AAPL pops, but indexes struggle

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The indexes opened slightly lower in early trade after yesterday’s reversal.  While yesterday’s loss was modest at -0.3%, the intraday range was the widest we’ve seen in weeks as the S&P500 sold off from a fresh 4-year high.  What does this tell us?  Simply that the market doesn’t go up in a straight line.  Most of August was an easy hold for bulls as the market drifted higher with low volatility.  But the market doesn’t like to be easy, so it has to throw in a few hiccups here and there just to keep everyone on their toes.

I’m suspicious of this bearish reversal because obvious shorts rarely work, and hard to hold longs often do.  Much like a rodeo bull, the market is bucking off longs with weak conviction.  Yesterday was an eye-opener as the reversal rained on the bull’s new-high parade and gave bears something to sink their teeth into.  No doubt a lot of the surge to a new high was bears covering shorts and bulls buying the breakout, but once all that automatic buying ended, no one was left to step in and support the market.  For such a noteworthy move, volume was noticeably absent.  Yesterday had the highest volume in over a week, but still well under average.  This means there was not a whole lot of buying on the pop, nor mass selling on the slide lower.

There are four investor moods that move markets, enthusiasm by bulls, enthusiasm by bears, apathy by bulls, and apathy by bears.  The low volume yesterday is more indicative of apathy by both bulls on the rally and apathy by bears on the sell-off.  This is simply continuing the summer’s low volume trend.  As I’ve shared before, my interpretation is big money is reluctant to commit new capital near recent highs and bears are exhausted from trying to drive it down.

Like anything in the markets, this could break either way as 50% of the money is on each side of the trade.  If buyers give up on this market first, bears will win and it will slide lower due to the absence of new money.  But if bears continue losing money, they will start changing their stripes and come over to the bull side.  Their buying will provide the initial lift for the market and it will be followed by chasing from formerly reluctant money managers who fear being left behind by a rising market.

I expect bears threw everything they had at yesterday’s sell-off and if that was the best they could do, the bull case remains solidly in tact.  The one wildcard is how many weak longs are still holding and prone to being spooked out of the market.  But once the market chases all of them off, we’ll be ready to resume the rally.  Sell early, or hold through the pullback, but try to avoid selling emotionally in the middle of a pullback because most often your breaking point will be the exact low of the correction, before the market resumes higher.

MARKET BEHAVIOR

The market broke from its low volatility rally yesterday, but that is no surprise.  We shot up in a short squeeze and then sold off due to a vacuum of follow on buying.  But one day does not make a trend.  Yesterday’s intraday range was 1.1%, which was exciting by recent standards, but hardly noteworthy when compared to price swings earlier this summer.  The low volatility trend continues for the time being.

TRADING OPPORTUNITIES

The market threw us a curve ball yesterday to make sure we are paying attention.  Anyone not expecting it was shaken out and this cleared the deck for a continued move higher.  No doubt we could see more red, retesting the 1400 consolidation, but I expect we’ll find support there and resume the low volatility climb higher.

No matter what anyone remembers from the good old days, there was never an easy time to invest in the market.  We remember where something started and where it finished, but seem to forget all the white knuckle zigs and zags in between.  Holding is never easy and we shouldn’t expect that here either.  The key to surviving these gyrations is to buy right and not chase.  The further away from the breakout you buy, the greater chance you have of getting shaken out in a normal and healthy pullback.

Now that is the bull case, since no one has a crystal ball and the market can throw off the best traders, lets build a plan B so we know what to look for if our original thesis starts breaking down.  We should see support at the recent 1400 consolidation.  Decisively breaking through this on volume demonstrates a high level of vulnerability to the recent rally.  At this point we should be unwinding our longs and looking for opportunities to short.  Don’t get overly aggressive at the first hints of a breakdown because often the market likes to throw in a head fake before resuming its previous trend.  And even if we do fall under 1400, the bull market is not dead, a pullback to the 50dma would not be an unreasonable thing for a bull rally to do.  But there is no reason to hold through that pullback.

INDIVIDUAL STOCKS

Everyone’s favorite stock AAPL is showing resilience after yesterday’s sell-off.  The thing about these favorite stocks is they go longer and further than anyone thinks possible.  AAPL cannot go up forever, but there is still gas in the tank.  I continue to be skeptical of AAPL’s long-term prospects as the most valuable company in the world because I see them dropping the ball to Android the same way they lost the PC battle to MSFT 20 years ago.  AAPL is a great and innovative company, but they don’t do well in the low-cost producer commodity markets.  How much more innovation can they push into phones and tablets?  The clones are on their heels and by some measures even out performing AAPL’s hardware. There will always be a place for AAPL’s marquee and premium products, but that isn’t enough to keep it the biggest company in the world. But that is then and this is now.  I’m a trader, not an investor, and clearly the momentum is behind AAPL and the stock has room to run with all the support for it.  But trade this stock, don’t fall in love with it.  As William O’Neil often says, “all stocks are bad…..unless they go up.”

HD is holding up nicely since its breakout out.  This stock has multiple tailwinds behind it, good earnings, housing recovery, and big money’s attraction to blue chip names in this economic environment.  What’s not to like?  This isn’t a 10x growth opportunity, but it could work for a nice trade if someone is scared of owning high-beta stocks like MLNX, KORS, or FRAN.

OTHER COMMENTARY

All the fear over the impending fiscal cliff is just noise.  Anyone who has followed politics knows even the most trivial decisions are pushed to the edge.  Brinkmanship is the name of the game in politics.  If you don’t push decisions to the deadline, you are doing something wrong.  This is negotiations 101, agree too early and you gave up too much.  Congress is nothing but one giant negotiation between the two parties and both sides will hold out until the last possible moment, trying to get a better deal for their constituents.  This is the way the game has always been played and to expect anything different now would be naive.  Quoting Churchill, “Democracy is the worst form of government except for all the others that have been tried.”  All this hype over the Fiscal Cliff is just trying to sell newspapers.

Stay safe

Market fades from 52-week high

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Markets launched out of the gate this morning and the S&P500 made a new 52-week high in early trade.  Given our proximity to this key technical level, it is not surprising high frequency traders and market makers pushed the markets through this key level to trigger all the automatic stops from bears and the buying from breakout traders.  But as soon as the frenzy peaked, the market started a one way slide giving back all those gains.

There continues to be a large level of skepticism among market participants who are anticipating a correction because they feel these levels are unsustainable.  But these people are stubbornly trading opinion, not the markets.  The key thing for bears to remember is a trend is far more likely to continue than reverse.  Trends continue countless times, but only reverse once.  And lets not overlook the fact anything “obvious” in the markets is most often a head fake.  Bears are piling in to this obvious short today and that could very well lead to a short squeeze in the coming days.

Further, we need to think about what is going through the mind of big money managers who are under-weight this market as they watched their benchmarks race off without them over the last few months.  How much longer can they wait for the pullback before they are forced to start chasing?  Can they wait for a 5% pullback or will they start jumping in at -3%, -2%, or -1%.  Up to this point they bought anything that turned red, let alone dropped a full percent.  Will these desperate fund managers put a floor under today’s sell off?

The world is always a scary place, so we always need to take all the things the bears are shouting about with a grain of salt.  Anything that is widely known and expected is already priced in the market.  The things we need to fear are the ones no one is talking about.  With all they hype over Europe, employment, China, US economy, etc we can safely discount those risks because they are already accounted for.  Any bear who is shouting about these things is focused on yesterday’s news.  As savvy investors, we need to be on the lookout for tomorrow’s news.

MARKET BEHAVIOR

The markets are making new highs and continuing the bull trade higher.  No doubt today is a noteworthy reversal, but we can’t go up every day, so red days will happen here and there, but so far the trend remains intact.  Every time over the last couple months the market tried to sell-off, buyers steeped in to and supported prices.  The low volume rally is more indicative of weakness by bears than weakness in bulls.  Bears are throwing everything they have at this “over valued” and “over bought” market, yet they fail to budge the needle.  Sometimes a low volume rally is something to be skeptical of and other times it is should be embraced.  The price action so far clearly shows this low-volume rally should be embraced.

No doubt we could see a down day, or even a week-long sell-off, but money managers behind the eight-ball and lagging their benchmarks will be forced to buy every dip as they to try to catch up.  While today’s slide looks ugly and has bears beating their chest, we are still close to flat for the day.  We will see if this chasing performance by big money keeps this pullbacks fairly modest too.

TRADING OPPORTUNITIES

Many stocks are extended as they hit new highs and are a good ways above their pivot points.  Avoid chasing stocks more than 5% extended from their proper buy points.  Stocks often rally two steps forward, one back.  If you buy on that second step forward, you risk getting shaken out on the step back.  If a stock is extended, add it to your watch list and wait for a follow on buy point, either a pullback into buying range or a 50dma bounce.  Days like today help bring extended stocks back into buy range.  And never forget, profit opportunities are like city buses, miss one and another one will come by minutes later.   It is better to miss the bus than get hit by the bus.

INDIVIDUAL STOCKS

AAPL is selling off after its big headline day yesterday.  But that is expected and nothing to worry about yet.  The traders who get in trouble are the ones who try to analyze every single random move a stock makes.  A lot of buying happened yesterday and no doubt it is healthy for some selling to happen today.  Just another example of why you want to get in early and shouldn’t chase.  AAPL will peak, but today is not that day.

URBN is breaking out on earnings.  A lot of people think the stock is expensive, as shown by 11% shares held short, but the thing about expensive stocks is they tend to get more expensive.  No doubt a lot of today’s pop is a short squeeze, but sampling the views on StockTwits $URBN, there is still a lot of skepticism left in this name.  A good way to trade this breakout would be to watch it instead of rushing in.  Tomorrow you could buy it if it goes above today’s intraday high, or if it pulls back into the gap, a potential buy point is when it reclaims today’s intraday low.  This is a volatile name, so if you chose to trade it, make sure to employ prudent risk management between position size and stop-losses.

Stay safe

Apple is taking off

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Indexes opened lower, but in bull markets stocks often open weak and finish strong.  That has been a common theme over the last month and we’ll see if it continues today.  The sell-off only declined half a percent in early trade, which is fairly trivial when compared to the volatility we lived through over the last few years.  If -0.5% is a bad day, I can live with that.  Not to say we can’t have larger sell-offs ahead of us, but it seems this market doesn’t want to sell-off more than that.  We trade the market we are given and this is the market we have.

There are a lot of comments floating around that the low ultra low VIX is indicating a lack of fear and over confidence by bulls, something often seen before a correction.  And while the VIX is extremely low, I don’t see the requisite overconfidence in the majority of market participants.  In fact, I think most are expecting a pullback and not fully committed to this rally, indicating the opposite of overconfidence.

Remember, the VIX is a derivative of a derivative and each time you make an indicator from another indicator, key information is lost.  Math nerds know every time you take a derivative, you lose the constant and that is why when you try to reverse engineer the original equation (integrate), you have to add back in an unknown constant.  The only thing a low VIX actually tells us is option premiums are cheap.  The unknown is why options are cheap and we cannot determine that by looking at the VIX.  Options could be cheap because of overconfidence, but they could also be cheap because of low historic volatility.  Looking back at how the market’s character has changed from wide and loose to ultra-tight where intra-day ranges are under one percent, it is little wonder option premiums have come in a lot.  And lets not forget, bull rallies are accompanied by low volatility.  A low VIX doesn’t have to mean a reversal is imminent, it could be telling us that this bull rally still has gas in the tank.

No doubt the volatility will return and we will have a correction, but in the markets timing is everything.  Bears will be right……..eventually, but the overabundance of bears needs to work itself off before we will have the correction everyone is waiting for.  For the time being, I expect the market will head higher and the VIX will go lower much to the dismay of all the bears.

MARKET PERSONALITY

The tight trade and bullish trend continues.  Don’t let yourself be stuck trading this summer’s patterns because we have clearly moved beyond that pattern.  The market is trading tight with an upward bias and it will probably continue this way for a bit longer.  Only after the majority of bears and reluctant longs have bought into this rally will it be ready to top.  Remember the way to make money in the markets is to recognize trends early and then prepare to change gears once the trend has become obvious to everyone.

TRADING OPPORTUNITIES

Continue holding your longs.  The market is marching higher and pullbacks in individual names are trivial to non-existent.  It’s been a while since it has been this easy to hold stocks.  But lets not get greedy.  Set profit targets of 20-25% for most stocks and start looking for the exit when you find yourself daydreaming about what you are going to buy with all your stock market profits.

INDIVIDUAL STOCKS

AAPL is the big story of the day, making fresh all-time highs.  The chart looks scary and is triggering a fear of heights in many traders, even hardcore AAPL bulls.  While the gut might be screaming too high, most often the gut is wrong in the markets.  Our brains are wired to protects us from lions and tigers, not stock crashes.  In fact the markets often move exactly opposite of our instinctive impulses.  Who hasn’t bought exactly when they should have sold?  Who can say they never been shaken out and watched the stock shoot higher without them?  Or worked up the confidence to buy only to top tick the move and see the stock come rushing down as if the market knew you were buying and was making it personal?

The truth is the market is agnostic and it could care less about any of us and is not intentionally out to hurt us.  It moves are entirely based on the emotions of the crowd.  The crowd is made up of individuals that react to feelings of fear, greed, hope, and despair.  We are all wired the same and most often react the same.  This is great attribute when trying to form a bond with other members of the tribe because our chances of survival are far greater when part of a group as opposed to being an outcast trying to defend yourself from all the scary predators in the wild. But these same herd instincts are going to get you killed in the financial markets.

Supply and demand dynamics work in such a way that the crowd is most often wrong.  This creates an inverse self-fulfilling prophecy because when crowd believes in something, most of the buying has already occurred and there is little buying left to keep pushing prices higher.  This is why crashes start when everyone is the most excited about a stock.

But when looking at the current AAPL trade, there is a healthy dose of skepticism in the market.  To see this, check out the various posts on StockTwits under AAPL’s feed.  There seems to be a lot of reluctance to buy this breakout, meaning there is still a lot of money available to bid up the price.  What we need to watch for is when the crowd becomes overconfident AAPL will continue higher, only then should you develop a fear of heights.  The best I can tell we are not there yet and there is still upside left in this name.

Of course it is obvious AAPL has come a long way and is widely held, so the best way to trade AAPL trade might be to ride this momentum higher and then cut out after a respectable 20% gain from the breakout.  At least that is the way I would play the name.  We could see a buy the rumor, sell the news into the iPhone 5 announcement in a few weeks, especially if the new phone doesn’t have some radical must have feature that stimulates a lot of upgrades.

Stay safe

Jump in, the water is fine.

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Yesterday broke out to the upside with the biggest daily gain in a couple of weeks.  The recent tight trade and bearish sentiment setup for a nice upside move, but today’s price action returns to the flat, tight trade.  But this is actually supportive of yesterday’s gains because big money is not profit taking and cynical bears don’t have the strength to weight down yesterday’s rally.  We are a fraction off of multi-year highs and market makers pay their alimony and kids private school tuition by pushing markets through key technical levels and triggering a flurry of buying and stop-loss activity.  At this point, a new 52-week high and short squeeze is a given, although we could trade flat or slightly lower first.

Technicians need to be careful in markets like this because often overbought/oversold indicators or resistance/support levels can be misleading when the market is breaking out.  I don’t buy into indicators because it isn’t the indicators that have the money I’m after.  People have money and that’s why I am always watching other traders for clues about their attitudes, positions, and emotions.  Even the VIX at these low levels can be deceiving for traders who mistakenly grasp for some signal to tell them how to trade.  The key to being successful in this game is recognizing who your opponent is and then keying off of his moves, not some lagging, second or third derivative indicator of what he is doing.

Market participants continue to be cynical and skeptical of this rally and these high market levels.  And chances are the rally will continue until we have demoralized and humiliated all these stubborn bears.  At that point the bulls will be cocky and taunt their fallen adversaries, but their joy will be short-lived because that is when the market will reverse and take the knees out from under the arrogant bulls.  That’s just the way this game works.

MARKET BEHAVIOR

Yesterday was the biggest move in a couple of weeks, but it was still relatively modest as compared to daily moves we saw over the summer.  The tight, low volatility trade will continue and we could see another week of tight trade before the next leg higher.  This is the new personality of the market and what we should expect for a while.

The low volatility comes from the lack of buying and selling from big money.  Big money isn’t profit taking at these levels, but it is also reluctant commit new capital.  And that’s why we continue tight, sideways trade.  But with each inch higher, we put more pressure on money managers under-weight this market as they fall further behind their benchmarks.  Slowly the pressure will mount and these managers will be forced to chase the markets.  For market behavior what this chasing means is desperate managers will start buying any and every dip, putting a solid floor under the markets, preventing the market from pulling back much at all.  But at the same time, they will be waiting for pullbacks to buy, so there will also be muted upside moves.  This will lead to a quiet and smooth rally, inching higher, at least for the time being.  The character will change a bit as the managers waiting in vain for a bigger pullback get more desperate and have to bite the bullet and start plowing larger chunks of money into the markets fearing they will fall even further behind.

TRADING OPPORTUNITIES

Same strategy as in the last 10 posts, find good stocks, buy them, and hold for a nice gain.  We don’t need to be as trigger happy when taking profits as we were over the summer.  Give your winners room to run and hold out for larger gains.

INDIVIDUAL STOCKS

FRAN and TDG are breaking out today.  KORS, GOOG, and HD are adding nicely to their earlier breakouts.  It seems like most everything is working and these are the environments that traders dream of.  Don’t let your fear of heights get in the way of making money.  The best buys are the hardest ones to make.  Jump in, the water is fine.

Creeping higher

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Everyone is expecting either a pullback or a full on correction from these levels.  But the thing about contrarian trading is it is going against the crowd, not the price.  Too often people confuse contrarian trading as trading against a move that has “gone too far”.  The truth is contrarian trading has nothing to do with price and everything to do with the crowd.  If too many people think the market has “gone too far”, then there is still fuel in the tank and the contrarian trade is to stick with the trend.  And I think that is exactly where we are now.  Follow the gurus or discussion boards and you’ll hear tripple-top, pullback, shorting opportunity and all that kind of chatter.  It is hard to find a bull opinion amongst all the bearish noise, but that is why the market continues to creep higher.

Contrarian trade is simply supply and demand at work.  People trade their convictions.  If they are bearish, they have already established bearish positions.  People holding positions can no longer influence the market and are only along for the ride because only new trades move prices.  So if everyone is bearish and has already established their positions, that means there is no new selling left to drive prices lower and inevitably they start going higher.  The move higher will then accelerate as the bears are forced to unwind their short positions in a short squeeze.  And the market will continue even higher as bears capitulate and convert to bulls, forced to chase the market higher.

Even if the market does trade lower, all the already established bearish positions means there is not much gas left in the tank to sustain a move lower.  In fact, the bears will even support the market as they start taking profits by buying back their shorts.  This bearish profit taking will slow down any move lower.

There continues to be lots of talk about the low volume, but that is just big money’s reluctance to commit to this market, another bearish attitude.  As the market creeps higher, the pressure to keep up with their benchmarks will force big money to chase the market higher.  And because they are behind their benchmarks, they will have to trade aggressively to catch the market that left them behind.   This aggressive trading by big money could cause high beta stocks to surge, something to keep an eye on.

MARKET BEHAVIOR

Clearly the new personality is blander than bland.  About the only traders who can make money in this market are sellers of option premium.  Even day traders are frustrated by the super tight trade.  Obviously the swing trade is dead, but that doesn’t stop people from continuing to trade what worked this summer.  We are creatures of habit by nature and that is something we as traders need to overcome.  If something worked well for us before, we continue to go back to it even if it is no longer working.  To be successful, we need to recognize and trade the new personality, not get stuck trading what is no longer working.

TRADING OPPORTUNITIES

Based on market psychology, the best trade continues to be on the long side.  Volatility is so low that day trading and swing trading the indexes is futile.  The best trade is to buy the indexes or good quality large cap stocks and holding for an extended period of time.  But while large caps have dominated small caps recently, there is a good chance small caps will start to catch up, especially if money managers under-performing their benchmarks are forced to take on extra risk to make up ground.

We could see some ugly headlines, but the market seems to be ignoring them and further, the Europeans seem to be really quiet lately.  Maybe they are all on vacation and that explains the lack of news, but it really seems like all the different groups are getting on the same page and recognizing what needs to be done.  Compromise in politics is difficult, but I think the Europeans are finally balancing both austerity and growth concerns and needs of all the parties involved.

INDIVIDUAL STOCKS

PETM popped today and made a new high.  You could call it a flat base or a 50dma bounce.  Either is a valid entry point. HD is continuing to run.  KORS fell back to the gap, but has since reversed higher.  So far leading stocks are doing well.

It is funny to see AIG and TYC making the cut as high quality stocks by IBD’s metrics and showing up in the Stocks on the Move screen today.  I’m not sure I would call either high quality, but as WON says “All stocks are bad unless they go up.”  By that metric TYC with its 84 RS and AIG with its 92RS make the cut as good stocks.  Not that I am recommending either, but they are doing quite well and qualify as turnaround stories, a valid CAN SLIM trait.

Day eight

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

I could copy and paste any post over the last two weeks and put it here and every word would still apply to today’s market.  For the 8th straight day we’ve hovered around 1400 in tight trade.  Without a doubt this is a new personality for the markets coming after this summer’s volatility.  There is a large contingent of buyers willing to step in any time we drift closer to 1400 because we bounce back any time the market drifts lower.  The big question is if we will breakout to the upside before these 1400 buyers run out of money.

MARKET BEHAVIOR

The big thing everyone keeps talking about is the light volume, but is this a real concern?  Stalling or churn is bearish and happens when there is little price gain on heavy volume.  This is called churn because you have a large number of investors selling as indicated by the high volume and it is assumed smart money is selling to dumb money.  But the low volume we are seeing disqualifies the current trade from being traditional stalling or churn.  No doubt the drawn out trade over the last two weeks could accomplish the same thing if all the buying and selling at these levels is added up.

TRADING OPPORTUNITIES

Plan A:  The market continues to defy gravity, holding solid above 1400 in spite of all the bears and swing traders calling for, and positioning themselves for a pullback.  It is encouraging to see the market hold up against all the bear’s selling.  A solid break above this trading range will force bears to cover and send fear of falling behind into those sitting on cash.  At that point they will start chasing the market.   In my mind, all the cynics have coiled the spring to the upside pretty tight and it could lead to a strong move.  Not a huge one day gain, but a sustained one way rally that offers very few dips for laggards to catch up.

Plan B:  While the market is holding up well, the low volume and flat prices show investors are reluctant to commit new capital to this market.  If we don’t see the breakout and rally in Plan A, we could see the market drift lower.  But using the spring analogy, the downside spring is already unsprung, meaning most of the sellers have already sold in anticipation of the expected correction.  The bears have already used up most of their ammunition and there is little left in the tank to push the market down.  In fact, buying from bears’ profit taking will actually provide a good level of support if we do start declining and that buying will make it a far more gentile sell off.  Using the spring analogy, clearly the advantage and risk/reward is to the upside.

INDIVIDUAL STOCKS

HD and KORS are showing good support after yesterday’s breakout.  HD is riding the big-cap and housing recovery boom.  KORS is the next hot thing in women’s fashion.  Both of these could have room to run.  Being a big-cap and established name, HD has a lot less room to run upside potential than a recent IPO like KORS.  An aggressive investor might up his position size on a name like HD to maintain a similar risk/reward profile as compared to smaller growth stocks.

Stay safe

Indexes break above trading range

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Markets poked their head above the recent consolidation.  No doubt this is getting the attention of those expecting a pullback and are either out of the market or short.  Fear of being left behind is a very real thing, especially for a fund manager whose performance is already lagging the indexes this year.  The market is ruthless that way and it is shaping up to be a very bad year for many money managers as they completely mistimed these major market moves.

The interesting thing from looking at a chart is noting how far we are above the moving averages and near 52-week highs.  This leads many technicians to assume the market is extended and likely to correct.  Then you add in the fundamentalists who are reading all the bearish headlines and predicting doom-and-gloom.  Heck, just a few weeks ago I fell into that trap too.  But the mistake I made was thinking about what the market should do, not what it was doing.  In the markets it is OK to be wrong, but it is fatal to stay wrong.  The market wasn’t doing what I expected, so that forced me to reevaluate my position.  This critical introspection allowed me to realize I got sucked into the wrong position and I was able to correct it in a timely manner.  Recognizing your mistakes early is the key to minimizing losses and profiting from the new trend.

MARKET BEHAVIOR

We are making new highs relative to the consolidation and pushing up against 52-week highs.  This slow and steady climb is not something we’ve seen out of the markets since the first quarter and is a departure from the summer chop.  The market never goes straight up, so we should expect some dips here and there, but so far the trend is clearly higher until further notice.  The volatility has also dropped off dramatically, making it easier for position traders to hold on for larger gains.

TRADING OPPORTUNITIES

Just when everyone was becoming most frustrated with the market is when it finally turns around and becomes a great time to invest.  The key to successful contrarian investing is knowing when to go with the trend and when to go against it.  Right now the contrarian trade is with the market because everyone else is so cynical.  In a few weeks or months when everyone comes around to this rally is when we need to be looking for the exits.  A critical nuance in contrarian trading is recognizing you are going against the crowd, not the trend.  This is a important distinction missed by a lot of people who think of them selves as contrarians when they short something that has gone up too much.   The successful contrarian trades against the other market participants, not against price moves.  Always remember that.

INDIVIDUAL STOCKS

KORS is making a huge move today, up 14% on strong earnings.  It would be a stretch to label the recent consolidation as a valid base pattern.  It could be a 50dma bounce, although the typical 50dma bounce happens when the 50dma is sloping higher and the stock is experiencing a temporary correction.  But nothing in the markets follows the textbook, so as traders we need to decide what flaws and defects we can live with.

HD, GOOG, and AAPL are also having good days and worth a look.

Stay safe

Another day of sideways trade

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Markets are stuck again at the 1400 level and struggling to make a move either direction.  This is making for boring blogging because there is nothing new and insightful to report.  We continue to show support at these levels simply because the previous pattern was to sell-off after a run up and we have instead been holding steady.

Institutional buyers are not buying, but they are not selling either.  They are comfortable with their current potions and are not looking to take profits as they would if they expected the markets to head lower from here.  But they are also reluctant to commit new capital to these markets.  Cautiously optimistic is how you might interpret this price action.

The lack of a sell-off as we dipped under 1400 this morning also shows bears are unable to mount a meaningful assault on this rally.  But the thing about the market is it will fall under its own weight if there is not follow on buying soon.  People only buy something when they think it will go up, but they can sell for any number of reasons other than thinking the stock will go down.  A pension fund will sell assets to finance its monthly obligations to retirees or a fund will re-balance part of its portfolio that has had a good quarter to get back into balance with its stated ratios.  This asymmetrical motivations between buying and selling is why stocks will tend to drift lower when nothing else is going on. The challenge for this market is finding a reason to rally after staying flat for the last week.  If we can’t find a reason to breakout, we should expect the market to drift lower for these reasons.

MARKET BEHAVIOR

The last time we saw 6 days of tight, sideways trade was at the end of April, which coincidentally (or not) was also at the 1400 level.  The ominous thing about this comparison is this price action indicated a stall before falling 100 points.  Will we see the same thing here, or will the third assault on 1400 be the charm?

TRADING OPPORTUNITIES

It seems the market has gotten numb to all the negative headlines the bears are shouting about, China slowdown, US recession, Euro collapse, etc.  But since everyone, even non-traders has heard these headlines, they are already fully priced in the market.  We can safely ignore everything in the media; what we need to fear and trade is the news no one is talking about yet.  Maybe that is trading a US and global recover from the long side.  Or trading the global markets will implode 2008-style from the short side.

The lack of bulls makes the contrarian in me favor the upside, but this is nothing more than a game of probabilities because there can never be certainty about the future.  There is always a risk of being wrong and losing money, but the goal is not to always be right, but to make more money than we lose by being disciplined in the way we trade.  Combining unique market insight with savvy money management is the best way to come out ahead over the long-run.

A 5th straight day of tight trade around 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The S&P500 continues to flirt with the 1400 level for the 5th day.  We are not selling off, but we are not surging either.  It seems we have a staring contest between the bulls and bears to see who blinks first.  But the lack of a sell-off from these elevated levels is far more encouraging than the lack of follow on breakout buying is concerning.   It is far easier for the market to fall than it is to climb.  So holding a key level is in fact bullish, especially in the face of all this skepticism.

MARKET BEHAVIOR

This tight sideways trade is not something we’ve seen out of the indexes in quite some time.  We’ve had very small intraday ranges and even tighter closes.  Chances are this is building to something and we’ll probably see a 1%+ move out of this when we get a headline that excites traders either up or down.  An upside move will put pressure on the bears to change their minds or at the very least cover the shorts they’ve laid down the last several days.

TRADING OPPORTUNITIES

With the market hardly budging the last week, there is not much new to add.  This stability supports the bull case and gives us the green light to buy CAN SLIM stocks.

There is always risk in the markets no matter how well things set up, so we need be mindful of our risk and stick with our stop-loss plans just in case the markets get caught off guard by an unexpected headline.

All of the above analysis is getting fairly redundant because we haven’t seen anything new from the markets in the last several days, but that quiet trade continues to support and reinforce the previous bullish analysis.  Maybe next week we’ll see the upside breakout and the surge from short covering and chasing.

Stay safe and have a good weekend

New leaders emerge, old leaders fade

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Stocks are holding around the 1400 level and volume continues to be below average.  But while many will say low volume shows a lack of buying by institutional investors, the thing to remember is buying and selling is symmetrical, ie for every buyer you must have a seller.  Using that logic, we can flip the previous statement on its head and say that the low volume also indicates not many institutions are interested in selling at these levels either.  The lack of selling at these high levels means holders of stocks are not cashing in.  The low volume also shows bears and swing trades have exhausted themselves because they have nothing left to sell and are unable to lean on the market.  So while many are leery of the light volume, I think it is very bullish.

MARKET BEHAVIOR

This tight trade after a rally is uncharacteristic of previous pullbacks that corrected rather abruptly once they ran out of buyers.  The 1400 price level is holding up well even when buying is slowing down, as indicated by low volume.  Again another change in character from this summer’s pattern.  All this indicates to me we are leaving the volatile swing trading and moving on to something else, so trading strategies that worked over the summer won’t work going into the fall.

TRADING OPPORTUNITIES

The market is holding up nicely and everything is indicating it is safe to buy high quality CAN SLIM stocks breaking out of proper bases.  There are several breakouts in today’s Stocks on the Move section of Investors.com.  Many of these are smaller and unfamiliar names.  Always do your background research before blindly buying a breakout just because it has a high composite rating from IBD.

INDIVIDUAL STOCKS

While we are seeing a lot of new names pop up in IBD’s screens, we are also seeing some of the old favorites stumble.  PCLN yesterday, MNST today, LULU this summer.  These old leaders are showing cracks and for many former leaders, these cracks will turn fatal.  We need to be looking out for the next leaders, not chasing the old ones.  Remember WON’s quote, “All stocks are bad unless they go up.”  Don’t let a cheap price or an attractive pullback tempt you into jumping in an old and tired leader.  IBD’s research show the average leaders correct 73% after their run is over, meaning there is a lot more room on the downside no matter how cheap they seem.  A few of these leaders will recover, but wait for the company to form a new base and have a valid breakout before buying.  As I said yesterday, a pullback because of a downgrade can bounce back pretty quickly, but slowing fundamentals is far more terminal for a high P/E stock.

Stay safe

Stock testing 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The S&P500 briefly dipped under the 1400 level as doubters and swing traders challenged yesterday’s breakout.  Given all the cynicism and how little the bears were able dent the rally demonstrates bulls are firmly in control at this point.  Even though bears make up the majority, they have exhausted all their resources fighting this rally and are helpless to stop it.  Little by little the bears will give up, admit defeat, and change sides.  Their buying will add to the rally and the higher it goes, the more pressure there will be on the remaining bears to change sides.

No doubt there could be an unexpected headline that turns the market on its head, but with everything we know and what is expected and feared out of employment, economy, China, and Europe, the trend is clearly higher no matter how dire the world seems to the fundamentalists.  We trade the market we are given and this one is inclined to go higher.  And we should trade it from the long side until everyone has become bullish, at which point we cash in and go short.

MARKET BEHAVIOR

Today’s price action supports yesterday’s breakout.  No doubt we could see a pullback into the trading range, but it seems like the market has broken from the summers trading range and we should not see a retracement back to the lower trend line.  If we do head back to the lower trend line, that would indicate this breakout has failed and we should anticipate breaking through the lower trend line and continuing materially lower.

The interesting thing to watch for is the new personality the market adopts going into the fall.  With the bullishness seen in the charts, we could see a nice rally as all the bears end up chasing the market and are forced to buy every dip.  Their buying of the dips will keep any pullback modest and make it easy to hold stocks.

TRADING OPPORTUNITIES

Plan A:  Buy this breakout and there are lots of high quality stocks to choose from.  But be careful and don’t chase a stock that is already extended from a proper buy point.  There will be some volatility as we try to hold this breakout and try for a new 52-week high.  Skeptics and swing traders will shoot against the breakout and they could have some temporary success holding down the markets.  Given growth stocks will react two to three times as much as the indexes, buying an extended stock could lead to a shakeout if the market pulls back.  Most winning stocks won’t correct more than 5% from its proper buy-point, but if you buy the stock more than 5% from the proper buy poiont you can easily get shaken out on a very normal and healthy test of the breakout.  Remember half of all breakouts test the buy point and we need to buy right so we can sit through that.

Plan B:  A modest dip under 1400 is expected, but if the bears are really as weak as they seem, the market will reverse higher rather quickly.  But if the slide continues deeper, we need to reevaluate our position because the bears are stronger than expected and it also shows bulls lack conviction to hold.  Breaking the mid-point of the trading range will be a key benchmark to watch for.

INDIVIDUAL STOCKS

PCLN is getting crushed today.  It is one thing to have a high-flier pullback due to a downgrade or skepticism.  Professional opinions are no more reliable than amateur ones when it comes to near-term price moves and often the more bearish the pros are, the more upside potential .  But when a company starts reporting real slowdowns in business, that is something an investor cannot ignore.  Opinion is opinion, but fact is fact.  Maybe this is just a single bad quarter for PCLN and they’ll bounce back next quarter, but it could also signal a fundamental shift in growth trends and that can absolutely crush a high P/E stock whose valuation is based entirely on huge growth expectations.  PCLN has had a huge run, but most of these stocks come back down to earth eventually and maybe this could be PCLN’s turn.

PCLN could sell off for a few days, but most of these sell offs don’t go straight down.  They’ll sell off hard, but then rebound and look like they are recovering.  It could even retake the 50dma, but if the stock really is broken, that would be a great opportunity time to place a short.

Or this could just be temporary growing pains and PCLN is forming another base that will eventually breakout to new highs in a few months.  But don’t buy until you get a legitimate breakout.  Bottom fishing and hoping for a recovery is not a high probability trading strategy.  If growth really is slowing, that could cut the P/E and thus the price in half, meaning there could be a lot more room on the downside.

Stay safe

Cleared 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

After some reluctance yesterday, the market finally reclaimed the 1400 level.  There is more psychological significance to this round number than anything else, but since the market is all about what other traders think, it is just as important as any other technical level.  Back in the spring the rally stalled out after hitting the 1400 level in March and late April.  But the market often works in forward steps and retracements; ie two steps forward, one step back.  If that is the case here, then we have the opportunity to hold and then move past 1400.

The low volume continues to show a lack of support by major players, but if these big money guys are wrong, their performance will suffer and they will have to chase the market this Fall.  This desperation to catch the market will lead to big money buying regardless of price or fundamentals.  Remember, the market tries to humiliate the greatest number of traders at any given time.  With the abundance of bearishness and skepticism, it is little wonder why the market is rallying.

The reason the market moves opposite of the crowd is because the crowd has already made their move, either buying or selling, and are now simply along for the ride.  All the bears are out of the market, or short, and if all their selling couldn’t push the market lower, then there is good support and it will rally once the bears have completed all their selling.  And that is what we are seeing here.  The bears and swing traders have leaned on this market with all their strength to no avail.  So even though bears out number bulls, the bears are exhausted and have little left continue the fight.

MARKET BEHAVIOR

Today’s rally above 1400 is pushing us through the upper end of the summer trading channel.  This is showing another break of pattern.  There have been a number of hints at a changing character, meaning we need to keep our eyes peeled for what comes next.  The best way to profit in the market is to identify and trade new trends early while they still work.  It is too early to identify a new pattern because we are in the middle of the transition, but we can use sentiment and history to guess at what is ahead.

Summer is typically listless and we get more directional moves in the Fall as all the senior traders come back from vacation and get serious about meeting year-end performance benchmarks.  And lets not forget Fall is a popular time for major market sell-offs.  At this point we could go either way, but we should expect some movement out of this trading channel.   This should be good news for most breakout traders who have been getting jerked around by this summers volatility.

TRADING OPPORTUNITIES

The best opportunities continue being on the long side as many leading stocks are breaking out or finishing their bases.  We are still late in a bull market so don’t be expecting everything to double and triple.  Most of the time take your 20% gain and move on except in the most rare of circumstances where a stock is showing exceptional strength.  If we see a rally, it will probably peter out late in the year after the election and Euro stabilization are priced in.  Remember, bulls make money, bears make money, and pigs get slaughtered.  We’re in this to make money, so always be prepared to take your worthwhile profits.

Stay safe

Market holds up

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The stock market held Friday’s big gains, all-be-it in lower volume.  Lower volume will scare off a lot of investors because they think it shows lack of commitment by institutional buyers.  But if people remember, we saw the same thing last fall and that lead to the phenomenal “light volume” rally.  Like anything else in the stock market, the volume rule is only right about 1/2 the time.

The reason any stock market rule is only right 1/2 the time is because if it were more reliable than that, some savvy hedge fund manager would make an absolute killing arbitraging it.  He would buy high-volume breakouts and short just as many low-volume ones.  This means he is long just as much as he is short, so his net market exposure is zero.  The market goes down he loses on his longs, but makes it back on his shorts.  Same applies if the market goes up.  In theory if his broad market exposure is zero, then his risk is zero.  But where he makes his money is the performance difference between the high-volume breakouts and low-volume breakouts.  If high volume breakouts really did perform better than low volume breakouts, then he would make lots of money with this strategy with very low risk.  Now maybe it is just me, but trading breakouts with zero risk sounds too good to be true, and that’s because it is.  Now don’t get me wrong, there are legitimate arbitrage opportunities in the market that have very little risk, but they are few and far between, and trading volume is not one of them.

That was a very long way of saying low-volume can be a warning sign some times and other times it can be encouraging.  In today’s environment I actually find this low volume encouraging because indicates bearishness by big money.  Their reluctance to buy at these levels is setting up a situation where money managers will yet again find themselves behind the curve if this market continues to rise.  And just like last year, they will get panicked and start chasing the market higher if it doesn’t pullback like they are anticipating.  Their pain becomes your gain.

MARKET BEHAVIOR

Our most recent pullback did not come back to the lower channel line before rebounding, showing the bears losing even more control than they had in the previous failed attempts to push the market lower.  The series of higher-lows and now the quicker reversal show the bulls clearly have the upper hand.  Chances are this is indicating a move to a new character for the markets.  I expect we’ll probably get away from this choppiness and that will make it easier to hold stocks without getting shaken out.  We probably won’t see a powerful rally like we saw in Q1, but a gentle run up into the election will be nice.

The interesting thing to note is market is up over 10% for the year, not something you’d expect if you were simply reading headlines and sampling investor sentiment.  As long as investors remain reluctant to buy this market, we’ll continue to have plenty of fuel to push this market higher.

TRADING OPPORTUNITIES

Plan A:  It should get easier to hold stocks for larger gains.  Over the last few months the best trade was cashing in any gains as soon as you made them because they were likely to disappear within a few days.  But this choppiness should be easing and holds of multiple weeks should be possible and profitable.

Many of the former leaders are struggling, so look for leadership in new names.  Maybe those old names will come back a little further along in the rally, or maybe it is time for new leadership.  Let the price action be your guide and buy what is hot, not what was hot.

Plan B:  The market continues to be vulnerable to a major complication out of Europe since we are within 2% of a 52-week high.  But don’t confuse major complication with the typical bickering and threats of doom-and-gloom that the market has grown immune to.  Major complication would be something like a PIIGS nation actually refusing to service its debt.  If something happens that is dramatically worse than what the market is expecting, that could crater prices in a hurry and we should be prepared to cut bait quickly.  In a situation like that don’t be tempted to play that “lets see if stocks come back tomorrow” game.

Stay safe

Employment numbers crush bears

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Big gains in the market after employment numbers smashed expectations. This blew all the bears and swing traders out of the water and this run up was due in part to a huge short squeeze. When too many market participants are on one side of the market, this sets up an explosive move in the opposite direction. And that is exactly what we’ve seen over the last month and a half as all the biggest moves have been to the upside.

This explosive upside behavior is a departure from the way the market traditionally acts where downside moves are bigger. But while this recent pattern is contradictory to market convention, the sentiment causing these large pops is exactly the same.

Large moves are almost always driven by fear of loss. Most often we see this to the downside, but over the last month the upside moves have been most dramatic because the large short interest. This sets up for a short squeeze where bears are sent rushing for the exits when the market moves against them. To close out their short positions, bears must buy stock, adding fuel to the rally. And as of recent, these powerful short squeezes show just how bearish this market is.

MARKET BEHAVIOR

The market made another new high without the market falling to the low of the trading range, showing we are moving out of this channel. So far this move seems to be breaking out to the upside. Now the challenge will be to figure out what the next pattern will be while there is still lots of time to trade it. A bull rally into the election would be nice, fingers crossed.

TRADING OPPORTUNITIES

Today’s strength furthers the case for a bull rally. It won’t be an easy buy because they never are, but hopefully we’re transitioning past the 40 point swings we’ve been living with all summer. Find the best growth stocks and stick to your trading plan. Buying right is what will keep you from getting shaken out and if we the market continues to find support, we can start holding for larger gains instead of selling for quick profits like what was required over the summer.

Stay safe

ECB lets down the markets

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The stock market foolishly expected fireworks out of the ECB today, but all they got was lip service.  This disappointment lead to today’s sell-off.  We’ve given up most of last Friday’s stellar gains, but the silver lining is the market clawed back some of those losses in the last hours of trade.

So where does this leave the markets?  There continues to be a bearish overtone as a large number of traders are anticipating a major sell-off due to the sagging global economy and the fiscal disaster in both the US and Europe.  But if this is a widely held view, then it is already priced in the market.  No doubt we could see a panic driven slide if some ruinous headline crosses the news-wire, but baring that, I expect the market will find its footing quickly given the large amount of bearish sentiment already baked in at this point.  For this reason the contrarian in me continues to be bullish over the medium and long term.  But the near-term volatility is a tougher nut to crack.

If the Europeans continue to play nice, we’ll see a rally into the US elections regardless of which party is polling the strongest.  No matter what the partisans tell you, the market is agnostic when it comes to politics and political parties.  We’ve hade massive rallies under Democrats and bone crushing crashes under Republicans.  What the market really can’t stand is uncertainty, that is why the closer we get to the election, the more positive the market will be.  At this point it will be able to anticipate the eventual winner and thus extrapolate the rules and regulations going forward.  For example, who would have guessed the stock markets would rally after the Supreme Court shocked everyone by upholding Obamacare?  Surely that was horrible and unexpected news for the market, so why didn’t the market tank?  It wasn’t because the markets liked the bill, but because the market can live with the bill and knowing what to expect is far more palatable than having the health care debate reopened.

It is examples like the reaction Obamacare that confuse many investors because they can’t understand why the markets didn’t respond the way they expected them to.  But this is where it is critical to understand what matters to the market when trying to make reason of the market’s rhyme.  In this case, the markets hate uncertainty more than bad news, and thus the rally.  No doubt the same thing could play out with the issues currently facing us.  Bad news or not, the market can very easily rally simply through clarity coming from leadership in the US and Europe.  Part of this will come from November’s elections.

MARKET PERSONALITY

The markets were down for the day, but the afternoon trade recovered some of those losses.  An interesting trend has developed recently where the markets would plunge on bad news (Obamacare ruling, Fed inaction, ECB inaction, etc), but then quickly bounce back.  The swing traders would jump on the short bandwagon as soon as the news broke and drive the market down sharply, but nearly as quik as it started, value buyers would jump in and turn the market right back around.  In fact, most of these bounces turned into multi-day rallies.  Will we see this same thing happen here too?

It all depends on why the value buyers were buying.  Was most of the buying coming from bulls banking on the Fed and ECB cranking up the printing presses and now that their hopes have been dashed, their will to support the market has vanished?  Or is the market simply too bearish already and every attempt at luering in new bears fails because everyone is already on the bear side and no one is left to sell?

TRADING OPPORTUNITIES

Tomorrow will be a key day.  If value buyers step in and support us at these levels, that will go a long way to show this market is on firm ground.  But if all of the recent support was simply swing traders trying to get in ahead of a major announcement by the Fed or ECB, then that foundation will crumble as if it were built on quicksand.  If the market rallies on Friday, that is a green light to start getting aggressive with leading stocks.  But if the market struggles, look to close out positions as a hedge against a further move lower.  We could find support at the 50dma but I wouldn’t count on it.  Failing to find support at the 50dma or 200dma could easily lead to a sell-off taking us down to June’s low.

Stay safe

Consolidation continues

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The market continues trading sideways for a third day.  This demonstrates strength since we are at the top of the obvious trading range and many technical traders are expect a pullback.  Holding strong in the face of that expectation means there is support behind this market and we could see a breakout to the upside.  Many swing traders are shorting the market in anticipation of a pullback, but the market is refusing to budge.  Any positive news will have these shorts rushing to cover and the market will surge higher due to their buying.

The big news events on tap are comments from the Fed on Wednesday and the ECB on Thursday, but we shouldn’t expect anything surprising form either of these.  They both know the market is on egg shells and will be very careful with every word because saying one wrong word will crater the markets and make their jobs even more difficult.

MARKET PERSONALITY

The market has traded withing a tight 40-point ascending channel since May, but we should be prepared for the market change its character soon since patterns usually change after they become obvious to everyone.  We are already seeing a slight change with this three-days of tight trade after a run up.  Past rallies reversed quickly, so by that measure we have already broken part of the pattern.  The other interesting thing to note is that over the last few months sideways trade always preceded a move higher. This sideways consolidation could be building a base for another leg of this rally.

TRADING OPPORTUNITIES

Plan A:  Both market sentiment and personality indicate there is more upside left in this rally.  At the very least a swing trader should be reluctant to short the market here.  The more adventurous should be buying these strong breakouts in leading stocks.

Plan B:  While a move higher seems more probably the way the market is setting up, an unexpected news event could sent the market sharply lower and paranoid holders will run for the exits and bears will pile on the shorts.  Given the strong potential for a move higher, any weakness will invalidate this thesis and we should then look for a market breakdown and an extended move to the lower end of the range.

In the markets no one can know for certain what will happen next.  The best way to approach this uncertainty is to have a multiple plans ready for various outcomes and always be prepared for whatever the market gives you.  In addition, anticipating multiple outcomes helps mitigate the dangerous tunnel vision that occurs when a person spends too much time thinking about a single outcome.

Stay safe

Swing traders are unable to push the market down

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The markets are trading in a tight range for the second day in a row.  So far this is showing good support at these levels as the swing traders are unable to push the markets lower at the upper end of the trading channel.  They are selling into this strength anticipating the next swing lower, but the market is holding up nicely.  The recent rally chased off all the bears and tempted in a few bulls on the breakout, but adding further gains to this breakout will give a larger number of cautious bulls the confidence to wade in, pushing the market higher.

Of course we do have some downside risk if all those bears sitting on the sidelines decide to try again and pile on the shorts in unison.  If this happens, the key level to watch will be the 50dma to see if the bears can finally break the back of this rally.  But so far the bulls are still in control and the bears are licking their wounds.

Looking at the bigger picture, even thought we are close to 52-week highs, there is a large amount of bearishness in the markets.  There is a lot of cynicism toward this rally and that is part of the reason the market is holding up so well.  All of these cynics have already sold or shorted the markets, meaning they can no longer pressure the markets.  And in fact they are built in buyers if they end up covering their shorts or are forced to chase a rising market.  This is exactly what we saw this winter as the markets had the best first quarter in decades.

But the thing to be careful of is oftentimes the bears are right, just early.  Success in the markets is all about timing, so early is the same thing as being wrong, but just because the market is holding up doesn’t automatically mean the bears are simply paranoid and wrong.  NFLX was one of the most heavily shorted stocks last year at $200.  While there was still a lot of upside left in the name as it eventually rose to $300, any bull would have done himself a favor to at least acknowledge the risks the bears were bring up.

The market is holding up very well right now and we are trending higher in the face of all the negative sentiment.  Conversion of bears to bulls could fuel a powerful rally, but any bull at least needs to recognize the risks bears are bringing up.

MARKET PERSONALITY

The markets continue to be heavily influenced by the currency markets and technical analysis of the EUR/USD is far more predictive of the equities market than the actual equity market charts. This skew from the foreign exchange markets is making it difficult to read the equities markets based on traditional behavior.  Globalization is making it a challenge for investors to specialize in one market and ignore all the others.  The more intertwined the world becomes, the more diverse successful investors will need to be.

Right now we are at the upper end of the trading range, and if we keep the recent pattern of staying within in this 40 point ascending channel, we will see a sell-off to the 1340 level.  But this will be the 5th swing of this pattern and it is getting a bit obvious and the market hates being obvious.  And we can see that as we are holding up near the high of the trading range for the second day in a row.  Past reversals happened fairly quick, so this is a departure already from the previous pattern.  If we do in fact have a lot of swing traders shorting the market here, but the market is not going lower, that could indicate a move higher since the bullish demand is offsetting the swing-traders selling.

TRADING OPPORTUNITIES

As always the market can head higher or it can head lower.  Brilliant insight, I know, but the market is at a turning point.  Right now the market is setting up for a move higher.  Between all the existing bearishness and holding at the upper end of the range indicate the market is ready for another leg higher.

But there is still very real risk lower since we have so much air under us from the recent rally and being near a 52-week high.  But the market has proven that it is willing to rally in the absence of horrible news.  This means barring a major shock to the system, the market will hold up.  But if we do hit a downdraft, be prepared to pull the ripcord quickly because the down-leg has room to run.

Based on what I see, trade the long side, but proceed with caution and be ready to run for cover.

Some leading stocks are doing really well over the last few weeks as the weight of the market has been lifted off their shoulders.  But do be careful because the higher they rise, the harder they fall if the market gets sucked into a correction.  Limiting any new buy to no more than 5% past the proper buy-point and that will greatly reduce the risk of getting shaken out in a normal pullback.

Stay safe.

Market trades flat after two-day rally

By Jani Ziedins | Intraday Analysis

I’m trying a new layout for these blog posts where I break it down into sections of Market Sentiment, Market Personality, Trading Opportunities, and Other Thoughts.

MARKET SENTIMENT

The markets opened higher this morning, but gave back those gains and traded slightly in the red for the rest of the morning.  Who knows what the news was, but it really doesn’t matter because the crowd is moving the markets, not the news.  Thursday and Friday’s strong rallies ran off all the bears in a powerful short squeeze.  Friday exceeded July 19th’s high, marking yet another higher-high.  You could see the last of the bears covering their shorts in the intraday chart as we surged higher after breaking through the previous high of 1380. These were the last of the weak-kneed bears running for cover.

With most of the bears already run out of the market over the last couple days, that source of enthusiastic buying will dry up.  To continue higher we’ll need bulls to step up and commit fresh capital at these levels.

On Friday IBD said the market started a new confirmed uptrend given Thursday’s powerful rally.  The interesting thing was reading the article’s reader comments to yet another change in the market pulse.  As I stated earlier, the harder it is to buy a breakout, the more likely it is to succeed.   Everyone was buying the earlier breakouts and they failed.  But here we are countless failed breakouts later on both the low and high side, and both bulls and bears are getting highly cynical and reluctant to be fooled yet again.  But the ironic thing is these breakouts going forward are far more likely to work than the earlier ones everyone was excited about.

MARKET PERSONALITY

The market has inched higher in a series of higher-lows and higher-highs.  While the ups and downs felt dramatic, the upward channel we’ve been tracing is only 40 points wide.  So far the best trade has been going against the market each time it reaches the upper or lower bounds of this channel.  But we are now working on our 5th swing in this channel and this pattern is becoming obvious to even the most inexperienced traders.  The market doesn’t like being obvious and chances are we are getting close to a change in personality, most likely represented by a breakout above or below the channel lines.

TRADING OPPORTUNITIES

If we are getting close to a change in market personality, that will create better trading opportunities than the 40 point chop we’ve been stuck in since mid-May.  The big question is which way will the market breakout, to the upside or the downside?  But as nimble traders, we can wait for the market to tell us before we commit our capital.

Plan A:  Being so close to a 52week high means there is a lot of air underneath us if some bad news comes along and surprises the market.  Most likely this will be a breakdown in the cooperation between the various European leaders trying to salvage the Euro.  A move lower could see a break under the 50dma, 200dma, 1300, and even June 4ths low of 1266.  Obviously this would be a bad time to be long stock, so it is a situation to be wary of.

Plan B:  The market could continue rallying in the face of all the uncertainty in the world.  In situations like this, it is said the markets climb a “wall of worry”.  This is because the markets are forward-looking in nature and are anticipating a positive resolution to the current crises.   It is this slow transition from a large group of worry-worts to a more positive outlook as the group slowly realizes the worst will not happen and bears turn to bulls one and two at a time. It is this slow transition from bears to bulls that causes the markets to rally.

Plan A & B are the two potential outcomes we need to anticipate and prepare to trade whichever one plays out.  We don’t know what the market will do next, but we can have a plan ready and jump on board the next trend.

OTHER THOUGHTS

Seems I struck a nerve with my criticism of gurus and systems.  The thing we need to remember is it doesn’t matter how much money WON makes in the markets, but how much money his students make.  If we are following his system, we need to evaluate the success of other followers in order to understand the capability of the system and the probability of our own success.  WON could very well have a 6th sense about the markets that lets him achieve all his success, but if he can’t teach that same intuition to his students, everyone else will fail to reach his same level of success no matter how closely they follow the system.

As always, stay safe

What’s your edge?

By Jani Ziedins | Intraday Analysis

The market continued yesterday’s rally this morning and is getting close to exceeding July 19th’s peak.  The last couple days put in yet another higher-low and we are looking at another higher-high if this rally goes a few points further.  The market’s gyrations continue to exhibit indecisiveness, but there is an upward bias as we are slowly creeping higher with each swing.

Fundamentally speaking, earnings seasons has been at best unimpressive.  This makes it highly noteworthy to see the markets holding 3% from its 52-week high.  Over the short-run the markets can ignore fundamentals as other factors dominate the market’s psyche.  Right now Europe and the exchange rates are front and center.  As we’ve seen, a declining dollar will rally the market even when all the marquee companies are lowering expectations.  The question becomes, what is more powerful over the longer-term, the economy or the dollar?  And of course this is not an exclusive either or situation.  A weak dollar can boost earnings and a strong dollar can dilute earnings.

If you trade the markets, the one question you must answer is “what’s my edge?”  The only way to consistently make money in this game is to have an edge over everyone else.  Maybe it is inside information, maybe it is lightning quick execution, maybe it is arbitrage, or maybe something else.  But without an edge, you are just throwing darts based on a gut feeling of what will happen next.  Why is your guess about the future any better than the next guys?  The truth is it isn’t and without a quantifiable edge your success is based on nothing more than luck.

Gurus would have you believe following their system gives you and edge.  But if it is a widely publicized system, where is the edge if everyone else knows the same techniques?  There is a saying in this business, it is far more profitable to sell advice than it is to take advice.  These gurus are not rich from trading, but from selling their system.  It is noble to think these gurus are wealthy beyond their wildest dreams from trading but are so unselfish that they spend half the year away from home living out of a suitcase simply because they love teaching.  Really?  I don’t know about you, but if I were loaded, living in motels is not how I’d spend my time.

Now don’t get me wrong, teaching and helping others makes people feel good, but there is a big difference between leading a local meetup group or teaching at a community college and spending months on the road selling multi-thousand dollar seminars.  Never forget these people are in the business of selling seminars and are not helping out of the goodness of their heart.

But that is not to say these systems cannot work.  In fact most of them do work………some of the time.  The key to trading any system is knowing when it is applicable and when it is not.  For traders without inside information or supercomputers co-located next to the exchanges, this is one of the few edges left to us.  Any system is like a tool and it has a time and place where it works great.  But using it somewhere any other time is bound to lead to undesired results.

CAN SLIM is a great system, but there is a very specific window where it works exceptionally well.  The rest of the time it will produce false buy signals and erode your account one false breakout at a time.  As I’ve shared many times before, I find it very easy to make money in the markets.  The hardest part is keeping those profits.

Back to the original question, what is your edge?  What makes you a better trader than the other people in our meetup group?  What makes you better than all the other CAN SLIM traders?  What makes you a better trader than other retail investors?  What makes you a better trader than all the pros on Wall Street?  If you don’t have a good answer to this question, how do you expect to beat all the other traders in the market and consistently out perform the market?  This is a game of skill and you need that edge to come out ahead.  If you can’t convincingly answer this question, you have two options.  First, study and learn the markets until you develop that edge.  Or if you can’t beat ’em, join ’em.  Buying and holding index funds is the easiest and most reliable way to make money in the markets.

Now some people will argue with me, but if you think I am wrong, will your trading account back you up?  Are you consistently outperforming the markets without an edge?  Proof is in the pudding.  If you find the market is easy to make money off of, then I’m wrong.  But if you struggle to beat the markets, that should be sign your approach is incomplete and you need to find that missing ingredient if you want to improve.

Back to the present, the markets are up for a couple days and then down for a couple.  We’re in the middle of two strong up days.  If we continue this pattern, we have one or two up days left before we pullback.  Up for a couple days, down for a couple days.  The best way to trade this market is cash in any profits after a strong day and then prepare for the reversal.  The only way to profit in this market is scalping a few percent at a time.  Wait any longer and your profits will evaporate.

The news out of Europe continues to be encouraging, contributing to this upward trend.  But what happens if we hit a rough patch when some of the anti-austerity leaders start asking for too much at these meetings and we hit another stalemate?  Things have been going smoothly for a while now, but remember these are politicians we are talking about here and they can only play nice for so long.  Given our proximity to 52-week highs, I continue to think there is material headline risk to the downside if we see one of these Euro meetings blowup.

Stay safe

ECB promises to do what it takes

By Jani Ziedins | Intraday Analysis

The markets jumped after a strongly worded statement from the president of the ECB saying they would do whatever it takes to preserve the Euro.  That sent the US markets up nearly 2% at the open.  But just a few hours into the day the markets gave up 1/2 of those gains.  For most of the summer the markets have been leaderless and subject to knee-jerk reactions to this comment or that headline.  This choppiness makes the markets difficult to navigate and no doubt chewed up anyone that got in the way.

Will the markets rally further on this verbal support from the ECB?  Or will this be a short-lived lift that quickly settles back to the 50dma?  Any guess is simply a toss of the coin and makes it very difficult to trade.  The smart money is sitting out this market and waiting for better trading opportunities.

The US equities market continues to be a derivative of the currency markets.  Early this morning the Euro shot up 2 cents against the Dollar after the ECB president’s comments.  Exchange rates are in the driver’s seat these days and this has completely changed the personality of the equities markets.  It is no longer about fundamentals or expectations of future growth, but a battle over whose currency sucks the least. At the moment the USD sucks the least, but Congress and the Fed are trying to change that.

Is this currency correlation just a temporary phenomena, or paradigm shift due to increasing globalization of most companies?  This overlap and correlation between the various markets and assets makes it increasingly more difficult for a trader to focus exclusively on one market.  Going forward, the most successful traders will need to understand all these interactions in an increasingly interdependent world.

AAPL failed to wow the market the other day and fell back under its 50dma.  But what was the leader of the markets in the first quarter has lost some of its influence.  A few moths ago an Apple stumble would have taken down the markets, but now the new standard-bearer is the USD and the currency markets. For better or worse the markets are constantly evolving and as traders we need to stay on top of these changes.

Stay safe