to step in front of a freight train.  Finding support at 1540 on Friday provided vindication for the buy-the-dip crowd, but is this real support or just a pause on the way lower?

True capitulation happens when emotional and irrational selling gets so carried away value investors can no longer resist and jump in, scooping up shares with both arms.  Is that what happened here?  Did we plunge far beyond sane levels and value investors were unable to hold back any longer?  That is a hard case to make when we only broke through to these levels in March.  Not a lot has changed in the ensuing weeks to make this 1540 level irresistible to value investors when they were uninterested in it six-weeks ago.   Heck, things are actually a tad worse with dramatically slowing employment and the precedent set by the Cyprus bailout.  There is no way value-buyers propped up the market on Friday when we are only 2.5% off of all-time highs and in the face of deteriorating economics.

If it wasn’t value investors, who was buying on Friday?  Speculative dip-buyers.  Every other dip this year was buyable and when people see something happen often enough, they start expecting it.  The unfortunate thing for bulls is dip-buyers lack the conviction, confidence, and deep pockets of value investors.  These late chasers opinions change with the wind and they will sell in droves as soon as the market moves against them.  Only after the selling accelerates and prices drop precipitously will reliable value investors finally step in and prop up the market.

TRADING OPPORTUNITIES
Expected Outcome:
Even if the this market is built on a house of straw, we could continue higher for a few more days.  Friday’s bounce will likely suck in another wave of dip-buyers, but look for the rebound to stumble when the limited supply of new buyers dries up.  Retesting 1540 shows buyers are running out of strength and can no longer support further upside.  A break of this key level will quickly send the market to 1500.  From there it is just a hop, skip, and jump to 1450.

Alternate Outcome:
As we discussed in Friday’s PM post, bearishness is picking up, offsetting the widespread optimism seen a couple of weeks ago when we set record highs.  Many of these pessimists are already out of the market and the aggressive went short, relieving potential selling pressure and making a move higher more likely.  Churn in sideways trade is what makes flat bases work as the paranoid sell to the confident.  Flat bases take longer to develop because they grind down optimists instead of frighten them with a sharp and decisive plunge.

If we hold 1550 through next week, bulls are stronger than most give them credit for and look for new highs.  Selloffs develop quickly and the longer we stay at these levels the more likely a continuation is.

GLD weekly at end of week

INDIVIDUAL STOCKS
AAPL finally broke recent lows at $419 and plunged 9% on a fresh wave of selling.  The sliver lining is this dropped first quarter’s expectations below the already low levels and reduces pressure on next week’s earnings.  Failing to find a bottom is finally extinguishing hope and causing many AAPL evangelists to give up.  Only after the most loved stock becomes the most hated does it stand a chance at bouncing.  A disappointing earnings next week will trigger one last selloff and AAPL will finally be buyable.  An earnings beat only prolongs the agony as the resulting bounce inevitably sells off.  This move has nothing to do with fundamentals and the selloff won’t end until all the hopeful are finally driven off.  Anything that delays this cleansing process puts off finding the bottom.

GLD found temporary support at $130 and finished at the highs of the weekly range, albeit down 6% for the week.  Volume was the highest we’ve seen since the market top in 2011.  Optimists will call this a capitulation bottom, and they might be right, but if a dip is too easy to buy, it is rarely the bottom.  Anyone in GLD should use this strength to sell and wait to buy back in at lower prices.

Plant your trade; trade your plan

PM: Too much pessimism?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks bounced back and recovered all of Thursday’s losses in average volume.

MARKET SENTIMENT
The thing that concerns me is how popular it’s become to bash this rally.  It seems everyone is predicting a pullback, even bulls qualify their bullishness by saying they expect some near-term weakness.  The challenge is figuring out what this means.  Those who are harshly critical are already out and likely short. By itself that took a lot of selling pressure from the market.  The only ones left to sell are the confident and complacent holders since the weak were flushed out in the preceding volatility.

The key to figuring out where the market is headed is understanding how other traders are positioned.  When everyone is bullish, there are lots of potential sellers.  But if traders are growing weary and expecting a correction, they called it quits.  If the cautious and pessimists bailed while prices remained stable,  it is bullish because we will see a rally once the preemptive selling abates.

The other thing to consider is market can do more than just up or down.  It can go up a lot, up a little, trade sideways, pull back a little, or pullback a lot.  So far the consensus expects a modest pullback and thus becomes the least likely outcome because it is already priced in.  That leaves both ups, flat, and down a lot.  The only scenario to consider is down a lot because flat and both ups can be bought and held.  The only outcome that requires a significantly different tactic is down a lot.

The reason down a lot is still on the table is while many active traders are out, the longer viewed investors only expect a modest dip and are willing to hold through it.    The bigger selloff occurs when these longer-term holders get spooked and start selling.  This pool of institutional money is far larger than the small group of active traders already out of the market.  The one thing I struggle with is smaller moves don’t need a reason bounce around, but larger moves require a catalyst to shake the confidence and resolve of otherwise calm and collected money managers.  While the market is poised for a down a lot scenario, without a bump from an external factor, we could glide across the thin ice without falling in.

TRADING OPPORTUNITIES
Expected Outcome:
Monday will be an important day for the markets.  If bulls cannot add to today’s gains, it shows they are losing control.  This is the obvious buy point and if dip buyers fail to show, that means we’re running out of them and this rally is done.  But chances are this buy-the-dip phenomena is becoming so obvious, non-swing traders are getting in on the action and making “easy money” buying the obvious bounce.  Unfortunately for them, real money is made being one step ahead of the crowd, not two behind.  That is why I am suspicious of the sustainability of this support.  We can coast a bit higher, but if this really  is a head-and-shoulder pattern, look for a modest bounce and slide back through 1540 in coming days.

Alternate Outcome:
Without a near-term breakdown, we have to be ready for the market to continue.  Sentiment shifted against this rally and recent volatility cleared the market of weak and uncommitted holders.  With these guys out of the way, the path higher is clear.  I’ve been suspicious of this market for several weeks, but holding together like it has is impressive and shows there could be more life to this story.  I’m okay being wrong, but I refuse to stay wrong and will do a 180 if the evidence no longer supports my cautious hypothesis

AMZN daily at end of day

INDIVIDUAL STOCKS
AAPL couldn’t hold earlier gains and is struggling to stay afloat ahead of earnings.  The good news for AAPL bulls selloff took a good chunk of downside off the table and set an even lower bar for the stock.  But buying here is clearly going against the trend and is nothing more than catching a falling knife.  The better trade is letting this stock find a bottom first.  You will be late, but the risk will dramatically reduced.  The best thing that can happen for the stock is a sharp, high-volume selloff following earnings.  This will extinguish any hope left in the stock and set the stage for new ownership to step in and ride it higher.

AMZN is struggling with the 50dma.  Not good for a stock that has come this far and has a staggering valuation.  A disappointing earnings could finally break this stock.  I wouldn’t bet against earnings, but there is a trade riding this stock lower if it breaks down.

Plan your trade; trade your plan

PM: Dip buyers come to the rescue

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:26 EDT

AM Update

MARKET BEHAVIOR
Stocks bounced and recovered the 50dma by midday.

MARKET SENTIMENT
Bulls and longs are breathing a sigh of relief.  The rebound they knew was coming is finally here.  Meanwhile bears and shorts are left scratching their head because they thought for sure the market was breaking down.

Today’s bounce doesn’t mean the rally is back on just yet.  Head-and-shoulder patterns form a right shoulder with one last bounce at support before finally breaking down.  Trade up to 1570 would remain consistent with a head-and-shoulders reversal and it is premature at this point to confidently say the rally is continuing.  Habits are hard to break and many trades made a lot of money buying dips.  Today’s support is an example of this reflex, but are there enough buyers driving this move to reclaim recent highs?

It is easy to find both bulls and bears actively promoting their point of view, showing the sides are equally matched.  And this shows up in the sideways chop we’ve seen.  But this is a change from the previously negatively skewed commentary early in the rally.  Bulls are finally finding their voice and becoming more vocal and confident, a warning sign for any contrarian trader.  Markets rally in the face of fear and without a doubt participants are far less fearful than a couple of months ago.

MARKET BEHAVIOR
Expected Outcome:
Today’s bounce at support is fairly typical in a topping market as buyers keep going back to what worked so well for them.  But eventually dip buyers run out of money and the expected rebound fails to rebound.  Another violation of 1540 shows bulls no longer have the money necessary to prop up this market and the next move is lower.

This bounce could last for a couple more days, but it is a selling opportunity not a buying one.  Dip buying is well beyond obvious and bulls are better off sitting on their hands than chasing one last rebound.

Alternate Outcome:
The head-and-shoulders pattern theory loses credibility if we trade above 1570 and is dead if we make a new high.  Right shoulders are also typically short in duration, so holding support for an extended period invalidates the H&S patter.  If this market won’t breakdown, the we must assume the next move is higher.  My bias is for a pullback, but we must always look for clues to invalidate our current thesis so we don’t get stuck on the wrong side of the market.  It is okay to be wrong, it is suicidal to stay wrong.

GLD daily at 1:26 EDT

INDIVIDUAL STOCKS
AAPL tried to reclaim $400 but bumped its head and is back in the $390s.  It’s been a long time since AAPL traded in the $300s and shows buyers are not interested in this stock no matter how cheap it gets.  The biggest problem for AAPL is they don’t have a “moat” protecting their core products from competition.  Every technology company is tinkering in the smart phone and tablet space.  While most don’t have the cool factor, the thing to remember is anything that is cool eventually becomes uncool.  Just ask anyone who bought bell bottom pants, avocado colored appliances, and red shag carpeting.  The more stylish something is, the more out of style it becomes when the crowd moves on to the next cool thing.  Without a doubt AAPL remains popular with upper-middle class suburban soccer moms, but is that user group large enough to justify a half-trillion dollar market cap?

GLD is up for the fourth day in a row, but this is a better selling opportunity than buying one.  The recent plunge eliminated gold from consideration as a safe place to park wealth and now it is simply a playground for speculators.  If you must trade this, sell strength and buy weakness.  Look for a retest of $130 in coming weeks as dip buyers are flushed out when the price pulls back.  This will be a volatile trade for a while and value investors should wait a bit longer.  Remember, buy after the blood in the street has dried, not while it is still flowing.

Plan your trade; trade your plan

PM: Finding support at 1540

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks broke the 50dma and 1540, but didn’t trigger a wave of accelerating stop-loss selling.  Volume was above average, but less than Monday and Wednesday’s elevated levels.  Today’s slide was the fourth down-day out of the last five.

MARKET SENTIMENT
I’m surprised the market didn’t see more stop-loss selling when it broke recent lows and violated widely followed support.  There are two possible explanations.  Sellers saw this coming and exited before actually reaching their predetermined stop levels or complacent traders ignored their stops, preferring to wait for the expected rebound.  One is bullish, indicating most of the selling already happened, the other is extremely bearish because there is still a lot of selling to come.

TRADING OPPORTUNITIES
Expected Outcome:
The lack of stop-loss selling today makes a bounce more likely.  Support at 1540 encourages holders to keep holding and this limits supply in the market.  But I’m only looking for a bounce to 1570 before dip buying exhausts itself and selling takes over again, pushing us through 1540, and ultimately down to 1400.  This minor rebound would build the complimentary right-shoulder to April 2nd’s left-shoulder.  A day-trader could take advantage of these minor fluctuations, but the rest of us are better off sticking with longer time-frames.

Alternate Outcome:
The lack of selling under 1540 concerns me.  I still think a pullback is in our future, but the market might not be ready for it yet.  One possibility is a brief bounce before rolling over, but if most sold ahead of the expected crash, the market has already refreshed itself and is ready to resume the up-trend.  While not as sustainable as a demoralizing selloff, recent volatility is flushing buyers from the market and creating a pool of the next chasers.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL cannot find a break.  Today’s selloff pushed it under $390 and no one is interested in buying it no matter how cheap it gets.  The increasing despair felt by shareholders is actually constructive for finding a bottom.  The most loved stock needs to become the most hated before the selling will exhaust itself.  Only after everyone has left it for dead will the selling finally stop.  Recent weakness silenced the most rabid bulls and has them eying the exit.  The stock still needs to purge those hanging on from much higher levels and replace their hope with discipline from far more patient and longer-viewed value investors.  But this is the medium-term outlook for the stock.  The long-term outlook for the company will likely end far different from what most are predicting.

Some people criticize AAPL’s unfair comparison to MSFT and they are right, just not for the reasons they think.  While MSFT is boring and lacks the appeal and innovation AAPL is famous for, MSFT never faced any real competition and still has a 70% strangle hold on the PC market.  Compare this to AAPL’s fierce battle with Android and Samsung.  AAPL’s long since given up the crown to Android, it recently fell behind Samsung, and is on the verge of being outsold by the Galaxy S4.  If MSFT’s stock price was flat for the last decade with stable profit margins and 80% market share, how is AAPL going to thrive in a fiercely competitive and commoditized hardware segment?  While this selloff might finally bottom and bounce off $350, that is likely only a temporary floor for the stock as AAPL goes back to being a small niche player in a much larger market.

Plan your trade; trade your plan

AM: Tap dancing in a minefield

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:27 EDT

AM Update

MARKET BEHAVIOR
Stocks are tap dancing a few feet from the minefield below 1540.  Technical traders view a violation of this level as a confirmation the correction is finally taking hold.  It will be the first material lower-low since this rally began five-months ago and many traders put their stop-losses under this widely followed support level.  Once the selling hits, expect it to accelerate as it takes out more and more stop-losses.  How far it goes depends on the volume of stop-losses triggered and how quickly value buyers jump on discounted shares.  But value investors are more disciplined than most and often wait for the dust to settle before acting, so don’t expect them to rush to the market’s aide.  Of course we need to fall into this area before the autopilot selling starts.  Rebounding and holding 1570 shows bulls are still in control and bears’ inability to push the market down these last few points will be a major defeat.

MARKET SENTIMENT
It is comical to see the financial press rationalize each of these whipsaw moves.  One day they are promoting great data, 24-hours later everything is bad news.  We go back and forth, day after day.  If the market was up huge today, I have little doubt they would find a reason.  But they are journalists and that is their job.  We are traders and our job is seeing through all the BS and understanding why markets are really moving.  It always comes back to supply and demand.  We are stuck in a fierce battle between bulls and bears.  The first couple of months bulls had the clear upper hand as we marched higher every week.  But since March bears have evened the fight, leading to this choppy sideways trade.  The market works in cycles and after a period of up, it is inevitable we will run into a bout of down.

TRADING OPPORTUNITIES
Expected Outcome:
Dip buyers are supporting the market at 1540.  The question is if they have enough money to keep us from sliding into all the automatic stop-losses just a few points away.  Every dip this year was buyable and many are sticking with this game plan, and to this point it’s been the smart trade.  But all good things must come to an end and eventually we will run across a dip that doesn’t bounce.

I cannot say conclusively this is the start of the selloff and the Teflon market could throw in another bounce, but given the age of the rally the and gains we’ve seen, the risk of an explosive downside move far outweighs the potential gains from another tired bounce.  An interesting trade here is shoring a break of 1540 with a stop around 1545.  Look for a slide to at least 1400.

Alternate Outcome:
Everyone is watching this market, waiting for it to breakdown.  Most of the cautious traders are already out, taking their profits weeks ago.  This preemptive selling took a lot of supply out of the market.  If we bounce and hold 1570 for a few days, the rally is back on and no matter what our biases are, we have to respect the market’s resilience.

AAPL daily at 1:27 EDT

INDIVIDUAL STOCKS
The stock that cannot go lower keeps going lower.  AAPL sunk to $395 and it is harder to find people promoting the buying opportunity at these new levels.  Formerly enthusiastic bulls are now confused and uncertain.  They are the ones selling at these levels as they finally give up on their favorite stock.  Earnings next week will is a coin-flip, but it wouldn’t surprise me to see one last flush lower.  $350 would be a 50% selloff and makes for a nice round number.  Of course many top stocks decline an average of 72% after their peak, meaning there is still a lot of downside risk left if the stock falls to $196.  While shocking, this level is not unreasonable if AAPL continues losing market share, doesn’t come up with a new innovative product, and margins decline due to price competition.

Bottom fishers are buying GLD at $135 figuring it cannot go any lower, but we probably haven’t seen the last of the selling.  And even if we have, there are a lot of horrified GLD  holders looking to get out of their positions on any strength.  The thing to realize is many buyers at these levels are opportunistic knife catchers.  They will dump their shares at the first signs of weakness, triggering another leg lower.

Plan your trade; trade your plan

PM: Will 1540 hold?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks gave up all of yesterday’s rebound and then some.  We found support at the 50dma, but still finished near the lows of the day.  Volume was well above average as formerly confident holders were selling enthusiastically.  This was the third test of 1540 and breaking it will trigger a huge wave of technical stop-loss and short selling.  The recent pattern is alternating strength and weakness and a strong rebound Thursday will build a larger margin of safety above all the sell orders sitting under 1540.

MARKET SENTIMENT
Yesterday felt like the rally was back on, today the inevitable correcting is taking hold.    What will tomorrow bring?  Every breakout/breakdown over the last month was a head fake.  Was today’s selloff simply another buyable dip?

The key to figuring it out is getting into the heads of other traders.  Was the two huge volume down-days this week enough to shake out weak holders, yet not so bad it damaged the confidence of the majority still holding?  With all the various breakdowns around the market, the haze of complacency is vanishing by the day.  Some traders are taking a proactive stance and selling while others are anxiously holding on.  Some of these holders remain confident while others are simply indecisive.  This latter group is who will provide the supply if the market does breakdown.  Hope is not a strategy and holding on simply because the market bounced back every other time is a good way to lose money.

But this is not a one-way street.  Bears are increasingly cocky as they finally see the pullback they’ve been waiting for.  If we rebound and continue higher, it will be due to the huge volume selling on Monday and Wednesday.  The anxious are climbing over each other to get out and after a certain point we will run out of sellers.  Twenty percent above average volume is strong for an intermediate dip.  If that is all this is, we will bottom soon.  If this is a much larger correction, twenty-percent is just getting started and we could see a hundred percent surge in volume if the market slices through the 200dma.

Both sides have equally valid arguments, our job is deciding which outcome is more probable.

TRADING OPPORTUNITIES
Expected Outcome:
Neither bulls nor bears can take control of this market as we bounce around the trading range.  No one knows for sure what will happen, the best we can do is look for clues.  We face a real test on Thursday.  If the market stumbles, we are dangerously close to an avalanche of selling just under 1540.   Break this level and many money managers will flee ahead of the widely expected pullback.  When it comes to selling, it doesn’t matter what starts it.  Once the stampede starts, it takes a life of its own as people sell for no other reason than everyone else is selling.  The market could easily bounce one more time, but the potential downside is far more frightening than any reward is worth.

Alternate Outcome:
Bears are turning into the boy who cried wolf and if they don’t deliver soon, they will lose all credibility.  A powerful rebound and holding 1570 through Monday  shows bulls still own this market and the next move is higher.  The sideways consolidation and high-volume dips are clearing the market and setting the stage for a move higher.  The linchpin is holders.  If they continue holding and are not afraid of a little weakness, that will keep supply tight and there is nowhere to go but up.  If they fall prey to the fear-mongering, there are a lot late buyers that will rush for the exits when their positions fall into the red as we dip under 1540.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL had another bad day and set new 52-week lows.  It managed to hang on to $400, but just barely.  The stock is finally losing its status as a market darling and becoming something people are ashamed to admit still owning.  This is pure anecdotal, but I get far less animosity directed my way when I criticize AAPL than I did a couple of months ago.  The cheerleaders are losing their faith and that is an important part of finding a bottom.  We might see on last plunge lower, but we are closer to the end of this selloff.

There are an absurd number of conspiracy theories surrounding gold’s selloff, but the truth is it was simply and over-owned asset and fell victim to its own success.  There is not a cartel of reserve banks conspiring against gold.  This has nothing to do with Cyprus.  The long-held investment thesis behind owning gold is as a hedge against money printing, inflation, and the inevitable economic collapse.  While it sounded good, the theory failed to pan out no one else is interested in buying Gold.  This is supply and demand plain and simple.  No one wants to buy gold at $1700/oz and this week they said they don’t want to buy it at $1500 either.  The ferocity of the selloff is due to the high leverage traders were using to buy this ‘safe’ asset and margin calls triggered an accelerating cascade of selling.  The simplest explanation is most often the right explanation

Plant your trade; trade your plan

AM: The yo-yo

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:29 EDT

AM Update

MARKET BEHAVIOR
The yo-yo continues as we dropped into the 1540s this morning.  The key level of support is 1540 and expect a wave of selling to hit the market if we break this widely followed price.  If we test 1540, this would be the third time in a month and technical analysis books rarely mention tripple-bottoms because third-tests are less likely to hold.

MARKET SENTIMENT
No one is winning this maddening market and both sides are humiliated with equal malice.  Anyone with an opinion is at risk of being duped into buying high and selling low, or selling low and buying high for the bears.  There are three traders surviving this, the extremely nimble day-trader catching each wave, the longer viewed trader with conviction in their position, and the guy who admits he has no clue and is sitting it out.  Anyone else forcing trades and reacting to the market is getting destroyed.

Bulls are humble, bears are humble, and we need to figure out what comes next.  These sharp dips are shaking the confidence of previously resolute bulls.  A large part of the recent rally was driven on light volume as holders were unwilling to sell and the resulting tight supply drove prices higher.  Every dip bounced back and holders became complacent toward negative headlines and market weakness.  It worked because every dip was on such light volume it was easy for the remaining dip buyers to prop up the market.  But volume returned last week and selling swamped dip buyers, triggering selloffs not seen since the rally began.

Volatility is often a characteristic of market tops and we have that in spades.  The question is at what point will the market break the confidence of complacent holders.  If supply remains tight, it will be far easier for dip buyers to keep the rally alive.  But if the flood gates open, there is a lot of air between us and the 200dma.

TRADING OPPORTUNITIES
Expected Outcome:
One day it feels like the market is breaking down, the next the rally is back on.  What is a trader to do?  I remain cautious of this market because I see too many warning signs between the age of the rally, indifference toward negative headlines, and the perception every dip is a buying opportunity.  While I might be proven wrong, that doesn’t mean I need to participate in this rally.    If we don’t understand something or feel comfortable with it, the best thing to do is sit it out.

Yesterdays bounce was impressive, but bulls could not add to it today and we undercut Monday’s lows.  It feels like bulls are losing this battle and selling will accelerate if we slip through all the stop-losses under 1540.  Between the market’s weakness, Gold’s plunge, and AAPL’s dip to $400, it is harder to remain an obliviously confident bull.  Expect supply to continue hitting the market as bulls lose their nerve.

Alternate Outcome:
It is easy to hate this market here, a little too easy.  Yahoo Finance had a poll on their homepage and almost 60% of the responders expected the market to go down.  Of course this was after Monday’s plunge and that obviously skewed the results, but the widespread pessimism is bullish.  This volatile, sideways trade is flushing out a lot of traders and creating a new pool of buyers for the next rally leg.  The market bounced back from several attempted breakdowns and another rebound shows bears cannot get it done.  Breakdowns happen quickly and regaining 1570 yet again shows there is more fight left in this bull.

AAPL daily at 1:29 EDT

INDIVIDUAL STOCKS
AAPL finally broke $419 and stop-loss selling put sent it in free-fall to $400.  This selloff actually benefits AAPL bulls because it further lower expectations and makes an earnings beat next week more likely.  Of course the big risk is if AAPL fails to reach the already extremely low expectations.  Option spreads are the safest way to trade earnings, but the better trade is waiting until after earnings.  An earnings surprise will send the stock back above $450 over several days.  A miss will push it to $350, but this will likely be the last selloff and the stock will finally be buyable after everyone gives it up for dead.

GLD is treading water as margin calls abate, but few are willing to buy the dip.  Given the level of damage Gold did to traders’ psyches and portfolios, expect it to stay in the dog house for a while.

Plan your trade; trade your plan

PM: Wild ride

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
It’s been a wild couple weeks and today’s strong rebound maintained the volatile whipsaw theme.  We recovered two-thirds of yesterday’s selloff in above average volume.  This was the rally’s forth-bounce off the 50dma and the second in less than two-weeks.

The market spent most of March stuck in a trading range between 1540 and 1570.  We broke out to the upside last week, but it was short-lived as we plunged to the lows of the trading range.  Today’s rebound puts us back above 1570 and it’s anyone’s guess what comes next.

MARKET SENTIMENT
The only thing that worked in the last six-weeks was buying weakness and selling strength.  The relentless head-fakes chewed up both bulls and bears trading the breakout/breakdown.  Was Tuesday’s rebound just another head-fake or signs of real strength and support indicating the rally is not ready to breakdown?  For as many people waiting for the pullback, the market is holding up surprisingly well and you have to give the rally the benefit of the doubt here.

Headlines just don’t matter and nothing will stop this rally other than running out of buyers.  I’ve been wary of this market for weeks, but bulls have been just as frustrated by the sideways chop and this turned into a battle of attrition.  Whichever side has larger numbers will eventually prevail.  Can buyers continue showing up in sufficient numbers or are the on the verge of being overrun by sellers?  No matter what anyone thought, they’ve been wrong so far, at some point we will finally have a winner.

TRADING OPPORTUNITIES
Expected Outcome:
Selloffs typically take hold quickly and maintaining these levels for a couple more days increases the probabilities of new highs.  If this market is really running short of buyers we will see the cracks grow wider in coming days.  If buyers continue stepping in at these levels it shows there are far more of them left than anyone expected and the inevitable pullback is still a ways out.

I am blown away by the resilience of the bull and how decisively they continue buying dips.  Obviously this cannot last forever, but bulls continue holding the upper hand until we see clear signs this rally is breaking down.  Right now the line in the sand is 1540.  Break though this and the selloff is finally taking hold.

Alternate Outcome:
Recent volatility is chasing off weak holders as effectively as a bigger selloff would.  Six-weeks of choppy sideways trade is refreshing the market like a 5% pullback would.   Yesterday’s plunge sent traders running for cover but lack of follow-on selling today shows holders are still willing to hold and buyers are still willing to buy.  Holding 1570 through Thursday shows new highs are likely.  If the market adds to its gains on Wednesday, bulls are still in control of this market.

Plan your trade; trade your plan

AM: Relief

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EDT

AM Update

MARKET BEHAVIOR
Stocks found support at 1560 and recovered half of yesterday’s losses by midday.  This pause breaks the runaway selling and gives nervous and indecisive traders time to evaluate the situation.  Holding 1560 is encouraging, but the critical level is former resistance at 1570.  We need to break back through this barrier to revive the breakout.

MARKET SENTIMENT
Nervous longs are breathing a sigh of relief as the selling ended and we reclaimed a big chunk of yesterday’s losses.  This is yet another example of the market rewarding indecision.  While it’s been the “smart” trade for a while, failing to act will inevitably get very expensive as indecisive and stubborn bulls give back all their profits when one of these dips fails to bounce.

Rebounding after such strong selling is typical, the bigger question is if real buying will follow the initial relief rally.  The biggest clue is holding and adding to the rebound in coming days.  Unsustainable bounces often fail within a couple of days and we should refrain from buying the dip until it demonstrates real, institutional buying and proves it is more than active traders trying to pick a bottom.

The market remains within 2% of all-time highs, showing the coiled spring is still to the downside.  That can easily continue under such circumstances, just be aware the potential for an explosive move is lower, not higher.

TRADING OPPORTUNITIES
Expected Outcome:
Things often stop working when too many people know about it and buying the dip feels that way, but it is hard to argue with the market.  We are breaking 1570 as I write this and the market keeps wanting to go higher.  My suspicions of this rally remain and there is no reason I want to own it here.  We will see a five to ten percent pullback at some point this year, whether we are on the verge of that pullback or still months away is still up for debate.

Holding above 1570 through Thursday shows this market found buyers and is ready to move higher.  Failing to hold 1570 means buyers are becoming scarce and lower prices are expected.

Alternate Outcome:
Buyers love buying this market and it is a dangerous game to argue with them.  This market will correct at some point, but that will only happen after buyers run out of money.  So far they continue jumping on every dip and until this changes, expect the rally to continue.

AAPL daily at 1:23 EDT

INDIVIDUAL STOCKS
GLD had a modest bounce from yesterday’s lows, but is struggling to add to those gains.  Selling in Gold reached extreme levels and it will bounce at some point, but the forced liquidations by over-leveraged institutions will likely continue for a while longer.  This selloff is ruining careers and companies, but it is hard to feel sorry for arrogant men who made millions while losing mountains of money for their clients.

AAPL bounced with the market and continues the sideways trade ahead of earnings next week.  I don’t really expect the stock to do much unless bulls jump on a juicy rumor or the price dips under $419 and triggers a wave of stop-loss selling.  This will be a really interesting earnings release to watch since growth expectations are nonexistent.  Are they finally low enough that AAPL can beat investor expectations?  This stock will get its relief rally, I just don’t know if the bottom will be $420 or $350.  Next week will tell us a lot and trading the subsequent surge or plunge might be the safer than gambling on the earnings.

Plan your trade; trade your plan

PM: Is this it?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks suffered their biggest decline in five and a half months on the highest volume since March’s quadruple witching.  The market lost 36-points as it sliced through support at 1570 and didn’t stop falling until 1552.  The next level to watch is 1540 where the market bounced two-previous times and is also backstopped by the 50dma.  Breaking 1540 will trigger wider selling and the next level of support is down at 1500.

MARKET SENTIMENT
The riskiest markets are where people feel the safest.  Five-months into this rally the largest up-week of the year is immediately followed by the biggest loss in nearly half a year.  Increased volatility is often seen in topping markets and if this doesn’t qualify, then I don’t know what does.

Today’s givebacks drop us to levels first seen in early March.  Anyone who bought in the last month is at best break-even and fearing more losses.  The supreme confidence of the resolute bull is giving way to uncertainty and indecision.  Every other dips been a buying opportunity, the question is if this 2.3% plunge is like every other selloff this year.  The problem bulls ran into is recent gains were made on light volume.  They had the strength to push prices higher when confident holders were keeping supply off the market, but the first day of above average supply overwhelmed the few bulls with cash left to buy the dip.

Recent weakness bounced back quickly as the dips grew more mild.  This is because more and more traders grew comfortable buying dips and rushed in earlier and earlier on each subsequent dip.  But today’s decline couldn’t find a bid and kept sliding lower and lower.  Early today the market found support at 1580.  Then it was 1570.  And finally 1560 prior to the attacks in Boston.  Traders tried to buy the dips at each of these key levels, but with so few buyers left they cannot keep up with the wave of supply hitting the markets.  We can only bounce so many times before running out of dip buyers and this market appears over its limit.

While the events in Boston were tragic, the market was already near the lows of the day and it only had a modest impact on prices.  It is unfortunate we live in a world where these things happen, but from a trading perspective, most will view this as an isolated, one-off event and is unlikely to change their outlook on stocks and the economy.

TRADING OPPORTUNITIES
Expected Outcome:
Either this is the long-expected pullback, or just another bounce on the way higher.  Given how old this rally is and how close we are to the highs, there is still plenty of room for additional selling.  At this point there is little reason to be in the market.  A rebound will be slower, methodical, and have limited upside.  A selloff will plunge lower in the blink of an eye.  The risk/reward is heavily skewed against owning stocks here.  That doesn’t meant we won’t see another rebound, it means this is a poor trade to make.  Long-term success in the markets is less about individual results and more about the process.  Remember it is better to be out of the market wishing we were in, than in the market wishing we were out.

The selling will likely continue on Tuesday, but look for support at 1540.  This could be an hour-long pause before plunging lower, or a multiple day bounce before resuming the selloff.

Alternate Outcome:
1540 is the key level to watch.  Bouncing back from this level, or better yet a slight dip underneath it, will show buyers are still behind this rally.  Monday’s selloff shook many weak holders from the market and once that selling pressure dries up the rally will resume.  Bouncing and holding 1560 will show this rally is back.  But if this market cannot hold 1540, stay out of the way and don’t try to catch the falling knife.

GLD daily at end of day

INDIVIDUAL STOCKS
Hard not to talk about the huge crash in GLD.  The safety trade isn’t providing much protection, down 13% over two-days.  Commodities are supposed to be relatively stable and is why many traders leverage up their position 3 to 5 times.  This massive crash is largely driven by margin calls as brokers are forcing their over-leveraged customers to sell.  This forced selling is triggering other margin calls and the vicious cycle often repeats until several major funds are forced to liquidate.

In the highly leveraged commodity markets, selling feeds on itself far more aggressively than what equity traders are used to.  This was fine when commodity trading was limited to experienced professionals, but the advent of the GLD allowed the masses to speculate in gold commodities.  As they are learning, this isn’t as easy as it first seemed.

The most frustrating thing for many traders is they were led to believe Gold was a safe hedge against market volatility and money printing.  Today is just another example of the “safest” position in our portfolio being the riskiest.  In many ways Gold mirrors what happened in AAPL.  Both were hugely popular trades that couldn’t lose, but in the process became over-owned.  Once everyone who wants AAPL or Gold had as much as they could hold, there was no one left to buy.  No matter what the fundamentals dictate, prices decline when demand dries up.  There is still a strong case for AAPL and Gold, but it doesn’t matter when no one is buying.  The plunge in Gold is a structural and limited to itself.  This is not indicative of the wider economy and is simply an isolated supply/demand event within a particular security.  There are many reasons to be suspicious of this market, but margin calls in Gold is not one of them.

Plan your trade; trade your plan

AM: Failing support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EDT

AM Update

MARKET BEHAVIOR
Stocks pulled back in early trade and are under 1570.  This level was recent resistance, which is supposed to become support following a sustainable breakout.  Given the strong gains last week, a pullback this week is expected.  The question is if this weakness is buyable or an early warning to get out.

MARKET SENTIMENT
The rally turns five-months old tomorrow.  We’ve seen a few dips along the way, but they are getting smaller and smaller as dip buying becomes the norm.  Early in the rally many were predicting a crash around every corner.  Traders were afraid of the market and sold ahead of the inevitable Fiscal Cliff meltdown.    When most sell before an event, they take the pressure off of the actual event and we often bounce when the news is less bad than feared.  Fast forward five-months and traders are climbing over each other to buy every dip and their enthusiastic buying prevents any real weakness from developing.  We transitioned from a market people were afraid of to one they cannot get enough of.  If markets rally in the face of fear and decline on the back of complacency, it seems like we are close to a turning point.

Sentiment is a fuzzy thing and it doesn’t give hard buy and sell signals, it simply indicates probabilities.  Is the market more likely to continue here or is pullback in the near future?     As much as people look for the magic bullet in the market, the red-light/green-light indicator, there is no such thing.  Everything in the market is fuzzy.  If this were easy, everyone would be rich.  We will never be able to predict the tip, but we can weight the probabilities of a continuation versus a pullback given the shift in sentiment.

TRADING OPPORTUNITIES
Expected Outcome:
Stocks are testing support at 1570.  This is a perfect level for dip buyers to rush in and support the rally.  If a person believes in a continuation, this is where they need to suck it up and buy the weakness.  But buying the dip seems obvious and is becoming a tired trade.  Dip buyers only have so much money and eventually there is a dip they no longer have the money to buy.  That is the dip that doesn’t bounce.  I was a bit premature in getting out of this market, but that doesn’t make the core analysis invalid.  I still am reluctant to own this market and expect wider selling before the rally will refresh and resume.

Alternate Outcome:
Traders love buying the dip and we need to look for that same trade here.  After the fear driven selling abates we need to reclaim and 1570 to prove buyers still believe in this market.   Falling back into and getting stuck in the previous trading range is not encouraging for such a young breakout.  The next obvious level for support is 1540 and the 50-dma.  Hold this level and the dip buying bandwagon continues.  If we break this level, watch out below.

Bull and bear alike need to watch 1570 and 1540.  Move and hold above, the rally still has legs; break under and this is the long predicted pullback.

INDIVIDUAL STOCKS
AAPL is struggling with $420 again and a break under the recent low of $419 could set off a wave of stop-loss selling ahead of earnings.  But the more selling that takes place ahead of earnings, the less downside there will be after earnings.

Plan your trade; trade your plan

WR: Big gains

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR
This was a historic week as we smashed the all-time high set back in 2007 and kept on going.  This was also the largest weekly gain since the start of the year, moving up 2.6% on light volume.

MARKET SENTIMENT
Markets typically make big moves under two conditions.  The first is after a steep selloff where traders were impulsively selling stocks by the truckload.  This leads to a capitulation bottom and the market rebounds decisively from irrationally oversold levels.  The second condition is at the tail end of long move where the last holdouts forget their reservations and finally embrace the long-established rally.  These are the last traders left to buy a rally and markets roll over shortly after on a lack of demand.

This rally is almost five-months old and to see some of the largest weekly moves in such a mature market is enough to raise suspicions.  One strong week doesn’t mean the top is in and we often see multiple strong weeks leading into a top.  Every market is different, but they are all the same.  There are parts of this rally that are unique, but after it is all done, we will look back and say I should have seen this coming because it was exactly like……..

I hope this market tops soon because normal and periodic pullbacks keep a rally sustainable.  This is the one-step back after two steps-forward.  If we jump ahead three, four, and five-steps at a time, expect a two, three, and four-step pullback.  I don’t think the market is grossly over-bought at this point and a five or ten-percent pullback would be part of finishing the year higher.  But if we go another ten-percent higher without a pullback, we will likely have a 20% correction in our future.  In a bit of irony, bulls should be rooting for a pullback and bears a strong rally higher.

TRADING OPPORTUNITIES

Expected Outcome:
The trend is higher and no matter what our biases, we have to respect that.  The market is clearly above support and the breakout remains intact until we dip under 1570.  Longs should move a trailing stop up to this level because a dip under this level in the first half of the week spells trouble for the aging rally.  On the short side, an aggressive bear could short weakness with a stop above the recent high of 1597.

This market is bound to pullback at some point.  Maybe it is this week, maybe next week, or next month.  The question isn’t if, but when.  The key to making money is figuring out the timing.  Without crystal balls, we have to watch the market and respond to the signals it sends.  Right now those are moves above 1597 and through 1570.

Alternate Outcome:
This is the rally that just won’t quit.  These things go longer than anyone expects, but fail as soon as everyone expects them to keep going.  It is really hard to say where we are.  Last week’s strength was due to the resurgence of the too-far, too-fast crowd after pushing up to all-time highs.  With those in the rearview mirror, what comes next?  Have all the pessimists given up and we can finally correct?

The biggest challenge I have is determining what conditions would get me reengaged in this rally.  Obviously I’m looking for a shakeout to refresh the uptrend, but what if the chase is just getting started?  I don’t want to stubbornly miss 100-points of upside because the market doesn’t do what I think it should.  A weakening market cannot hide its cracks, so if we don’t see weakness develop over the next few days, the next move will be higher.  Then we resume our search for cracks and another move higher.  Repeat until the market stops going higher.

Plan your trade, trade your plan