LA: Buy the dip?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review and Look Ahead

Look for a quick bounce from last week’s dip as holders grow more comfortable holding.  This market will top, just not yet.  AAPL continues its 6-month trend of lower-highs and lower-lows.  Don’t bottom pick in this stock and wait for strength to come back before buying.

MARKET BEHAVIOR

Stocks recorded their first negative week of the year and shook out a pile of nervous holders in the process.  Weekly volume was light due to the holiday, but each day was near or above average, meaning it was not a quiet trading week.  The 10wma is catching the market and only 33-points behind.   The slower moving 40wma is still 100-points, but closing the gap.

While the market finished down just 4-points, the weekly range of 34-points was the widest we’ve seen in a while, setting a new high and temporarily dipping under support at 1500.  Obviously things didn’t workout as planned for anyone buying the breakout or shorting the breakdown and everyone will be watching anxiously for the market’s next move.

MARKET SENTIMENT

There are two kinds of pullbacks, those that go further than expected and those that bounce quicker than expected.  While there are no hard rules in the market, extended pullbacks are usually rooted in emotion.  Obama winning reelection and the Fiscal Cliff debate lead to a wave of emotional selling as traders left reason at the door and predicted an imminent collapse of the American way of life.  The subsequent rebound was equally impressive because the selling was unjustified.  Now compare this to the dips that were more structurally based and arose from buyers taking a break.  Selloffs caused by normal supply and demand imbalances are short-lived because the market is simply regaining its footing.

Many traders expect last week’s selling to continue, but it really doesn’t need to and in fact the high-probability trade is a quick bounce.  Of course quick is a relative term and can mean anything from 1 to 3 weeks, but the sheer number of people thinking this selling will continue leads me to believe it is likely done.  I could be wrong, but that’s what stop-losses are for.

TRADING OPPORTUNITIES

Expected Outcome:
The harder trade is buying the dip after only two-day, but the dramatic shift in sentiment and surge in the VIX suggests we already shook complacency from the market.  It is encouraging selling dried up on Thursday as holders kept holding after a dip under 1500.  And more than that, anyone who held the dip is feeling pretty smart and  even more committed to this rally.  That growing confidence among holders is why this market will not top on bad news.  No doubt the rally’s days are numbered, but the correction will happen from running out of buyers.  In the near-term continued strength will force bears to cover shorts and those trailing the market will keep chasing, meaning there is more buying left in this move.

Alternate Outcome:
Two-days of selling might not be enough and we could see another week or two of weakness before the market makes new highs again.  The deeper the selling, the more sustainable this rally becomes.  Shaking weak hands is what refreshes the market and clears the way for a move higher. If we resume the rally after just two-days of selling, the rally will be fragile and close to topping.  A deeper dip will let this market more thoroughly refresh, potentially extending into the 2nd quarter.

As for a trade, stay long the market as long as it holds above 1495 and look for a new high stretching past 1540 over the next few weeks.  A dip under 1495 means the market will test support at 1475.  No one knows for sure what the market will do next week and we will revise our outlook as the market gives us new information.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL fell 2% for the week and is resting at $450.  Upside resistance remains at $485 and the low of the move is $432.  Dropping under $432 will extend the pattern of lower-lows and a close above $485 gives the stock its first higher-high in 6-months.  It took rumors of an increased dividend to push the stock up to $485 two-weeks ago and it will most likely take another fundamental catalyst to get it back up there.  Without some great news, expect the stock to continue drifting lower.  The stock could rally on broad market strength, but use that as a selling opportunity and resist the temptation to buy strength until the stock regains $485.

Stay safe

PM: Bulls fight back

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The market ended the selling and found support at 1500, bouncing back to resistance/support at 1515.  AAPL stopped the losing streak, but is just leading on hopeful holders and NFLX is taking a much-needed break.

MARKET BEHAVIOR

Stocks recovered all of Thursday’s losses and finished at the highs of the day.  Volume was fairly average, but quite a bit less than the elevated selling over the previous two-days.

The last few days of trade brought volatility back to the market and most tops involve elevated volatility leading up to the reversal point.  That doesn’t mean the market is about to collapse, we just need to be aware we are approaching that point.

Today shows 1500 continues to be a point where buyers are willing to step in.  The market finished at 1515, a level that provided both resistance and support going back to the beginning of the month.

MARKET BEHAVIOR

Today’s rally ended the selling streak and rewarded holders that sat through the weakness.  Low-volume show few were excited to buy, but more noteworthy is fewer were willing to sell as supply dried up and the market bounced hard.

All the hype that said this was the start of a big selloff spooked out most weak holders.  Once the paranoid finished selling, longer-viewed investors that already sat through the Fiscal Cliff and a negative GDP report were not spooked by some meeting minutes.  That bodes well for the continuation and supports the thesis that this market will top due to running out of buyers (optimism), not negative headlines (fear).

TRADING OPPORTUNITIES

Expected Outcome:
I still expect the market will make new highs before the end of the quarter, meaning we have at least another 15-20 points of upside left.  In reality the market will likely blow past the old high of 1531 as it triggers a new wave of short-covering and breakout buying.

Don’t get me wrong, I am not a raging bull and think the market is in the process of topping, I just don’t think the top is in yet.  For various psychological reasons markets most often reverse in double-tops, head-and-shoulders, and exhaustion surges.  So far I don’t see any reason this time will be different.  That means Tuesday’s high is not the top and the high-probability trade remains buying the dip.

Alternate Outcome:
Today’s rally could be a head-fake to suck in bottom-pickers before steamrolling them with another crushing down-day on Monday.  I don’t dispute the real possibility of another horrible week.  There are no grantees in the market and every trade involves risk, the difference is the savvy trader uses probabilities to move the odds in his favor.  I could be wrong about buying this dip, but that doesn’t make it a bad trade.  Savvy traders manage risk by looking for the high-probability trade and using stop-losses to protect against unexpected losses.

If weakness continues next week, look for a dip to 1475, but that will be another potential rebound point.  Failing support at 1500 doesn’t kill this rally, but dropping through 1475 does.

NFLX daily at end of day

INDIVIDUAL STOCKS

AAPL finally saw its first up-day since Cook crushed investor’s hopes for an increased dividend/buyback.   If people are buying this bottom, I have a bridge to sell them.  I shouldn’t be so flippant because so many people are stuck in this trade, but I’ve warned about this for weeks now.  I was sucked into the AAPL earnings story just like everyone else.  The difference is I took my lumps after earnings came out, realized my investment thesis was flawed, sold out, and moved on.  We are in this to make money, not own stocks.  If something isn’t working, stop doing it and find something that is.

NFLX ran into some selling the last couple days.  Holding out for more than a 100% gain is just plain greedy.  It was obvious the stock would continue higher after earnings, just like it is obvious it will pullback after hitting ~$200.  That doesn’t mean the story is dead, the stock simply needs to catch its breath.  Look for a pullback to at least $160 before resuming the rally higher.

Stay safe

AM: Stocks finding a bid

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

AM Update

The market is finding support and recovering recent losses.  Should this strength be bought or sold?  AAPL continues its lifeless trade and AMZN is setting up to break either direction.

MARKET BEHAVIOR

Stocks are finding support above 1500 as the wave of impulsive selling abated and traders are using the pause to more rationally evaluate the market.

MARKET SENTIMENT

The last couple of days were dominated by “sell first, ask questions later”, but some sanity has finally returned after bottoming around 1500.  This is an important development because herd psychology can trigger massive selloffs when people start selling simply because everyone else is selling.  The most encouraging sign of support came yesterday afternoon when the market didn’t collapse after dipping under 1500.  That was the perfect setup for technical stop-loss selling to trigger wider selling.  Demonstrating support in face of all those automatic stop-losses showed selling was slowing down, not picking up.

Everyone acknowledged the recent series of non-stop new highs was getting frothy and this two-day pullback addressed that.  The bigger question is if this was enough of a dip to resume the uptrend, or do we need to see more selling before this thing finally bottoms?  Markets top on complacency and how quickly the mood changed once the selling started shows me this market is not complacent and traders are still cynical and edgy.  Topping complacency is when stocks start selling off a little at a time and no one seems to notice or care.  Clearly that was not the case here.

The encouraging thing for the bull is the recent dip created a new pool of potential buyers.  Recent shorts and swing-traders that jumped out will turn into buyers if the rally resumes.  Markets move on supply and demand only, this renewed pool of buyers gives us more fuel to keep the rally going.

TRADING OPPORTUNITIES

Expected Outcome:
Arresting the slide shows the emotional selling has dried up for the time being.  That doesn’t mean the coast is clear, it just says the risks of an avalanche of herd selling has returned to more normal levels and makes it a little safer to buy-the-dip.

Even thought we are seeing some calm here, this could simply be the eye of the storm.  We need to use stop-losses to protect our account we jump in too early.  A stop-loss at 1495 provides a reasonable level of protection while still giving the market enough room to move around.  Everything I see still points to new highs before the end of the quarter and set your profit target accordingly.  The only question is if 1500 is the bottom or we need to dip down to 1475 first.

Alternate Outcome:
This pause could simply be a dead-cat bounce on the way lower.  The market is the most humbling contraption ever created and if too many traders are betting on the bounce, it will humiliate all of us by continuing the selloff.  Of course if I were in charge and my goals was to crush as many traders as I could, I would let the market rebound before sending it down for real.  Rather than just zing bull or bears, why not get them both at the same time?

INDIVIDUAL STOCKS

AAPL daily at 1:19 EST

AAPL is on pace to log its first green day in over a week.  While this is good, the lifeless sideways trade is showing little conviction supporting these gains.  As much as people hate to hear it, I still think there are new lows coming and any strength is a selling opportunity.

AMZN is doing its best to prove both bulls and bears wrong as it seems magnetically attracted to the 50dma.  Since everyone is expecting it to move one way or the other, the most frustrating trade is flat.  I don’t expect this will last and look for a break either way; buy $267 and sell $259.  Both the long and short trade have room to run; an upside breakout will make new highs and a dip will probably fall to the 200dma.  At this point it is a coin-flip and let the market show its hand first.

Stay safe

PM: Holding 1500 for now

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Stocks find support at 1500 and finish off the day’s lows.  Is this the last chance to bail out before crash, or another golden buy-the-dip opportunity?  AAPL still cannot find a buyer and will likely see another leg lower before finally bottoming.

MARKET BEHAVIOR

The slide continued and the market tested support at 1500.  It briefly traded under this key level, but was able to regain it by the end of the day.  Volume was elevated as selling flushed another round of previously complacent holders out of the market.

The absence of a huge wave of stop-loss selling after dipping to 1497 is encouraging.  The other benefit is this knocked out stop-losses right under 1500, relieving potential selling pressure going forward.  If we dip under 1500 tomorrow, it will be less of an event because many of those stop-losses are gone.  If the market cannot hold 1500, the next level of support is the 50dma around 1475.

MARKET SENTIMENT

Is this selloff just getting started and we should load up on shorts, or are these the last gasps of selling and we should buy-the-dip?

Last week I talked about the need to lighten up and take profits, and seven-consecutive up-weeks is about as far at the market goes without a red-week.  I didn’t say these things would lead to market crash, but a healthy and normal pullback as part of continuing higher.  So far I’ve been right about the first part and the second part still on track

The dramatic dip over the last two-days combined with the uneasiness many have had with this market lead to a large number of weak holders bailing out   Shorts are also pouncing on what they see as the obvious trade lower.  What is the most unexpected outcome after the biggest two-day losses in months?  New highs, and that is where we are headed.

If we hold 1500 Friday, that means most of the selling has already taken place.  Without new supply to keep pressuring prices, there is no place to go but higher.  Once the market recovers 1530, look for shorts and underweight traders to scramble on board the rally bandwagon, but ironically their buying will bring us one step closer to the dip that doesn’t bounce back.

TRADING OPPORTUNITIES

Expected Outcome:
Rallies don’t simply roll over and die.  The change of power from bulls to bears is a messy process that includes lots of volatility.  We are seeing some of that volatility here, but we have not seen the last of the new highs yet.  I am not a raging bull, just an opportunistic trader.  I know markets don’t top like this and most often we see double-tops and head-and-shoulder reversal patterns.  The thing about both of these patterns is the market makes a new high after the initial selloff.  As the opportunistic trader, that means the high probability trade remains buying-the-dip.

Obviously we need to be careful when dealing with volatility like this, but if the market holds 1500 tomorrow, consider buying and holding through 1540 and using 1495 as a stop.  Depending on where we open, this is a pretty favorable risk/reward; 10-points of downside for 35-points of upside.  Of course if the market cannot hold 1500 in early trade, all bets are off and look for the market to test 1475, but then 1475 becomes the next buying opportunity.  If we cannot hold 1474, the rally is dead.

Alternate Outcome:
The market can keep sliding and that is a fact of life.   It doesn’t matter how creative and thoughtful our analysis is, the market is going to do what it wants to do.  We always need to use protective stops to mange risk incase we get the trade wrong.  But even if the market continues lower tomorrow, I still think this makes for a poor short.  If anyone is lucky enough to have short profits, harvest some of those gains because they might not be around much longer.

AMZN daily at end of day

INDIVIDUAL STOCKS

AAPL is back under $445.  The quick rebound everyone was hoping for is deader than dead and it will take a long period of healing before this stock recovers.  In fact there is probably one last flush lower before this stock finally finds a bottom.  The stock peaked on the nice round number of $700 and it might finally bottom on the nice round number of $400.  Of course that is one of the better outcomes.  A 50% selloff to $350 is not out of the realm of possibility as many high-fliers drop 50, 60, even 70% after peaking.  What cannot get any cheaper usually does.  People will point to the fundamentals, but the company and the stock are not the same thing.

Even with all the broad market weakness, AMZN is still hanging above the 50dma.  There is not a lot of cushion left, but the expected rebound in the indexes will drag AMZN along with it.  This is a speculative trade and not many people should own it here, but please don’t short it.  There are far easier ways to make money than argue logic with the market.  Same goes for LNKD and NFLX, what cannot go any higher usually goes higher.

Stay safe

AM: Testing support at 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EST

AM Update

Stocks dipped and are testing support at 1500.  We could see a little more weakness, but this is a buy-the-dip moment, and those piling on the short bandwagon are going to have a bad time.

MARKET SENTIMENT

There are two kinds of holders, those that sell a 2% pullback and those that don’t.  Today we find out how large each contingent is.  New buying largely dried up because anyone already reluctant to buy the recent rally is not rushing in when the market is “melting down”.  The key to this pullback rests firmly in the hands of holders and how many are running for the exits versus those saying this is no big deal.

So far all the headlines say “buy protection while it is cheap”, “the pullback could be ugly and deep”, “correction”, etc.  It really is hard to find anyone shouting “buy the dip”.  When everyone thinks this is the real correction, I’ll take the other side.  I’m not saying this is the bottom and no doubt we could easily see further selling, but I do think we will make new highs before the end of the quarter.  That makes this a buy-the-dip opportunity, we just need to find the right timing to buy that dip.

Real tops happen when everyone is complacent and buying the dips.  When the guy running around saying the sky is falling is labeled Chicken Little and ignored.  Right now the guy promoting the rebound is the oddball and more likely to be ridiculed than the one saying the market is on the verge of collapse.

Why this matters is it gives us insight into how traders are positioning their portfolio.  Anyone who expects a major selloff is already out of, or short stocks.  These were the people who sold yesterday, but once they are out, they no longer have vote in what direction the market goes.  The only people with a say are those still holding and those contemplating buying the dip.  Those are the two groups we need to focus on when determining how to trade this market.

So far holders sat through too-far, too-fast, a negative GDP number, and everyone knows sequester is just around the corner.  I think it will be harder to shake these core holders out and this wave of selling could be short-lived.  The market is already finding support at 1500 as the selling is temporarily abating.  We have to be careful of the stop-losses sitting under 1500 because that could trigger one last wave of selling, but that will be the last of it.  Once those autopilot sell orders work through the system selling will climax and we will bounce higher.

Holders are just half the equation, we also need to consider who will buy this dip.  There are a lot of big money managers still underweight this market, wishing they bought the rally back at 1500.  Here is their chance and no doubt some are taking advantage of it.  Expect the buying to intensify if the market starts making new gains and big money fears being left behind for a second time.

This rally since November is running out of steam and we are closer to the end, but this is not that end.  Look for a more typical double-top or head and shoulders pattern before we see a bigger pullback.  That means new highs in the near-term and this dip is buyable.

TRADING OPPORTUNITIES

Expected Outcome:
I am looking for buying opportunities here, not shorting ones.   This selloff is too easy and once all the weak hands bailout, supply will dry up and we will continue higher.  I like going against the crowd, but that is different from catching a falling knife.  We need to look for a valid entry to buy back in.

The low of this pullback will be somewhere between 1500 and 1475.  If you are okay with another 25 points of weakness, buying now is not a bad thing.  Another strategy is putting a trailing buy-trigger just above the market.  Right now that could be 1506 or yesterday’s close of 1511.  This would let you ride the market down if it continues sliding, but will get you in when it is trying to rebound.  Another strategy is to wait a few days and let this market find and hold support. But either way I would not be short this market here, the high probability trade is a rebound, not a collapse.

Alternate Outcome:
The market can do whatever it wants and doesn’t stick to a standard playbook.  While most markets top with exhaustion, volatility, double-top, or head-and-shoulders, there is no rule that says it can’t just roll over one day and die.  While this is certainty a possibility  it is not the high-probability trade.  If you need a guarantee, get a savings account.  If you can handle a little risk when the odds are in your favor, look for the eventual top to be more consistent with history, making this a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL just cannot find a bid and is now under $445 now.  That is a 10% decline in 10-days.  Buyers are just not showing up because everyone who wants this stock already has some.  The high-probability trade is waiting for new lows and swing-traders to jump in and buy the dip after the stock hits $430.  This could lead to another bounce to $450, but that will be a selling opportunity.  There are still far too many hopeful holders in this stock for it to rebound and it will take time and volatility to grind that out.  Some people won’t ever give up, like the CSCO holders waiting for the bounce back to $50.  But that is a vice, not a virtue in the markets.

Stay safe

PM: Shaken nerves

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Today’s dip cleared the air of complacency and is making traders fearful again.  Is this the real selloff or just another buying opportunity?

MARKET BEHAVIOR

Biggest selloff of the year, down 1.25% and finishing at the day’s low.  While 1.25% is noteworthy, it isn’t nearly as dramatic as some in recent memory that dipped multiple percent.  Volume was 20% above average and typical of a selloff that takes out several layers of stop-losses.

The market broke through minor support at 1525 before ending a few points under 1515.  The next major support level is 1500 and is more meaningful because it goes back nearly a month.  If we trade near this level, be wary of a dip under because a huge pile of automatic stop-losses will push a wave of new supply on the market.  If we still cannot find a floor there, the next level is the 50dma down at 1475.

MARKET SENTIMENT

We finally have the selloff everyone’s been waiting for, and that is why this isn’t the real deal.  No doubt we could see further weakness, but this rally will most likely end in a double-top.  While Tuesday set a new high, a 0.7% gain on average volume is hardly exhaustion.  But even if the rally is not dead, that doesn’t mean we should rush out and buy stocks because an intermediate dip could easily take us back to 1475.

The excuse for today’s selloff was dissent in the Fed minutes over when to withdraw stimulus.  This is a two or three-year story, not an imminent change in Fed easy-money policy, but just a hint of withdrawing liquidity was enough to send already paranoid traders to the exits.  After that, selling accelerated as we tripped automatic stop-losses.

Today’s dip rattled the market and it led to a lot of selling.  We are left wondering if this is just another buy-the-dip opportunity or the start of something larger?  While I can’t give you answers right now, there are clues we can look for to guide our trading over coming days.

TRADING OPPORTUNITIES

Expected Outcome:
We have one of two likely outcomes, finding support tomorrow and bouncing back to 1530, or selling continues and we don’t find a bottom until 1475.  If the cascade of selling ends and we rebound, the rally is back on and look for a new high next week.  But if we keep taking out stops, don’t try to bottom-fish and let the market continue shaking out weak hands.

This market will eventually set a new high, the only question is if that is next week or next month.  Double-tops are one of the most common topping patterns and probability-wise we should expect this trade.  After that second top we can start looking for a bigger shorting opportunities, but until then take profits on shorts early and often.

Alternate Outcome:
Sometimes markets top without much fuss, but those are rare.  Usually we see elevated volatility accompanied by one last surge higher, a double top, or a head-and-shoulders.  Rarely do bulls simply give up and roll over without a fight.  While today could be the start of a bigger selloff, heading straight down from here is not the most likely outcome.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL closed under $450 and has been down six-days in a row.  When the stock hit $485 last week, holders were most hopeful of a rebound when they should have sold.  The market loves to play head games and the most successful traders expect this; buy when you don’t want to buy and sell when you don’t want to sell.  If AAPL cannot find support at $450, new lows are just around the corner.  This is a swing-trading stock right now, not an investing one.  If you want to make money here, buy the dips and sell the rallies.

The market brought everything down with it, especially high fliers like NFLX, LKND, GOOG, and AMZN.  When the market has a bad day, there are few places to hide.  Look for these high-beta stocks to go down further than the market if broad weakness persists.

Stay safe

AM: Modest selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

AM Update

Modest selling after making a new high.  AAPL is still searching for a support.

MARKET BEHAVIOR

Stocks gave back some of yesterday’s gains in early trade, but are finding support around 1525.

MARKET SENTIMENT

This weakness is actually supportive of a continuation because it shows the market is still skeptical and chasing is not getting out of hand yet.  The trend to this point has been breakouts followed by sideways trade.  If the market holds these levels for a few days, look for another new high next week.

Yesterday’s surge into the close was largely driven by short covering and by itself is a temporary source of buying.  Now that shorts have covered, we need to find new people to buy this market.  Today’s restraint shows many traders still on the sidelines are holding back.  We will be close to the end when this dam of restraint finally breaks and buyers fight each other to get in the market.

Looking at the calendar, there are five-weeks until the end of the quarter.  Big money managers underweight this market and overweight AAPL are getting nervous, but they are hoping the expected market pullback and AAPL rebound will save their quarter.  They still have time to move into high-beta stocks to catch the market if they need to and the pressure won’t really set in for a couple of weeks.  Desperate money piling into high-beta stocks will cause some fireworks.  Of course the above scenario only applies if we keep making new highs into early March.

TRADING OPPORTUNITIES

Expected Outcome:
While we need to exercise restraint here, the trend is still higher.  This is the time to be collecting winners, not initiating new positions or going short.    Each trade has a different risk profile and a good time to take profits is not automatically a good time to put on shorts.

The market is retesting support at 1525, which is normal and healthy.  If we hold this level for a few days, an aggressive and nimble trader could buy back in and squeeze a little more upside out of this market.  But for the average trader, its been a good run and there is not much left in this move.  We could continue up to 1550, but the risk of melting down increases by the day as the supply of available buyers is used up and lack of demand could trigger a larger wave of selling.  Is another 20-30 S&P500 points worth the risk?  For some yes,others no.

But that is the trade as it stands right now.  A modest dip and sideways trade for a week or two clears the way for a continued move higher and that is buyable for most traders.  I don’t know what the market will do and simply look for the best trade at any given time.  Today it is cautious optimism and restraint, but that could change next week if big money keeps buying every dip.

The hardest part of trading is selling winners on the way up and very few people trade this way.  But if most people don’t make money in the market, maybe we should consider using a different strategy than everyone else.

Alternate Outcome:
If the expected outcome is a little more upside, the alternate is an imminent collapse.  The sequestration fight is heating up and could take the air out of this market any minute now, but I don’t expect it.  Anyone who sold/shorted the Fiscal Cliff lost a lot of money and they are not about to repeat the same mistake here.  In fact, I’m wondering if we are seeing some buy-the-rumor, sell-the-news here as the market is rallying into an expected budget deal.  What is the least expected outcome?  A market selloff on a budget deal, and that is why we might actually see it.  This is pure speculation at this point, but the closer we get, the more clues we will have about the market’s intentions.

INDIVIDUAL STOCKS

AAPL daily at 1:19 EST

AAPL’s sell-the-news keeps on selling as the stock dipped under $450 this morning.  This is no longer a fundamental story, it is a supply and demand trade.  It doesn’t really matter what Apple the company does here, the stock is stuck in a rut because it cannot find new buyers.  This is the most widely owned stock by both retail and professional investors.  This means everyone who wants some already has more than they need, and beyond just a lack of demand, this also creates a huge pool of potential sellers.  Gigantic supply of potential sellers and small pool of available buyers is why this great company’s stock is down 35% in just a few months.

NFLX is seeing a little selling pressure here.  After running up nearly 100% since earnings, a pullback to $160 should be expected.  I’d still be afraid of shorting this stock because it is so heavily shorted it could pop 10% at any moment, but holding a long here is getting greedy.

AMZN put the hurt on more bears as it traded up to $275, but that squeeze didn’t last and it since pulled back to $270.  So far the stock looks like it wants to set a new high above $285.  What cannot go any higher usually keeps going higher.

Stay safe

PM: All is well with the world

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The rally continues and all is well with the world.

MARKET BEHAVIOR

Stocks jumped to fresh highs and finished at the top of the day’s range.  Volume was slightly above average.

MARKET SENTIMENT

The market is running in clean air, meaning we don’t have overhead resistance from regretful owners looking to get out at break-even.  Everyone with a diversified portfolio is sitting on profits and that is a big reason traders are willing to hold through modest pullbacks.

Many traders were burned by selling the post-election/Fiscal Cliff dip.  They also bailed after the Fiscal Cliff pop went “too-far, too-fast”.  But as the rally continued, most who sold anytime over the last several months have come to regret that decision.  Fool me once, shame on you; fool me twice, shame on me.  The sellers that bought back in and those that held through the dips are more confident in the market than they have been in quite some time.

What this means for the rest of us is this market will not collapse in a wave of panic selling.  It rallied on negative GDP and it clearly knows sequestration is just around the corner, but it doesn’t care.  If those headlines won’t spook this market, anything short of a terrorist nuclear bomb detonation will not dent it either.

If this Teflon market won’t fall on news, the only thing left is running out of buyers.  The calm and steady climb higher is seducing the remaining holdouts and momentum chasers and shorts covering provided much of the buying today on a headline-free jump to new highs.  This market is no longer trading on fundamentals, but supply and demand.  Holders are not selling and former cynics are chasing.  This is a recipe for price increases, but it is also a short-lived phenomenon.  We will eventually run out of chasers and the last people in the door will have little profit cushion, causing them bail at the first signs of weakness.

This chasing rally can last for weeks or even months, so don’t short this market.  But if we know what we are looking for, we will be better positioned to trade the top when it finally happens.

TRADING OPPORTUNITIES

Expected Outcome:
There are two things the market can do tomorrow, continue higher or pullback to support and consolidate.  A continued surge is unsustainable and will end in an exhaustion top.  A modest pullback to support will spook out some of the momentum traders and tempt bears to re-short this market.  That repositioning clears the way for the sustainable grind higher.

Either way we are getting closer to the end of this run and it is better to be taking profits than initiating new positions.  The time to buy was two and a half months ago when the world was ending, not now when everything seems fine.  There is some upside left in the market, but holding out for top-dollar is often a fool’s game.  We are in this to make money and you can only do that by selling winners.  It is hard to close a position making money, but if the most successful traders sell too early, maybe we should do it too.

I sold half of my SPX trade late today.  I had a trailing stop that let me ride up to the close, but ending at the day’s highs made me take some profits off the table.  We could see this continue higher tomorrow and that will probably get me out of the rest of my position, but if we pullback and find support for a few days, I will look to buy back in.

Alternate Outcome:
Without a doubt this market could go higher and I probably sold too early, but that is what a disciplined trader does.  If this rally is sustainable, there will be other opportunities to get back in.  If it runs up in an exhaustion top, I’ll miss a few dollars of upside, but I would probably end up selling too late and miss the top anyway.  At least when I’m out of the market and have a clear head, I will be better positioned to look for the next trade.

INDIVIDUAL STOCKS

AAPL fell under $460 early and while it recovered from the day’s lows, it was unable to close above $460.  Some of the focus on price levels seems arbitrary, but the power comes from other people trading these same levels.  If everyone looks at $460 as support and places their stop-loss at $459, when the stock dips under this level, it sets off a chain reaction of stop-loss selling.  That is exactly what sent AAPL to $453 in early trade.

Between $460 and $485 the stock is in no-man’s land.  If it cannot regain $460, look for new lows.  If it climbs above $485, look for a run back to $500.  $500 will be a major milestone and significant resistance, but if it breaks through and holds above this level, the rebound is real.

AMZN turned premature shorts upside down again.  In cases like this is it better to be a little late to avoid getting whipped around.  AMZN is a legitimate short, but wait for the stock to dip under the 50dma first.  As long as it holds above this level, the stock is still a buy.

NFLX is within a couple of dollars of $200.  We are getting close to the end of this run and look for a pullback and consolidation before continuing higher.  I still wouldn’t short this stock, but taking profits here after it ran 100% in a few weeks is the smart move.

GOOG daily at end of day

GOOG is making new all-time highs in an apparent, “what is bad for Apple is good for Google”.  GOOG is a money-printing machine, but most people forget they don’t make any money selling Android phones; it all comes after the fact from mobile search.  Google’s financial statements don’t care if you buy an Android phone or an iPhone, because both use Google as the default search engine.  This can change as we saw with Apple producing their own mapping application, but after that fiasco, I suspect Apple will think long and hard about replacing Google’s search on the iPhone.  Until then don’t get too excited about Android market share gains on the iPhone because it will not translate to the bottom line.

Stay safe

AM: New highs again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EST

AM Update

New highs in the market as all is well with the world.  AAPL struggles with $460, AMZN is holding the 50dma, and NFLX is close to breaking $200.

MARKET BEHAVIOR

The market made new highs in early trade and is holding those gains through midday.  What cannot go any higher keeps going higher.

MARKET SENTIMENT

No one wants to sell this market and anyone watching from the outside is developing second thoughts about sitting this one out.  There are few motivators more powerful than seeing everyone else make money and that is why so many former cynics are quickly forgetting their fear of heights.  The calm and complacency of the group is infectious and there are fewer and fewer people warning of imminent doom with each passing day.

The gradual shift in market sentiment is what heightened my senses.   There could easily be days and weeks left in this rally, but we are far closer to the end than the start.  From a risk versus reward analysis, the remaining reward is shrinking by the day and the risk becomes more and more real.  We could easily see another 25-points to the upside, but on a 180-point move from November’s lows, holding out for those last few percent could lead to “tripping over pennies”.  Buy when everyone is fearful and sell when everyone is greedy.

TRADING OPPORTUNITIES

Expected Outcome:
The market is rallying here, but don’t become complacent.  This is not a time to short the market, but it is a good time to start locking in profits, especially if the rate of gains increases.  This would be the last of the holdouts chasing the market and once they buy-in, demand will dry up and we will finally have that pullback everyone’s been calling for.

It’s easy to predict the market because it always does the same things.  A pullback is a no-brainer because markets always pullback……eventually.  The money is made in correctly timing these moves and that is the hard part.  I don’t know exactly when this market will top, but I suspect it is coming.  No doubt I’ll get out of this market early, but I’m okay with that because top-picking is a fool’s game.

Alternate Outcome:
Markets often go further and longer than anyone expects.  We could see this rally continue higher for weeks, even months, but that doesn’t make it a high-probability trade.   This market has already gone further and longer than anyone expected, already up 60-points from the Fiscal Cliff pop.  We are approaching the point where cynicism gives way to greed and that is when markets top.

If someone wants to play both sides of the fence, a trailing stop is not a bad idea.  It leaves the door open to further gains, but locks in profits if the market does start dipping.

INDIVIDUAL STOCKS

AAPL daily at 1:23 EST

AAPL couldn’t hold $460 and stop-loss selling pushed it down to $453.  The real test will be if the stock can reclaim and hold $460 or if this level becomes resistance again.  The sell-the-news dip continues following last weeks push up to resistance at $485.  Last Tuesday Cook quashed hopes of an imminent increase to the dividend/buyback program and without that catalyst  the stock has drifted lower.  I still don’t know where the next buyer will come from or when the next revolutionary product will be released.  Until those questions can be answered, the stock will probably retest recent lows as it continues purging hopeful holders.

AMZN is finding buyers above the 50dma and the stock looks like it wants to keep defying bears and shorts.  Owning AMZN here is a pure speculation trade and based entirely on the next greater fool theory, but it seems likely that greater fool will be shorts rushing to cover as the stock trades back above $270.  This stock will unravel at some point, but it is a bad short right here.

NFLX continues its assault on $200 and is less than $10 away.  Anyone who thought the 30% post-earnings pop was waaaaay over done missed a great trade.  Remember, the contrarian trade isn’t going against the chart, it is going against the crowd.  If the crowd thinks something went “too-far, too-fast”, the contrarian trade is betting on a continuation.

Stay safe

LA: What to look for

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

How far can this streak of up weeks continue and where is the incremental AAPL buyer going to come from?

MARKET BEHAVIOR

Stocks were up for the seventh consecutive week.  Over the last few years this is as long as any streak lasted and we should expect a red-week simply based on historical precedent.  While I’m sure there are many times over the last 100-years where the market strung together a larger number of winning weeks, trading is a game of probabilities and we need to trade what is most likely, not what is possible.

MARKET SENTIMENT

The recent rally and absence of volatility is making the market feel safe, something we need to fear.  I’m not promoting a crash, simply a red-week or two to keep traders on their toes.  How people respond to the dip will tell us how far it will go.  If the prevailing attitude is complacency and buy-the-dip, look for a deeper pullback.  If everyone starts yelling fire and rushing for the exits, look for another quick rebound.

The rule of thumb is trade the opposite of what most expect.  The sharp pullbacks to 1,500 two-weeks ago got traders attention and excited bears.  This was finally the pullback everyone was waiting for, but the market rebounded and is now 20-points higher.  That episode ago humiliated bears and sellers who jumped on the pullback bandwagon only to watch the market pop higher.  Now this group of potential sellers is less likely to pile on board a similar dip in the future.

This matters because nervous sellers and shorts have a limited war-chest and run out of ammunition quickly if bigger money doesn’t join the selling.  That is exactly what happened two-weeks ago.  But what happens if the nervous sellers are already out of the market and bears are reluctant to re-short the market?  That means the next dip isn’t manufactured selling, but real selling.  This is the fundamental difference between a buying-the-dip opportunity and a real market reversal.  If you know who is selling, you have a better chance of accurately anticipating the move.

The above scenario describes the way these things normally play out.  I’m not exactly sure where we are in this process and that is why we need to keep looking for clues from the market’s behavior.  The trend remains higher, but we need to be increasingly cautious with each passing day.

TRADING OPPORTUNITIES

Expected Outcome:
Look for a small red week this week or next simply because history says this is about as far as these things normally go.  This could be a small pullback, or the start of something bigger.  We need to keep a close eye on how the market and sentiment responds to any weakness, looking for clues on where this market is headed.

Alternate Outcome:
While seven up-weeks is a lot, it is not impossible for us to string together several more.  The momentum is clearly higher and reluctant buyers are finally starting to wade in.  Their buying will keep propping up the market until they run out of money and that will be when the market finally noses over.  Running out of buyers, not complacency is what finally causes a market to top.

The outcome I am most hoping for is a strong push higher because that is unsustainable, will clearly signal an intermediate top, and be an attractive place to short the market.  This grinding higher stuff is far harder to predict and time.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is struggling again and the last few weeks of buying sucked in many of the bottom-pickers.  The question any AAPL bull has to answer is who is the next buyer that will keep the rebound going?  Markets are driven by supply and demand, so where is this new demand going to come from if all the AAPL bulls already own the stock?

My opinion is there is still too much hope and optimism left in the stock to stage a quick recovery.  The most likely scenario is the most loved stock will need to become the most hated stock before selling and hope finally exhaust themselves and the stock can bottom.  The other red flag is any weakness felt by the broad market will be exacerbated in AAPL shares.

Stay safe

WR: Amnesia

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR

Stocks closed flat for the week, up less than 2-points.  The range was tight, 0.7%, with a low of 1514 and high of 1525; both of these levels representing near-term support and resistance.

Exchange volume was right around average, but since it was option expiration week, volume was actually a little light.  The slow trade allowed the 10-week moving average to catch up and it is now just 48-points under the market and the slower moving 50-week moving average is trailing by 110 points.

MARKET SENTIMENT

Holders have not been interested in selling this market.  We’ve seen multiple dips to support, but nothing achieves critical mass and inevitably rebounds quickly.  If there was one trade that worked well with the indexes the last couple months, it’s buying anything, dips or not.  A few weeks ago traders were afraid of this too-far, too-fast market, but now that every sale, stop-loss, and short has been a mistake, cynics are finally coming around.  But the thing to be careful of is this shift in sentiment is what causes an intermediate market top; after everyone buys, demand dries up, and stocks dip.

There were tons of reasons not to buy this market a few weeks ago, but a relentless series of new highs is giving traders amnesia.  Everyone isn’t sold on this market yet, but they are coming over in larger numbers with each passing day.  How much longer this can keep up is the big question.

I don’t expect the market to collapse because there are still too many cynics remaining, but there is no more effective persuader than seeing everyone else make money.  This means there are two ways we can move ahead.  One is directly and the other is after a nerve rattling dip.  Straight up will suck in the last of the fence-sitters and exhaust demand in one final push higher.  Typically this happens on the largest weekly gains we’ve seen since the early days of the rally.  This would be the quickest route to a material pullback.

The slower, but more sustainable trade would be dipping dramatically to flush out some of this new-found complacency.  To continue sustainably the market needs to shake out recent buyers and tempt aggressive bears to short the market.  Once this limited selling runs its course, look for the market to find support and resume its rally.  A mid-rally dip like this could last a couple of weeks before resuming higher, but expect it to feel like the real selloff because that sense of panic is what will refresh the rally.

TRADING OPPORTUNITIES

Expected Outcome:
Look for near-term weakness from a sustainable rally or a strong push higher out of a topping pattern.  We are half way through the first quarter, meaning there are at most six-weeks left in this move, and possibly less.  The conservative trade is taking profits and the aggressive trade is squeezing out a little more.  If you like sleeping at night sell some stocks, if you enjoy the thrill of the chase, tighten up your stops and get ready to hang on.

The advantage of selling into strength is you don’t have to guess if a dip is just a dip or the start of a real selloff.  Chances are weakness next week will be another buying opportunity, but there are no guarantees and the aggressive trader will have to decide wither or not to sell.

Alternate Outcome:
The market is not always predictable and a strong break higher could be a buying opportunity, but that is a low probability trade and one I’ll just have to sit out.  I don’t need to make all the money, just the easy stuff.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL finally had a down-week after two-weekly gains following the post-earnings plunge.  Was this two-week rebound the dead-cat bounce or is this week’s weakness just a dip on the way higher?  The stock ran into psychological resistance at $485 and is currently retesting support at $460.  A dip under $460 would trigger more stop-loss and short-selling, pushing the stock back down to recent lows of $430.  To resurrect this stock from the dead, it will need to regain and hold $500, but in the near-term the stock will make for a far better swing-trade than buy-and-hold investment.  Buy the dips and sell the rallies and the stock swings between extremes of hope and despair.

Stay safe

PM: Complacency creeping in

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The S&P500 finished the week nearly where it started and volatility dropped off dramatically.  AAPL is testing support at $460 and AMZN is trying to find a direction.

MARKET BEHAVIOR

Stocks traded flat again with support near 1515 and resistance at 1525.  This was the fourth-day within this 10-point range  as volatility virtually disappeared   Obviously this cannot last and it will be interesting to see if the rally uses this quiet period to launch another move higher, or a plunge lower to shakeout complacent and greedy holders.

MARKET SENTIMENT

The market is stuck in this tight range because 1) no one is buying and 2) no one is selling.  Obviously this is only figurative because we had 37 million shares change hands on an options expiration Friday, but for every seller there was an equally willing buyer.

It will be interesting to see how the market trades next week since many trader’s put protection expired today.  This could make it easier to shake these previously steady holders out of their position and would add to down-side volatility next week.  But this factor might be mitigated by the increasing complacency and greed felt by current holders.  Every dip since November has been a buying opportunity and anyone shaken out in a bout of weakness was made to regret that emotional impulse as the market bounce back not long after.  This shame over selling prematurely makes traders less likely to sell the next dip and explains a lot of the recent reluctance for holders to sell dips.

Obviously complacency and greed is a key component of a market top, but they do not lead to a top immediately. A prevailing sense of complacency and greed brings in the last of the reluctant buyers and that forms the top of the market.  Even though we are getting complacent here, there are still reluctant traders left to push the market higher.  Their final buying will likely trigger that last surge higher before the market corrects.

TRADING OPPORTUNITIES

Expected Outcome:
While we are still looking for one last push higher, we might see another dramatic selloff along the way.  The market hates being easy and right now it is pretty darn easy to buy-and-hold.  I have little doubt some heart racing volatility is around the corner, but it won’t get too carried away, maybe a precipitous drop to 1505 before bouncing back.  Tops usually get more volatile as the battle between the bears and bulls evens out and the market’s indecision intensifies.  For those with a weak stomach, it would be far easier to sell into some strength and wait for the next buying opportunity.

Alternate Outcome:
The market could plunge, takeoff, or stay flat next week.  If this predicting stuff were easy we would all be rich right now.  We evaluate the situation, make our best guess, place our bets, and then wait for confirmation or invalidation, and that is what we need to do here.  There is no reason to trade this late in the market rally and often holding out for the last few dollars causes people to give back all their earlier profits.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL dipped to $460.  While not a long-term support level, it has been a key level since earnings last month, initially providing overhead resistance and now acting as support.  There are many people trading this same level, so a dip under could trigger a wave of stop-losses and short selling, intensifying pressure on the stock.  If the stock bounces here and breaks above $485, that would qualify as making higher-highs and higher-lows, which would be extremely bullish.  Unfortunately sentiment wise there is still too much optimism and hope in the stock to have realistically put in a long-term bottom.

LNKD and NFLX continue inching higher on the backs of pessimists.  Short these at your own peril.

AMZN pulled back to the 50dma but found support for the time being.  A lot of traders are watching this level and look for a move in either direction to pick up speed as swing-traders jump on whichever bandwagon shows up first.

Stay safe

AM: Another day of quiet trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EST

AM Update

Stocks are holding recent levels in quiet trade.  AAPL is holding support at $460, but technicals still indicate a downtrend.  AMZN is building a trade around its 50dma, we just have to wait and see what that trade is.

MARKET BEHAVIOR

Stocks were up in early trade, but hit their head on 1525 and are down midday.  1525 seems to be resistance and 1515 support.  We will watch to see which of these levels gets taken out first but I wouldn’t buy/sell a break through either level because the probabilities of a head fake are high and these are minor technical levels.

MARKET SENTIMENT

The low volatility drift higher continues.  While the market is bouncing up and down, it is doing so within fractions of a percent and more likely the result of random noise than meaningful trade.  What we know for sure is the market continues creeping higher through these gyrations and the trend remains intact.

TRADING OPPORTUNITIES

Expected Outcome:
While this market is closer to topping, don’t try to short it here because the rally is still alive and has some upside left.  On the other side, longs need to start building a plan to lock in profits.  I find it easier to sell into strength, but trailing stops work too.  If you are sitting out of this market, it is a bit late for anything other than quick day trades.  The market could rally sharply from here, but that will be the end of the run, not the start of the next leg.  If the market consolidates and/or pulls back slightly, that will refresh the market and make a good entry point, but if it races ahead, resist the temptation to chase.

Alternate Outcome:
If the expected outcome is caution, the alternative trade is reckless abandon.  While a several percent move higher seems likely and could be profitable if timed exactly right, it will be part of a topping pattern and not the start of a new leg higher.  If someone needs to trade this market, stay nimble.  The more comfortable people become with this market, the more nervous we should be.

INDIVIDUAL STOCKS

AMZN daily at 1:15 EST

AAPL is down, but still holding above $460.  Volume tapered off the last couple days as both buyers and sellers are taking a break.  Technicals show the downtrend remains intact as the stock continues making lower-lows, and lower-highs and is solidly underneath the 50dma.  Without a doubt this stock will rebound at some point, but when in doubt stick with the trend.  As for a trade, sell a break under $460 and buy a pop above $485.

AMZN is dipping but still has a several dollar cushion above the 50dma.  If someone bought the break above the 50dma, they still have some breathing room, but get out if the stock cannot hold the 50dma.  Holding the 50dma is obviously bullish, but a break under the 50dma could be shorted, but only for a couple of days because it is likely to bounce.  Failing to hold the 50dma for a third time setup a longer short trade.

Stay safe

PM: Another new closing high

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks opened at 1514 and rallied through the day, finishing above 1520.  While we missed a new intra-day high, it did notch a new closing high as the slow grind higher continues.

MARKET SENTIMENT

As the market inches higher, the calls for a pullback get quieter by the day.  I don’t think everyone is sold on this market, but the cynics are not nearly as vocal after getting their nose relentlessly bloodied day after day.  This is all part of the normal progression through the life-cycle of a market move.  With each passing day bears and cynics are throwing in the towel and joining the rally bandwagon.  Their buying is the fuel that is propping up this market, but once the last have changed sides, demand will dry up and the market will finally nose over.

TRADING OPPORTUNITIES

Expected Outcome:
While there are no clear signals to sell yet, we need to be increasingly vigilant.  This market will top in coming weeks and we need to be ready for it.  It might happen as early as next week or it could drag on through the end of the first quarter, but either way the writing is on the walls .  Look for the inability to hold support or the biggest weekly price gains since this rally began.  Those will be the signs to get out.

Fund managers are judged by their quarterly performance and the longer the rally goes, the less time managers have to catch the market before the end of the first quarter.  A pullback will be a huge relief for many professional money managers, but will most likely be the reason it won’t happen.  Managers behind the eight ball are buying every dip in an effort to catch this market, but if you get too many people buying dips, there are no dips to buy.  That behavior explains why the move higher has been so smooth.

Alternate Outcome:

Clearly there is no rule that say rallies can only last 12 to 16 weeks and obviously there are countless examples over the last 100 years that lasted a lot longer.  But trading is a game of probabilities and we need to trade the most likely outcome.  It is entirely possible this rally goes for a couple more months, but the odds are against it.

INDIVIDUAL STOCKS

AAPL is finding support in the lows $460s.  Holding here and using $460 as a stop is a reasonable way to trade the rebound.  But if the market breaks $460, look for a wave of stop-loss selling from a lot of other like-minded traders.  I’m still suspicious of this stock because supply and demand is stacked against it.  If everyone thinks this is a great value and already own the stock, where are the new buyers going to come from?

Stay safe

AM: Cautious optimism

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EST

AM Update

S&P500 bounces off of support at 1515 and AAPL is finding buyers in the $460 range.  AMZN, NFLX, and LNKD continue proving the cynics wrong as they keep gaining.

MARKET BEHAVIOR

The market opened lower, but rallied off of 1514, again finding support near the 1515 level.  What was resistance a couple of weeks ago is providing support here.

MARKET SENTIMENT

Josh commented a couple posts ago that while exchange volume returned on Tuesday, trading volume on the SPY remains suspiciously light.  This is a really interesting observation and it might give us further insight into this market.  The SPY is a trading vehicle for speculation and hedging, not investing.  This can be seen by the SPY’s ridiculously high turnover rate of just 5 days.  Following volume on the SPY provides great insight into what traders are doing, separate from longer-viewed investors.

One possible explanation for the low volume on SPY is traders are afraid to buy this market and just as fearful of shorting it.  Since short squeezes have been a big part of what pushed this market higher, we might not have that same bid above the market going forward.  If that is the case, this market will need to draw in new buyers to keep moving higher.

TRADING OPPORTUNITIES

Expected Outcome:
Without a doubt the market is approaching the end of its run and an intermediate top is weeks and a handful of points away.  The safer this market feels with its steady climb higher, the more nervous it makes me.  I’m not ready to give up yet, but I am less confident and more paranoid than I was a couple of weeks ago.  One of the hardest part of trading is knowing when to take a winner.  We should be giving that more thought here than what positions to add.

Alternate Outcome:
If the expected trade is promoting caution, then the alternate is going all in.  Markets often move further and longer than most expect and undoubtedly this one has already don that, jumping over 120 points in less than two months. But are we seeing skepticism grow or fade the higher this thing goes?  I’m still waiting for that large weekly price gain, but am actively looking for an exit.  It is always better to be out of the market wishing you were in, than in the market wishing you were out.

INDIVIDUAL STOCKS

AAPL is finding support at $460 and trying to regain upward momentum after two days of selling.  $460 is a good line in the sand to use as a stop-loss for a long trade, but if this is an obvious stop-loss, other traders will use it and the stock could trigger another wave of selling if it dips to under it.

LNKD daily at 1:22 EST

After some early weakness, AMZN is fining buyers willing to support the break above the 50dma and recent gains.  This stock is not done humiliating bears and get in its way at your own peril.

LNKD and NFLX continue dining on fresh bear meat as they push to new breakout highs.  Remember, the contrarian trade isn’t going against the price, it is going against the crowd.  If the crowd thinks these are ridiculously overpriced stocks and bound to crash, then the contrarian trade is betting on the continuation.

Stay safe

PM: Is this too easy?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

New highs in an otherwise quiet day.   AAPL continues struggling for direction and high-fliers keep humiliating bears.

MARKET BEHAVIOR

Stocks traded up to 1525, fell to 1515, and finished the day back at 1520.   1525 set another new high and 1515 held recent support.

MARKET SENTIMENT

While we set another new high, don’t let the dull trade lull us into complacency.  The trend remains higher, but we could see near-term weakness test our resolve.  A pullback to 1505 should be expected and we need to plan on how we will respond.  Proactive traders could lock-in profits on the way up and look to buy after the market finds support.  Traders who like to sit through a little volatility can continue holding, but they have the harder task of  recognizing the difference between healthy pullbacks and topping.  And lastly, buy-and-hold should keep holding because that is what they do.  Of course even buy-and-hold investors benefit from shorter timeframe analysis because it helps them mentally prepare for the emotional dips that could tempt them into selling at the exact wrong time.

At most this rally has six-weeks left in it and we need to come up with an exit plan for taking profits.  So far we’ve resisted the temptation to get shaken out between too-high, too-fast and the volatile dips last week, but it will all be for naught if we stick around too long.  The November bottom was twelve-weeks ago and we have been above the 50dma for six-weeks.  While I’m still waiting for the high volume price gains, I am becoming increasingly suspicious of this market and inching closer to the door.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working, but start working on an exit plan.  We’re in this to make money, not own stocks, and we can only do that by selling and taking profits.  My preference is to sell early because it prepares me mentally to buy the next dip.  Holding past the top is always a head game because there is regret at not selling sooner and hope that prices will bounce back.  All of this clouds judgement and prevents a trader from identifying the next great trade.

Alternate Outcome:
Technically this rally could last forever, but practically speaking three to four months is the most these things go before they run out of new buyers and have a material selloff that refreshes the larger bull rally.  We’ve seen countless selloffs of 100-200 points over the last four-years and this year will be no different.  While the trade is obvious, getting the timing right is where all the money is made.

INDIVIDUAL STOCKS

Much like the market, AAPL rallied, sold off, and finished near flat.  Inability to break above $485 is noteworthy and while most are treating this as a fundamental and event-driven story, it really is still a supply and demand trade.  As long as everyone is promoting the attractive valuation, it means the hopeful have not been flushed out yet.  Why this matters is everyone who likes AAPL already owns it, meaning there are few new buyers left.  If someone isn’t interested at an obscene valuation, they probably won’t be impressed with a doubly-obscene valuation either.

AMZN daily at end of day

AMZN popped today and the cynics were out in force.  That explains why the stock finished at the top of the day’s range.  AMZN is AAPL’s mirror twin.  Everyone loves AAPL and it keeps going lower while everyone hates AMZN and it keeps going higher.  This is totally irrational behavior if you look at it from a fundamental and valuation basis, but bring supply and demand into the picture and now it makes total sense.  AMZN isn’t done humiliating bears and look for the rally to continue.

NFLX and LNKD also rallied through the day and these stocks are trading like they want to go higher.  It will be a wild ride, but $200 is easily within reach for NFLX.  After it hits that milestone we will reevaluate sentiment and see if attitudes in the stock have changed.  $180 is in the cards for LNKD.  If there is one takeaway from these posts, please don’t short explosive stocks.  That is a great way to go broke.  These might or might not be a good buy, but they are definitely not a short.  But some people prefer to learn their lessons the hard way.

FOSL’s strength faded and it is retesting support.  Keep this one on a really short leash and any further weakness means institutional money is not supporting this stock.  Don’t go down with the ship if it cannot hold support.

Stay safe

AM: More constructive trade

By Jani Ziedins | Intraday Analysis

AM Update

The S&P500 continues finding support near recent highs.  AAPL is struggling for direction.  AMZN popped above the 50dma plus a few other individual stock stories below.

S&P500 daily at 1:18 EST

MARKET BEHAVIOR

Stocks gaped up at the open, sold off to break-even by midday, and are attempting a rebound as I write this.  Nothing new or insightful from this price-action and the previous analysis and expectations of a continuation remain intact.

MARKET SENTIMENT

Any selling widely viewed as the start of an expected pullback will not turn into said pullback.  This rally will top, but it will happen when everyone is convinced it is another buy-the-dip opportunity, and we are not there yet.

So far this Q1 is a carbon copy of last year’s Q1.  Last year’s rally kept going and going until everyone gave up fighting it and that is when it finally nosed over.  People will point to some fundamental story that broke last year’s market, but the truth is fundamentals can only break the market when it is already setup to fall.  We have all witnessed when markets reacted counterintuitively to a major story and that is because the underlying supply and demand was setup for a different direction.  When fundamentals and supply and demand disagree, always go with supply and demand.

TRADING OPPORTUNITIES

Expected Outcome:
Some weakness is normal and healthy.  Anyone rushing for the exits or piling on the shorts because the market dipped a few points is going to have a bad time.  Markets top on complacency, not fear, and as long as traders keep predicting the top, it won’t happen.

Alternate Outcome:
The end of this rally is coming and the market doesn’t always follow a set playbook.  There are countless examples of markets topping without a surge of buying that exhausts demand, but we are playing a game of probabilities.  If most rallies top on high volume, that becomes the basis for a high-probability trade.  We could be wrong, but if we trade this way over a long period of time, we will win more often than we lose and that is the key to succeeding in the markets.

INDIVIDUAL STOCKS

Quite a bit of indecision in AAPL as it struggles for direction.  The stock opened low, surged higher, and is now drifting lower.  While the technical rally attempt is still intact, we can probably say the fundamental justification for the rally, an imminent dividend and buyback increase, is dead.  Can this rebound continue without its rally cry   As it stands, I see no fundamental or supply and demand reason for this stock to rebound here and I continue expecting lower prices.

AMZN daily at 1:18 EST

AMZN broke above the 50dma on elevated volume.  Anyone who jumped on the short bandwagon is having a bad day.  Same goes for those that bought unconfirmed 50dma support and were chased out by the recent pullback.  Going forward, anyone looking for a good entry into AMZN, here is your shot.  Put your stop near $260, but this bounce should not fall back under the 50dma.  If it does, consider selling before it reaches $260.

NFLX is recovering from a few days of selling.  Any bears who used this weakness as a shorting opportunity are second guessing that decision and many are buying back their shorts, adding fuel to the rally.  These stories go further and longer than most expect and bears would be better off burning a pile of cash in their driveway than shorting a strong stock.  Maybe NFLX is overvalued here, but that doesn’t mean the market will recognize that any time soon.

LNKD is finding buyers at these higher levels and this is supportive of a continuation.  The market obviously doesn’t care what its P/E is and neither should you.  Anyone shorting this stock because of the P/E should just send their money to me and I promise to put it to better use.  No doubt this stock could crater here, but that doesn’t make shorting LNKD a good trade, just a lucky one.  The difference between luck and a good plan is luck always runs out.

FOSL is having a bad day.  We will see if it respects support at $102.  If a stock falls more than a few percent under the pivot, then the chances of success diminish dramatically.  Success in the market is not about being right all the time, but how a trader responds when wrong.

Stay safe

PM: AAPL sells the news

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The S&P500 made a new high as volume returned, further supporting recent levels.  AAPL fell after Cook disappointed the hopeful, and FOSL still looks interesting.

MARKET BEHAVIOR

Another new high as stocks broke 1520 on average volume and traders finally returned after two holiday-like volume days on Friday and Monday.  The intraday range was tight and the market is taking a break after last week’s volatility.  All good signs of support for these new levels.

MARKET SENTIMENT

Two things we know about this market, 1) it is not breaking down and 2) it is not taking off.  While fairly basic, these two characteristics are highly insightful.  Each dip last week bounced back decisively after an early flurry of selling.  The market found a bottom and rebounded because most holders are comfortable with their positions and not easily spooked by weakness.  On the other side, the rate of gains is fairly moderate as new buyers are only trickling in at this point.  There is no irrational chasing, simply pessimists joining the rally bandwagon a handful at a time.  This slow erosion of bears is what is pushing the market higher.

If those two characteristics are driving this rally, then we need to be on the lookout for a change in either.  Failing to hold support would be a big flag showing holders are not as confident.  On the other side, if we see a mad dash to buy this market, expect that buying to exhaust itself fairly quickly.

TRADING OPPORTUNITIES

Expected Outcome:
This is turning into a broken record, but keep doing what is working.  Often the market adopts a consistent personality for an entire quarter as fund managers fall into the same pattern.  This quarter is driven by big money chasing the market higher.  Next quarter could be volatile sideways trade and the quarter after that is the expected selloff.  This quarterly behavior isn’t the rule, but it happens often enough to be noteworthy and it potentially means we have 6-weeks left in this rally.

Alternate Outcome:
The days in this rally are numbered and we are on day and a few points closer to the end of this run.  Look for a change in character between not holding support, increased volatility, or a surge higher.

I surprised a few people when I said I am 300% long S&P500 index funds.  While that sounds like a lot of risk, we cannot make a valid risk assessment based on leverage alone.  A huge move in the S&P500 is 2%, while a big move in AAPL is 10%.  When factoring in volatility, the risk in a 300% index position is not all that different from a 50% stake in AAPL.

But having said that, I trade what works well for me and that is swing-trading the indexes using leverage to spice up the returns.  I follow the S&P500 close enough that I often know when a trade is not going to work out even before it hits my stops.  This is the level of risk I am comfortable with, but it took years to work up to this level.  I always suggest people trade what they are most comfortable with.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL hit its head on $485 yesterday and sold off ever since.  We will see what the stock has in store for us tomorrow, but this is shaping up as a boiler plate sell-the-news trade.  Tim Cook seemed openly hostile to accusations of cash hoarding and it doesn’t look like the company’s stance will change in the near-term.  If this was the catalyst traders used to justify bidding up the stock, they need to close out once their original thesis proves invalid.  The stock can rally for any number of reasons, but an increased dividend seems less likely.  If the stock doesn’t come back to life on Wednesday, look for a retest of recent lows.

FOSL closed at the lows of the day’s trading range and almost closed the opening gap.  Even with the intraday selloff the stock still looks interesting as long as it finds support.  Often the more cynical traders are to a story, the more likely it is to work.  Just look at NFLX, AMZN, and LNKD for recent examples.  Look for support at $106 and the trade will clearly be broken if the stock dips under $102.

Stay safe

AM: Adding to recent gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:02 EST

AM Update

The market is holding recent gains in quiet trade while AAPL is dipping in active trade.  FOSL is breaking out and setting up an interesting trade.  AMZN bounced back and is just under the 50dma and NFLX is holding recent gains.

MARKET BEHAVIOR

Stocks are up modestly this morning and continue supporting the recent break above 1515.

MARKET SENTIMENT

Things that are “expensive” usually get more expensive.  This is because people shy away from them and that means there is a larger pool of available buyers.  Contrast this with something that is “cheap” and a “good buy”.  That means everyone is already in the stock/market and there is a large pool of available sellers.  We are seeing both cases play out in this market.  The S&P500 continues higher no matter how “overbought” people claim it is and AAPL keeps going down no matter how “cheap” people think it is.  Trading isn’t about what people think, but how they are positioned.   When everyone loves something there is little demand left, when everyone is suspicious there are few sellers left.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with the trend because what is overbought is about to get even more overbought.  The tight trade over the last couple days is a nice change from last week’s volatility.  Calm and stead trade bodes well for a sustainable continuation.

Alternate Outcome:
This rally will end at some point and with each passing day we are one day closer to that end.  We’ve come almost 180 points since the November lows and without a doubt most of this leg’s gains are behind us.  At most we have another 50 points left in the tank before we see some kind of larger consolidation/pullback.  Look for a material break of support at 1500 or an unsustainable surge higher to signal this rally is dying, but until then stick with the steady climb higher.

INDIVIDUAL STOCKS

AAPL is suffering a bout of sell-the-news as Tim Cook failed to deliver what speculators were hoping for.  If the justification for the recent bounce is invalid, then the trade is also invalid and traders need to get out.  Look for the stock to trade back down to recent lows if it cannot find a floor and bounce back this afternoon.

FOSL daily at 1:02 EST

FOSL popped nicely and looks buyable for the aggressive trader.  The stock could dip and close the gap, but the trend is clearly higher.  Use a stop-loss near $103.

AMZN is bouncing back from yesterday’s selloff, but is still under the 50dma.  If it cannot regain this moving average on decisive volume, there could be a quick short trade here.  Either way look for a decisive break from this area and ride it for some quick profits.  Don’t get greedy and take profits early.

NFLX opened higher, but sold off by midday and is in the red for the 4th day.  But more bullish is holding support above $175.  Selling is a normal and a health part of moving ahead so don’t pay too much attention to the recent volatility as long as the stock keeps holding recent gains.

Stay safe

PM: Finding support

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Resistance at 1515 is acting as support and look for the “overbought” market to get even more overbought.  AAPL closed the post-earnings gap, but where the stock goes depends entirely on what Tim Cook has to say.  Continue watching AMZN and LNKD from the sidelines, but FOSL is interesting.

MARKET BEHAVIOR

Stocks traded near Friday’s high on light volume as recent resistance at 1515 became support.  The market is at 5-year highs and there is no meaningful overhead resistance from regretful holders looking to get out at break-even because everyone holding a diversified portfolio is sitting on profits.  Last week saw an uptick in volatility, but today’s tight trade brought some calm back to the market.

MARKET SENTIMENT

While the market was in the red for most of the day, the losses were modest and volume light.  If anything this was more due to buyers holding back than any material selling.  This reluctance is bullish because it shows  a lot of traders have not bought the rally yet.  Often these things top in a big, high-volume surge and today’s quiet action was anything but that.

Today’s low-volume dip fits well with what we have talked about recently.  Holders are increasingly confident with each new high and less likely to sell while pessimists remain reluctant to buy.  Low-volume over the last two days was the result of no one selling and no one buying.  When holders are confident and sideline-watchers fearful of falling even further behind, there is only one direction to go and that is up.

Too-far, too-fast will eventually catch up with this market, but only after reluctant traders pile in.  The rally is fueled by investor pain and a continued rally will hurt the largest number of people the most.  The bull’s turn is coming, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working because there is no reason to sell this market.  These things go further and longer than anyone expects and that is exactly what we have here.  As long as the chorus is singing overbought and unsustainable, stay long.  Only after all the cynics have given up and joined the bandwagon will we be ready to pullback.  Supply and demand 101.

Alternate Outcome:
This market will top one of these days and I am 100% certain I will either be early or late.  There is a huge difference between trading probabilities and picking tops.  I’m good at probabilities, not so good at tops.  But that is why we build a plan and stick to it.  I know I can’t pick the top and I prefer getting out early.  I don’t know how much longer I will stay in this trade, but as long as things continue following my plan, I’ll stick around.

For those that are curious, I’m 300% long the S&P500 through a combination of leveraged ETFs and margin.  I find the indexes easier to trade because they don’t have the same event-risk found in individual stocks and it is a more pure sentiment trade.

INDIVIDUAL STOCKS

AAPL touched $485 but turned back and closed just under $480.  Tim Cook is speaking on Tuesday and AAPL traders will hang on every word, looking for a reason to buy the stock.  I’m in the sell-the-news camp because AAPL’s is historically stingy with details and its cash.  If I had to guess if Cook will exceed investor expectations or leave them wanting more, I’d bet on the wanting.  If the stock sells off,  get out and even look to short.  If investors love what Cook has to say, look for a test of $500, but expect major resistance at this level.  $500 was support for three months and it wouldn’t surprise me to see it act as resistance for a while before the stock finally breaks above it for good.

LNKD added to yesterday’s gains, putting even more hurt on the shorts that tried to stick it out.  The stock will consolidate, but look for the rally to continue from there.  NFLX’s recent price-action is an example of what LNKD could do.  As for a trade, I wouldn’t buy the stock here and I certainty wouldn’t short it either.

FOSL daily at end of day

AMZN failed to hold the 50dma.  The stock isn’t dead yet, but it shows why the smart move is to wait for the bounce before jumping in.

FOSL looks like it is under accumulation after last week’s bounce off of the 50dma and it is still within buy range.  The stock gapped down last spring, but there is clean air up through $125.  This is a speculative play so anyone trading this should use an appropriately sized position and any broad market weakness will pummel a high beta stock like this.

Stay safe