LA: Looking for support

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

The goal of this post is to look at the coming week for what we can expect and how to trade those opportunities.

MARKET BEHAVIOR

Last week was the first red week since the November 16th bottom.  We closed the week right on the 50dma and under previous resistance at 1420.  Volume has been constrained due to the typically light holiday season.  If we are looking for historical precedence, the recent three-week rally is a spring chicken and it takes far more selling than we saw on Thursday and Friday to kill a normal up-trend.  But that is assuming we are in an up-trend and this three-week rally is not simply a dead-cat bounce on our way lower.

MARKET SENTIMENT

There are a lot of people on both sides of this half-full or half-empty debate.  In fact the market price always seeks the perfect balance point between these two warring factions.  If the slightest imbalance develops, prices move a few pennies one way or the other to regain this perfect balance.  Repeat this process thousands of times a day and now you know what makes intra-day prices go up and down.  What appears like random noise to the untrained eye is really tiny movements the market makes to maintain this perfect balance between half-full and half-empty.

Why this matters is if we don’t have a tactical edge on other market participants and are simply trading the same information and techniques everyone else is using, it is impossible to do any better than random luck.  This is a tough idea for most traders to swallow, but the truth is you have to do things differently than everyone else to make money at this game.  If your typical yearly performance is close to what the indexes do, that shows you don’t have an edge on the market and your trades are simply winning and losing due to random luck.  You win some, you lose some, and at the end of the day are not that far off from the market averages.  It took years of studying the market and analyzing my performance for this to dawn on me and almost every trader I share this idea with resists it initially.  Maybe that is because we all came to the markets because we think we can beat them.  But the truth is, to win at this game we need a unique advantage.   We need to exploit a market crack.  There are several cracks in the efficient market hypothesis to choose from; structural, information, emotion, and non-profit motivated.  At some other point I’ll dig more into these areas, but the main focus of this blog is exploiting the human aspect of markets and profiting from crowd psychology.

The reason I bring this up is a lot of people are expecting the market to implode.  They cite the Fed’s money printing, US federal deficits and debt, the Fiscal Cliff, Euro Contagion, and a slowing China.  But the reason I don’t pay much attention to these ideas is because everyone knows about them.  Every bear on the street will cite the same reasons, ones that have been dissected ad nauseam in the media for years.  The only thing that scares me are the ideas no one is talking about, and so far I have yet to come across a bear with a unique and unexpected reason for the market to fall apart.

Lets use the 2008 financial meltdown as an example since that is the most recent major market crash.  In the fall of 2008 most pros on Wall Street didn’t know what a Mortgage Backed Security or Credit Default Swap were.  Even the bankers in the middle of this mess didn’t have a clue what was going on.  It wasn’t until the global financial system was brought to its knees and stock prices were cut in half did main street even get a whiff if what was going on.  Now lets contrast that with the situation we are in now.  When a barista at Starbucks is worried about something you know you can safely discount it because it is already accounted for and priced in the market.

Anyone remember all those planes falling out of the sky because of Y2K?  While it is a joking matter now as we ridicule the paranoid people who stockpiled a year’s worth of food and water in their basement, that doesn’t diminish the seriousness of the threat.  Y2K was a very real problem, but what ultimately made it a nonissue was everyone talking about it.  Knowledge is power and when we recognize a problem before it happens, we are really good at mitigating it.  Everyone and their grandmother knows about the Fiscal Cliff, Debt Ceiling, Slowing China, prolific US Deficit Spending, Global Money Printing, Euro Contagion, Greece, Italy, Spain, Ireland, Portugal, and the rest.  But the great thing is we recognized these problems early and the smartest minds in the world are hard at work solving them.  For example Europe has teetered on the edge of collapse for three years, yet somehow they keep chugging along.  That is because they recognize the problem and working to fix it.  Going back to 2008, no one had the slightest clue what was going on including the most savvy people on Wall Street.  Bear Sterns was a $62 stock just days before JPM offered to buy them out for $2 a share   NFLX and GMCR have had spectacular declines recently but very few blue-chip stocks can drop 97% in one week!

And so where does this leave us with our current predicament?  While it doesn’t feel right and it is a bit scary, we can safely ignore all the reasons bears are using to justify their bearish predictions of doom and gloom.  Now don’t get me wrong, the market can selloff and it can crash hard at any time, but I know it won’t be for any of the reasons people are currently talking about.   Ignore what everyone is talking about and fear what is unseen.

TRADING OPPORTUNITIES

Going into this week we can do one of three things; up, down, or sideways.  While not particularly helpful when looked at that way, when we break those scenarios down in greater detail we can formulate a plan.

We can bounce near the 1400 level that has provided reliable support going back to August.  This would represent a minor reset of an otherwise bullish rebound.  There is still a lot of fear in the markets and it is often said markets climb a wall of worry.  This pessimism will continue the fueling the next rally.  Look back to Saturday’s post for an explanation on why this happens time and time again.

We can trade sideways for a while as we digest the recent 90 point rally from 1350.  Sideways trade is usually bullish because selloffs are typically quick and dramatic.  The thing many bears often overlook is the world is getting better, not worse.  The recovery is not happening fast, but no recovery is as fast as everyone would like.  These things take time

And lastly we can selloff aggressively to the 200dma.  If we can’t find support at 1400, expect the market to push on through to 1390 and even a little under before finding support.  This is about as low as I expect a selloff to get unless something new and unexpected develops.  Potentially we could retest 1350 if the market panics over a Fiscal Cliff breakdown, but that emotional selling creates buying opportunities because the fiscal cliff is a well understood event and the market rarely plunges on what it can quantify.  Markets fear the unknown, not the known.  A great  example of this was this summer’s big rally on the heels of the SCOTUS ruling upholding Obamacare.

So how do we trade these?  Expect some near term weakness, but we should find a bottom not too far from here.  There isn’t a lot of downside left to short, so if you have short profits, look to cash them in when we push down to the 1400 level.  While we might drop to 1385, holding out for those last few points of downside is just greedy and foolish.  It is easy to make money in the markets, the hard part is keeping it.  Don’t be tempted to hold too long and give back all those hard-earned profits.

On the long side, don’t try to pick a bottom and let the market find support in the 1400ish range before buying in. And of course I reserve the right to be completely wrong and change my mind in a moment’s notice. Always be on the lookout for behavior that doesn’t confirm to what you expect because it means something has changed and you need to change with it.  It is okay to be wrong, it is suicidal to stay wrong.

AAPL weekly at end of week

INDIVIDUAL STOCKS

A lot of the above analysis applies equally to AAPL.  It is way late in the game to be short and if you are lucky enough to be sitting on short profits, lock those in quick.  We might see a dip under $500 on tremendous volume, but that will likely be the capitulation point if we didn’t already see that with Friday’s huge selloff.  But either way there is very limited downside remaining in AAPL and it is time to reel in those short profits.

For the bold with a long-term view, you might consider accumulating shares here if you are willing to sit through some near-term volatility.  AAPL could shoot itself in the foot with its 4th quarter earnings, but the thing about the nearly 30% selloff is most of that downside has already been realized.  There is plenty of chatter about suppliers being told to slow production because of slow iPhone5 sales, but I’ll be honest here, if I heard that, then everyone knows it and it is already factored into AAPL’s price.  AAPL wil eventually succumb to competition like every other tech company has, but the reports of AAPL’s death are greatly exaggerated.

Stay safe

WR: Taking a step back

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR

This was the first negative week since the November low.  The market peaked on Wednesday after taking out the pre-election highs, but gave back all of those gains by Friday’s close.  Weekly volume was slightly under average, but we cannot read a lot into that since we are in a traditionally low-volume period between Thanks Giving and Christmas.

MARKET SENTIMENT

The market has only ended negative on 5 of the last 21 trading sessions.  That is a pretty impressive run and explains how we gained nearly 90 points.  As impressive as that run has been, every run eventually comes to an end.  Are we at the end of this run with two-consecutive down days on Thursday and Friday?  And what does the end of a run mean?  Is it just the end of the straight up phase of the rally?  Or does the end mean falling off a cliff?

If you look back at what has been done, our three-week rally is peanuts.  The most impressive rally was early this year where over an eleven week period we had just one week ending in the red.  By that yardstick we can’t even come close to claiming a three-week rally is grossly over-bought.  But if this market isn’t over bought, what is it?  Maybe it is just resting.  Maybe it had a few too many chasers as we broke above 1435 on Wednesday.  Maybe Thursday and Friday are just another bear-trap on our way higher.

As far as sentiment, bulls are more confident and comfortable than they’ve been in months.  A bounce off of a low will do that as it reassures holders that this was the right decision.    But it would be a huge stretch to call this market complacent.  Bullish headlines are few and far between as even non-investors cannot escape all the Fiscal Cliff chatter.  The most bullish headline of the week was a report that our politicians were fighting a little less.  Talk about a half-full reason to rally.  Further, many market participants expect us to fly off the Fiscal Cliff.  Of course politicians on both sides saying they are willing to take the plunge doesn’t help foster an optimistic environment.

Many times I’ve said markets rally in the face of pessimism and decline on the back of complacency.  This is boiler plate contrarian investing.  People trade their opinions and anyone expecting doom-and-gloom is already out of the market.  If a person is 100% in cash, the only thing they can do is buy stocks.  If the majority of market participants are pessimistic over all the economic risks in front of us, then they are already mostly in cash and the only thing they can do is buy this market.  This is exactly why the Obama selloff bottomed and rallied so strongly.  When the only option left to most people is buying, the market can’t help but rally no matter what the headlines are.

TRADING OPPORTUNTIES

Some of the commentary in this post conflicts with what I’ve written about in daily posts, but this is where timeframe makes a big difference.  Daily posts look at what will happen over the next few days.  These weekly posts look at what will happen over the next few weeks.  And in cases like this, I expect some near-term weakness, but remain long-term bullish.  That is why it is important to take a step back and look at the big picture.  The market tries to seduce and trick us with its misleading daily fluctuations, but it is far harder for the market manipulate weekly charts.  It is always better to trade with trend.  This is sailing with the wind at your back and it takes very little effort to succeed.  Compare this to the trader fighting the larger trend and he has to work very hard tacking into the wind.  Trading the counter-trend moves can be done successfully, but it is exhausting and leaves little room for error.  When contemplating shorting this market here, a person should ask themselves what is the bigger trend?  If the trend is lower, grab on and make easy money.  But if the trend is higher, shorting a modest dip is an aggressive and risky play.  It can be done successfully, but it is far more difficult.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL’s been giving people heartburn again. An analyst downgrade sent AAPL to its lowest close in nearly a year.  It is hard to find someone who is jumping up and down, screaming what a buy AAPL is at these levels.  The stock is 28% off its 52-wk high and that is scaring away a lot of potential buyers.  But that is one of the most odd things about the stock market, people only want to buy expensive merchandise.  Put something on sale and they turn their nose up at it because it is too ‘risky’.  But the truth is AAPL was a far more risky at $700 when everyone was excited to own it than it is here at $500.  Why do people fight each other to pay $700 for a stock and won’t touch the same stock with a ten-foot pole at $500?  It all comes down to how the mind works and what people are looking to get out of the markets.

The human mind is great at seeing patterns (even when they don’t exist) and a trend is an easily recognizable pattern.  Stock investors are in this to make money and they want to buy something that will go up in price.  Obviously a stock making all-time highs has been going up and the natural assumption is this pattern will continue.  At $700, buyers see this obvious pattern and expect prices to continue going up.  And when you flip that around, after a 28% decline people won’t get near a stock because the pattern tells them it will continue going lower.  But to be successful in the markets we have to fight our natural instinct and trade with reason and logic, not emotion and intuition.  Maybe AAPL has more downside left, but without a doubt it is far less risky to own AAPL at $500 than it was at $700.

ET CETERA

I want to thank everyone for all the positive feedback regarding this blog.  I enjoy writing these posts and am happy to hear people are finding them useful.  And for those tweeting and re-tweeting these posts, I am extremely flattered and appreciate you helping spread the word.  I don’t make any money from this blog, but sharing ideas with fellow traders has been invaluable in improving my trading and I’m glad to be able to give back to the community.

Stay safe

PM: More low volume selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets declined on light volume.  We are just a hair above the 50dma and clearly under previous resistance at 1420.  Volatility is modest as the last few days of weakness failed to trigger a large wave of selling.  Is the market growing complacent after a 90-point, straight up rally?

MARKET BEHAVIOR

Everyone knows where the market came from, but very few can tell you where it is going.  The clues are there, we just need to learn how to spot and interpret them.

Supply and demand moves stocks in  four different ways; 1) over-abundance of willing buyers, 2) over-abundance of willing sellers, 3) lack of willing buyers, and 4) lack of willing sellers.  Today’s decline on low volume was a victim of insufficient willing buyers.  The low volume selling over the last couple days reveals not many people are concerned about this selloff as they continue to holding.  Is this the result of complacency taking over?

Typically it takes large volume selling to set the stage for a rebound.  This is because on the way down, weak holders sell to more confident value investors who are willing to sit through some volatility.  After a high volume purge, you end up with fewer weak holders and more confident investors.  That is the tipping point that tightens supply and turns a decline around.  (Looking at AAPL’s chart shows some of this high-volume selling taking place and is part of the reason I think there is hope for the stock.)

We had several of these high-volume down-days in early November and that was part of what turned the market around on Nov 16th.   Since then we have seen a lot of buying push the market to new post-election highs, much of it on higher volume.  But like on the way down, high volume buying on the way up also shows the makeup of the market is evolving as conservative investors sell to the more bold who are happy to chase the market higher.  These new owners are the impulsive investors that follow the crowd, but they are also the first to panic when the market turns against them.  And so here we are, two days into a modest correction with very few people worried about the slide so far.  This might suggest there is more selling ahead.

Many discount these ideas because they think we are stuck in a news driven market and next week’s price moves are simply an unpredictable result of what the headlines are.  I see their point, but I also know news does not drive markets, only supply and demand can do that.  The news might be random, but the market’s reaction to it is not, and that is the source of our advantage.  If we know what traders think and how they are positioned, we can figure out how they will respond to different pieces of news.

TRADING OPPORTUNITIES

So where are we?  Great question.  First I want to remind everyone I do not have a crystal ball and cannot see the future.  There are no guarantees in the market, but in the market we don’t need to be right all the time to make money.  Like card counting, we look for different clues to move the odds ever so slightly in our favor and over time we will come out ahead.

It seems like the market is full of traders expecting a Fiscal Cliff resolution, or alternately assume going off the Fiscal Cliff is not as bad as most fear.  These are the traders who were comfortable buying stocks during the dip to 1350, but now that the market has rallied 90 points from the November low, we are running short of new confident buyers willing to step in front of the Fiscal Cliff.  And that is why prices have declined on light volume.

I think there is some further weakness ahead based on the above, but we are still in a bull market and counter-trend trades don’t last long.  We will probably bounce somewhere around 1400.  Maybe it is 1405, or maybe it is 1390.  Look for the high volume purge that shakes out most of the weak holders and replaces them with confident and patient buyers willing to buy shares at a discount.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL was pounded today, see my AM post for more thoughts about this particular selloff, but more broadly we are getting a lot of shares changing hands here in the lower $500 range.  Opportunistic value investors are buying shares at a steep discount from fearful and emotional traders who can’t handle seeing the losses mount.  The market has run short of AAPL bulls and most everyone is bashing the stock here.  The selling might not be done yet, but more selling just creates a better base for the stock.  Seeing the stock break under $500 on the highest volume in months would be a great buying opportunity because that could be the last shake-out.  Of course there are no guarantees in the market and catching falling knives is a hazardous way to make a living.  The far more conservative approach would be to let the stock bounce from that low before buying in.

Stay safe

AM: Stuck in no-man’s land

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:23 EST

AM Update

MARKET BEHAVIOR

Markets traded slightly lower, staying within a tight rage.  We are resting between 1420 the 50dma.  This is no-man’s land with a potential rebound on one side and a selloff on the other.  Neither camp is making an agressive move here and instead waiting to see what other traders do first.

MARKET SENTIMENT

Between the conflicting negative sentiment, strong price gains, and relentless short-squeezes, most traders are uncertain where this  market is headed and are just sitting on their hands.  We might break this log jam leading into the close as traders with more conviction start piling in on one side or the other.  Breaking above 1420 or under the 50dm could trigger a larger wave of activity from those waiting for the market to make a move.

Trading so close to the 50dma makes us vulnerable to a dip under it and the inevitable avalanche of automated orders that get executed when we break well followed technical levels.  Market markers pay their alimony and kid’s private school tuition through trading volume.  They know all these stop-losses are just a couple of points away and will do their best to push us into that area to trigger all that activity.  The bigger question is what happens after all those automatic orders are executed.  Does it trigger a larger slide as selling begets more selling?  Or will the market run out of sellers and bounce?

TRADING OPPORTUNITIES

It is getting late in the game to put on a new short.  At this point we could easily bounce back above 1430 on yet another short-squeeze.  And if we selloff, we probably won’t fall much further then 1400.  That doesn’t set up for a good risk/reward.  If you have some short profits from yesterday, keep them on a tight leash and start eyeing the exit.  You don’t have to sell today, but the probabilities and rewards are less in your favor than they were yesterday.

Anyone out of this market should start looking for stock they like and look for an opportunity to buy on this pullback.  We might see prices get a little more attractive, but don’t get greedy and wait too long.  For long-term holders, don’t let this modest selloff spook you out of your holdings no matter how scary the headlines become.  Remember, our profit comes from the market not the medida, so don’t take your eye off the ball.  We could see prices dip to 1390 and maybe even a little bit lower, but that is where selling should climax and find support.

Of course the emotional trade is the wild card and we need to watch for signs the market is cracking if traders become spooked by developments out of Washington.  But given this market’s strength in the face of recent bickering and rhetoric, current participants are not all that sensitive to what is coming out of DC and I don’t expect a panic driven rush for the exits even if talks breakdown.  But I reserve the right to change my mind on a moment’s notice as the story develops and the market reacts to it.

INDIVIDUAL STOCKS

AAPL was flattened by a downgrade from a UBS analyst.  He lowered his price target from $1,000 to $700, and that caused the stock to drop to $510.  But let’s not forget these analysts are really glorified accountants and if they could trade, they would be traders not lowly analysts.  The other thing is this UBS analyst is still very positive on the fundamental story, he is just playing stock market by trying to guess what the market will do next.  And in most instances analyst driven moves rarely stick because they are not related to the fundamental story, they are simply one person’s opinion.  Fundamental news out of the company is what triggers directional moves in a stock.

Trading wise we might see the stock break $500 on gigantic volume, forming the second dip in a double-bottom before returning to more normal levels.  A lot of people are selling AAPL by the dump truck load between the weak price action, impending tax increases, and sentiment change, but look all of those to reverse next year.

Stay safe

PM: Rally let some air out

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets slid through the day as air let out of the recent rally.  We dropped back to 1420, what was overhead resistance up until two days ago.  Volume was average, but lower than the last couple days.  The somewhat restrained volume shows panic hasn’t hit the market and it was more a lack of buying that pushed us lower than a surge of selling. Is old resistance at 1420 going to become new support?  Or is there more downside left?

MARKET SENTIMENT

With seven short-squeezes over the last month, it wouldn’t surprise me if a large number of bears developed an aversion to shorting this market.  Fool me once shame on you, fool me seven times, shame on me.  But the thing about the markets is the more failed attempts there are, the more likely the next one will succeed.  Seven short-squeezes is getting up there and the probability for a real pullback is growing by the day.

It took a lot of buying to push us up 90+ points and  there is little wonder why the market is struggling to find new buyers.  It will probably take more than a one day decline to tempt value buyers with their large war chest to jump in.   A pullback to 1400 and things start looking real interesting again.

We could get hit with a panic driven selloff if the Fiscal Cliff thing blows up, but that is unlikely.  The post-election selloff shook out most of the emotional traders, so there are a lot fewer people left to hit the panic button this time around.  Further, there are a lot of people who already expect us to fall off the cliff and that possibility is so widely discussed it is largely priced in.  And lastly, the Fiscal Cliff is more like a rolling hill than a cliff and most of the effect won’t be realized for moths, so passing the deadline is more symbolic than consequential.  You could have retail investors dump their 401k accounts, but there will be so few of them that the selling will be far more restrained than the post-election selloff.  And honestly I would welcome more irrational selling because that creates great profit opportunities for those that keep their head.

TRADING OPPORTUNITIES

Be prepared for more downside, but don’t be surprised if the market bounces pretty quick.  Shorts need to be real careful here and don’t get greedy.  It shouldn’t be hard to hit 1410,  1400 is a little more of a stretch because we could bounce anytime in that area.  Waiting for 1390 is getting greedy and less likely to happen.  I’m not saying it can’t happen, just less likely.  It is easy to make money in the markets, the hard part is keeping it, so selling a little early is always preferable to waiting too long and letting those profits evaporate.

Fiscal Cliff negotiations will play a role in the next few trading sessions.  We need to pay careful attention to how the market is responding to these developments.  If the market shows increased skittishness, then there might be more room on the downside, but if the market continues its indifference, then we can ignore it and trade the rebound.  Coming up on the holiday break next week, the result will be binary, either negotiations fall apart and everyone goes home, or a deal will be reached.  In coming days we will look at how to trade this.

INDIVIDUAL STOCKS

Predictably AAPL had a bad day, but I think this is a really good sign.  I would be far more concerned if AAPL rallied today because that shows the emotional trade is still in control.  The closer AAPL follows the indexes, the better off the stock will be.  We might see some agressive selling if we break under recent lows, but that autopilot stop-loss selling is expected, normal, and healthy.  It will take months for AAPL to climb out of this hole, but for the long-term investor the risk might be worth the reward.  For the swing-trader, there is still some volatility to play.

Stay safe

AM: Running out of buyers

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:11 EDT

AM Update

MARKET BEHAVIOR

Markets traded lower this morning.  If you read the financial press, they’ll claim some piece of news caused this weakness, but reality is we ran out of new buyers after running up 90+ points in just a few weeks.  As anyone who reads this blog knows, only supply and demand drives market prices.  Fundamentals and technicals are secondary and that is why going against the crowd is often a winning strategy.  You can have the best fundamental or technical analysis in the market, but if supply and demand is not on your side, you’ll lose money.

MARKET SENTIMENT

We’ve seen a lot of buying in the last few weeks at the market gained 90+ points from the November lows.  Most of this move was simply recovering the emotional selling that took place after Obama’s reelection.  But where does that leave us now?  Did we come back to equilibrium, or did we overshoot and are poised for a pullback?

It seems likely we’ve exhausted the supply of available buyers for the time being.  Momentum traders jumped on the bandwagon and shorts have been blown out.  Regardless of what the news reports, to go higher we need to find new buyers willing to pay even more to continue this rally.  Short-term traders make up most of the daily trading volume, but they have limited buying power and only institutional money can sustain moves higher.  But the thing about institutional money is they hate chasing stocks and prefer buying the dip.  If we’ve exhausted the supply short-term money, we will pullback some before big money will step in and start buying the dip.  Two steps forward, one step back.

TRADING OPPORTUNITIES

Don’t expect a major market correction here.  If you are tempted to trade the short side, take your profits early and often.  If you are a swing trader, now is a good time to lighten up and wait to buy back in at lower prices.  Value investors, hang on and don’t let the noise around you distract you or make your question your resolve.  This will be a modest pullback and look for a rally early next year as a lot of this tax motivated selling and special dividend money is reinvested in the markets.

INDIVIDUAL STOCKS

AAPL is the high-beta trade, down 3x the indexes losses, but this shouldn’t surprise anyone.  One more selloff will purge the stock of the last holding on and set the stage for a consolidation and recovery.  Once all the people who can be scared out are scared out, supply will dry up and the stock start a recovery   The Apple Inc story is not broken and the company is fundamentally sound.  AAPL stock on the other hand was over-owned and that lead to the pullback because it ran out of new buyers.   I’m a loyal Apple Inc fan, but not an AAPL stock bull by any stretch.  I see the stock entering a decade-long sideways trading range as it continues to grow internationally and print money with shockingly high margins, but it will lose market share to lower priced competition and they will not come up with the next disruptive, must-have gadget.    I actually think the Windows 8 family of products are the most promising thing out there, but it will take a couple of years for them to get the hardware and software mix just right to compete with the fit and polish of Apple.

Stay safe

PM: New high, but finish flat

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks notched the highest levels in almost 2 months after the Fed announced it would keep rates near zero until unemployment dropped to 6.5%.  But the enthusiasm was short-lived as the markets gave back all those gains and closed flat for the day.  Volume was higher between short-covering and momentum trading, but those buyers quickly ran out of money and the market couldn’t entice anyone else to jump in at the new highs.

MARKET SENTIMENT

We got another shot-squeeze today, the 7th by my count since the November lows.  I’m surprised bears are still solvent after all that bloodletting.  Chances are many bears have grown tired of shorting the market and conceding defeat.  It is okay to be wrong, it is fatal to stay wrong.  But the ironic thing is as soon as most give up, we will finally get that selloff.  The market is cruel that way.

TRADING OPPORTUNITIES

Stocks are getting a little rich up here and it would be a good time to trim profits.  The market is not setup for a major fall, just a retest of the 50dma or 1400.  The two reasons we won’t have a major correction, 1) the market is pessimistic, not complacent and 2) the market is obsessing about negative news, not oblivious to it.  The fuel for major selloffs is unexpected bad news.  Anything that has been talked about ad nauseam is not going to surprise anyone.

For a trading plan, lighten up on longs and wait for better prices to buy back in.  The extremely aggressive could look to put on a quick short, but don’t stay short more than a couple of days and close your position near the 50dma.  But honestly there isn’t a lot of profit to make a short trade worth the risk.

INDIVIDUAL STOCK

AAPL seems to be firming up around the $540 level.  This isn’t an absolute floor for the stock, but some sideways consolidation here is part of the basing process.  We will probably see one more dip lower due to broad market weakness that flushes out the last of the hopeful, but after that the stock will be better poised to climb out of this hole.

Stay safe

AM: The oblivious rally

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EDT

AM Update

MARKET BEHAVIOR

The market is trading higher after yesterday’s breakout.  We are just above of resistance in the low 1430s after the market popped on the Fed’s announcement.  It’s been one heck of a ride over the last 5 trading days as we bounced off 1400 and had 5 consecutive up-days, now looking at our 6th.  It wouldn’t be surprising to see a down in the near future.  In fact a little consolidation here would be healthy because going too-far, too-fast is unsustainable and leads to larger snap-backs.

There is some volatility surrounding the Fed announcements with the initial reaction being higher and breaking former resistance at 1434 is triggering some stop-loss/auto-buying.  This is the oblivious rally that just keeps on going no matter how many reasons it shouldn’t

MARKET SENTIMENT

Many traders are suspicious of this rally and unsure what to do.  They joined the crowd and sold stock after Obama’s reelection.  They continue fretting over the Fiscal Cliff headlines and still worry about developments in Europe that everyone has seemingly forgotten about.  Yet the market is oblivious to these concerns.  What is a trader to do?  Most rationalized it as a temporary bounce and it would come back down, but it’s been nearly a month and 85+ S&P points and the market is still going up.

In the markets, price is truth and many cynical traders reconsidering their views.  This is a perfect example of what happens when too many traders opinion’s cluster together.  Efficient markets depend on independent opinions.  Surprisingly it doesn’t matter if individuals in are rational or not, just as long as they are independent.  Even when participants are irrational, if the irrationality is independent, the extremes on one side counteract extreme views on the other side.  In an independent environment the irrationality cancels itself out and we are left we an efficient market.  But what we had in the post-election selloff was a clustering of opinions.  Rational or not, when groupthink hits the market, it skews prices and makes the market inefficient.  But this isn’t bad for trader because this is our bread and butter.  Inefficient markets create profit opportunities and without cracks to exploit, beating the market would not be possible.

The situation we have now is pessimists suffering from doubt and an identity crisis.  These turncoats are the new buyers that are pushing us higher, as both as short-covering and afraid of being left behind chasers.

TRADING OPPORTUNITIES

Up six days in a row might make the market vulnerable to a pullback, so anyone tempted to chase this market might wait a couple of days to find better prices.  As we have seen time and time again, it is ruinous for your trading account’s health to be short this market.  The trend is clearly higher and the easy trade is owning the market.  We should expect a pullback to the 50dma, but that will be a buying opportunity.  The one snag to watch for is an emotional trade surrounding the Fiscal Cliff negotiations.  Much like the Obama reelection, we could see some irrational selling, but that will be short-lived and create a buying opportunity.

INDIVIDUAL STOCKS

AAPL is again following the indexes, albeit with a lot more beta.  The irrational selling seems to have abated.  Most of the pre-tax increase selling has probably already happened too. Anyone contemplating locking in AAPL gains for tax purposes was likely pushed over the edge watching the stock nose over like it did.  Most of the commentary surrounding AAPL is focusing on their weaknesses and what they are doing wrong and no doubt there is truth to these points.  The iPhone finally has real competition from Samsung and is losing market share in the US, but lets not forget AAPL is an international story and how they perform overseas is what will drive the stock.

Stay safe

PM: Can’t hold this bull down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Markets surged higher and is flaunting strength in the face of widespread pessimism   We make our money off of the market, not fundamentals, so listen to what the market is saying and here is wants to go higher.  We could see some near-term consolidation of the recent gains, but the trend is clearly higher.

MARKET BEHAVIOR

The market surged past resistance at 1420 and burst above 1430 before settling back to 1427.  There was a late selloff after all the short-squeeze buying tapered off, but the market still finished in the top half of the day’s range.  Volume was slightly above average.  The next level of overhead resistance dates from before the election at 1430 and support is now 1420.

MARKET SENTIMENT

The market was caught off guard when word came out of Washington that Fiscal Cliff talks were making progress.  Lately the assumption has been both sides are digging in and unwilling to compromise, but today’s tone was far more conciliatory.

The resulting price-action reveals how bearish the markets were and how many traders were either under-invested or short the market.  A lot of today’s move was a short-squeeze and as we saw this afternoon, the air often lets out of those after reaching the point of maximum pain for bears.  But even with the modest letdown, the market still closed in the top half of the range.

TRADING OPPORTUNITIES

The market is becoming more hopeful a Fiscal Cliff deal will be reached and is rallying in anticipation.  But this early move shows the market is ahead of the news and all the upside will already be priced in by the time something is agreed to.  We might even see a sell the news if the eventual compromise isn’t everything the market is hoping for.

The market clearly wants to rally here as all the bears are helpless to hold down the market.  We might even see under-invested money managers chase into yearend if this strength keeps up.  The important technical levels are 1420 underneath and 1430 above.  We coud easily retest and even dip through 1420 on a routine, healthy, and productive pullback, but anything larger shows major flaws in this rally.  1430 is the new line in the sand for bears and we’ll get another surge of buying if we can break above this level.  Recent price action shows it is time to be long the market.  We will watch for downside weakness tomorrow, but barring a major breakdown, this market wants to go higher and any dips should be used as entry/add-on points.

INDIVIDUAL STOCKS

APPL rallied with the market and finished higher by 2.1%.  As I shared in the AM update, seeing AAPL follow the market’s price moves is a good sign the selloff fever is breaking.  The irrational and emotional selling will need to dry up before any kind of sustainable rebound can happen.  Often this comes after most have given the name up for dead.  The failed bounce off of $500 a couple of weeks ago did a lot of demoralize the hopeful crowd.  A double bottom with a new low would go a long way to completely demoralizing the last holdouts and ironically put a floor under the stock.  Much like the broad market, we need skittish holders to sell to longer-viewed value investors who are comfortable sitting through volatility.  Once there is a critical mass of stable value investors, the volatility will subside and the name will begin its climb higher.  The big catalyst will be earnings in January and with the newly lowered expectations, it will be easier for AAPL to exceed the vastly lowered bar.

Stay safe

AM: New highs

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EST

AM Update

MARKET BEHAVIOR

Markets surged past resistance at 1420 and are now in line with pre-election resistance near 1430.  All of the Obama reelection selloff has been recovered and the market continues flaunting strength in the face of pervasive negativity.

MARKET SENTIMENT

It is a bad time to be short the market and bears are feeling more pain today as the market refuses to acknowledge their view of the world.  But as we know, markets operate on supply and demand, not fundamentals.  Fundamentals and sentiment can influence supply and demand, but price is exclusively driven by supply and demand and all other factors are secondary.

Because the pessimism is fairly widespread, that view is already priced in.  People trade their views and if everyone is telling you how bad the world is, then they have already traded those opinions.   After they sell, these people are simply cheerleaders since they can no longer dump more supply on the market.  But here is the interesting thing, while the current bears are unable to further pressure prices, they can boost prices if they start buying back into the market.  And that is the heart of contrarian trading.  The crowd cannot push the market any further in their direction, but they can move markets if they change their mind and push the prices the other way    And this rally is doing just that.

TRADING OPPORTUNITIES

Don’t expect the market to go straight up and their will be some turbulence, but we should hold above the 1420 going forward.  If there is material a violation of 1420 that likely means the rally is fizzling.  But a test of 1420 and modest penetration will just be part of digesting these new gains.  Today’s pop is largely driven by shorts getting blow out of the water and their frenzied buying will climax soon and we should expect a little retrenchment.

Stocks rallied on encouraging words out of Washington on progress toward averting the Fiscal Cliff.  Maybe they will actually get something done before the deadline, but you have to wonder if this is a buy-the-rumor, sell-the-news setup forming.  But either way I expect this rally will continue into next year as the economy continues growing slowly and headline events turn out better than trader’s worst fears.

INDIVIDUAL STOCKS

AAPL popped along with the broad market today.  It is getting late in the game for AAPL to announce a special dividend, so anyone hoping for that should adjust their expectations accordingly.  Today AAPL’s price-action is mirroring that of the indexes.  That is progress as the stock is weaning the emotion out of its trade.  Emotion is not an on-off switch, so we can expect more wild swings, but this is part of getting back to more normal trade.

Stay safe

PM: A win for the bulls

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets traded mostly flat on light volume.  Neither sellers nor buyers showed up in force and while it looks like a draw, holding above the 50dma is a win for bulls.  We are within a couple of points of a post-election high and breaking above that would be a technical accomplishment.  Of course we need to wait for the breakout to stick because it could just as easily turn into a double top, dropping us back to the 200dma.

MARKET BEHAVIOR

The market is holding up well giving further hints owners are not ready to sell shares even with all the counterproductive rhetoric in Washington.  Another support day here and it will be time to take a serous look at going long this market.  The real test will come when we break above Dec 3rd’s high of 1424.  If we don’t selloff in a double top, it will be extremely constructive action and we have to take notice no matter what is going on in the headlines or how light the volume is.  Markets rally in the face of pessimism and that could be what is happening here.  All the pessimists already sold to new holders who are comfortable sitting through the Fiscal Cliff volatility.  This attitude creates a self-defeating prophecy where the holders willingness to ride out volatility actually eliminates the expected volatility.   If everyone is holding, supply dries up and the market heads higher.

TRADING OPPORTUNITIES

Another close above the 50dma and this market will show more strength than most give it credit for.  No doubt there is a lot of pessimism around the Fiscal Cliff, Europe, and China, but the only times I can recall when everything was great was just before a major bear market.  This fear of impending doom is also creating a self-defeating prophecy as it holds prices in check keeps the bear in his cage.

My recent bias was for a modest pullback after the recent 75 point rally, but I am reconsidering that near-term expectation.  There is probably a 50/50 chance we’ll avoid a selloff and instead use this sideways consolidation to reset the clock.  Headlines are always a risk in this market, but everyone is expecting us to go over the fiscal cliff so that is already largely priced in. We could see a couple of days of emotional selling, but nothing like what happened after the election.  There was far more hope of a Romney win than a Fiscal Cliff resolution, so that means any Fiscal Cliff selloff to be more modest.  Hope is the fuel of declines and right now hope is scarce.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL had another down day.  At this point the stock is so emotional it is largely a coin flip if it will be up or down.  It has completely disconnected from the broad market and is marching to the beat of its own drummer.  It has become a trading stock and is completely divorced any market or company fundamentals.  If it feels too risky to buy AAPL here, then it is probably a good buy for anyone willing to hold through more volatility.

Stay safe

AM: Supporting the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:12 EDT

AM Update

MARKET BEHAVIOR

The markets rallied modestly in early trade.  There are not many sellers at this level and they are being matched with more than enough willing buyers to support prices.  We are also close to making a new post-election high 1424.  Volume is light, but that is normal for this time of the year.  For as much concern as there is over headlines, the price-action doesn’t reflect this sentiment.

MARKET SENTIMENT

Owners are willing to hold here and the swing-trade is not putting much of a dent in these higher levels.  The recent pullback to 1443 changed the makeup of stock owners as weak-kneed owners sold out to more long-term opportunists willing to buy at a discount and hold through some volatility.  The stability of these new owners is supporting prices so far and we haven’t seen the volatile ups-and-downs that followed past declines in 2010 and 2011 and this summer.

There has not been much progress in Fiscal Cliff talks, but the market seems to be rallying in anticipation of the inevitable deal.  This is pretty standard buy-the-rumor, sell-the-news kind of stuff.  Given the recent rally in the face of stubborn posturing by both sides, it seems the market is okay with us heading off the cliff for a short amount of time.  But even if the majority of smart-money is expecting it, the actual event could spook retail investors and they start selling by the fistful because of media hype.  This could create another profit opportunity like we saw following the election.

TRADING OPPORTUNITIES

Holding above the 50dma is encouraging, but we need to maintain this level for another day to prove there is real buying behind this move and it isn’t just short-term traders propping us up.  Breaking 1424 without selling off will be a strong indication current owners are perfectly content holding and that lack of supply will support of prices.

On the other side, breaking under the 50dma could trigger a wave of selling and that could shake the confidence of many content owners.  Nothing undermines resolve like red splashed across a trading screen.

AAPL daily @ 1:12 EST

INDIVIDUAL STOCKS

AAPL is showing its divergence from the rest of the market with it down while the broad market is higher.  It is now trading in a world of its own as everyone is trying to guess the next move.  This stock has completely separated from the fundamentals and is just a dice game at this point.  Everyone is in the markets for their own reasons, some want to make money and support their families with others are looking for a gambling-like thrill.  All the gamblers are flocking to AAPL and if that is your thing, there is no better place to be.

The supportive thing for the market is while AAPL carried the market on it’s back in the early part of this year, the collapse of AAPL has not weighted on the broader markets as much as expected.  At the time it seems to be a single stock story that is not spreading.

Stay safe

LA: Look for 50dma support

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

Here is what we can look forward to this week and strategies to trade it.

MARKET BEHAVIOR

The market regained the 50dma late Friday.  Finding new buyers to support prices above the 50dma will be a key component of continuing the current rally.  We are in the middle of the holiday lul and should expect volume to continue slacking off.  Lower volume means more volatility since it is easier for smaller traders to move the market, so expect head-fakes to continue.

MARKET SENTIMENT

The 50dma and 200dma are a key psychological levels for no other reason than so many people follow them.  Congestion around a price level creates more powerful support and resistance because this is where a lot traders actually bought and sold shares.  Emotions of fear and regret will cluster here because this is the point where many traders accounts will move between profit and loss.  Moving averages and round numbers make for noteworthy mile markers but don’t generate the same levels of pain and pleasure for traders who didn’t enter or exit trades at these levels    But the secondary indicators can affect the market’s mood and influence exceptions about what lies ahead.  In many ways these secondary technical levels are self-fulfilling prophecies.

A lot of traders are going to watch how we trade around the 50dma.  If we hold above it, they will buy the market.  If we fall under it they will sell and short.  And if that is what people are going to do, then we want to get out in front of this so we profit from the crowds buying and selling.  We don’t want to be the first one on the bandwagon, but we want to jump on before it is obvious to everyone else.

The market is currently ignoring the Fiscal Cliff debate and is not showing concern about the growing political deadlock.  Both Republican and Democratic leadership have thrown out ultimatums  and I wouldn’t expect either side to back down any time soon.  And the market knows this too, but it doesn’t seem concerned.  While this might be perplexing to the fundamental trader, we trade the market, not the news.

The thing we have to decide is if traders are buying for non-fundamental reasons here and that is creating this support here.  Are shorts buying this market because they cannot stomach further losses?  Are bandwagon traders buying because everyone else is?  If either of those traders are leading the charge higher, we will head lower quickly after their limited buying power dries up.  But if big money vale investors are attracted to these prices, then we will likely continue higher.

TRADING OPPORTUNITIES

The big difference between short-squeezes and momentum traders and value investors is the size of their trading accounts.  Short-term traders drive a lot of the daily volatility we see, but only the large mutual funds can sustain major market moves.  And so the most obvious way to tell who is leading this market is to wait a few days.  If big money is in charge, we’ll hold these levels going forward.  But if the short-term traders are propping up the market without the support of larger traders, this rebound will fizzle and collapse under its own weight.

If the market choses to ignore the Fiscal Cliff and thinks a pullback to 1400 is the only rest it needs, we have to respect that because the market is larger than we are.  It isn’t about what the market should do, but what the market does that puts profits in our accounts.

AAPL weekly at end of week

INDIVIDUAL STOCKS

How can we not talk about AAPL?  Not only is it one of the most widely held stocks, but it also makes up the largest portion of the indexes.  AAPL’s $50 decline wiped out more market cap than most of the companies in the S&P500.

The first thing we need to recognize that AAPL the stock is a lot different from Apple Inc.  Apple Inc. is one of the most profitable companies in the world and growing like gangbusters.  There is nothing wrong with Apple Inc., but AAPL the stock on the other hand has run into significant headwinds.  Call it unrealistic expectations or over-owned,  but whatever it is, the stock is off 25% from its $700 high just a couple of months ago.  Is this stock done selling off?  Is it headed to $400?  Honestly I have no idea.  Has sentiment peaked, or is this just a shakeout?  I think AAPL is getting hit by all these people trading for tax reasons and the stock might liven up closer to the new year when this artificial pressure goes away.  But there are no guarantees because emotional trades go further and longer than most expect.  And lets be honest, at this point AAPL has turned into an emotional trade because it what everyone is talking about.  If you are a gambler, try to pick a bottom.  But if you are in this to make money, wait for the stock to find a bottom before buying in.  Most often we will see a couple false bottoms before the real rebound starts.  One false bottom down, one more to go.

Stay safe.

WR: Recovered early losses

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

It is important to periodically take a step back and look at the bigger picture because too often the daily noise can be confusing and misleading.  That is the intent of these weekly reviews.

MARKET BEHAVIOR

The market sold off early in the week as Monday and Tuesday finished in the red, but the market rebounded Wednesday, recovering all of those losses.  Interestingly enough, we opened the week by gapping above the 50dma, couldn’t hold that level and traded down to 1398 before bouncing back, ending the week above the 50dma.  Wednesday was the low point in the week and had the highest daily volume in quite some time.  Was this the capitulation point of a modest pullback?    Certainly could be looked at that way.

MARKET SENTIMENT

How a week closes is similar in importance to how a day closes.  Often big money makes their trades later in the week after they had a chance to evaluate market conditions and new fundamental data.  Pros throw their weight around near the end of week and it is important to keep tabs on what they are up to because they have all the money.

The most bullish thing from last week is buyers were willing buy Wednesday’s dip under 1400 and kept pushing the market all the way back above the 50dma.  On the other side we should be asking if this was the last short-squeeze before correcting lower.

The single the most challenging aspects of trading the market is both sides always have extremely compelling arguments for their positions.  The market price is the exact balance point between these two opposing viewpoints and you end up with exactly half the money on each side of the trade.  One side is buying because they think it will go higher, the other side is selling because they think it is time to get out before prices decline.  (there are other reasons to sell, but lets keep this simple)  To be successful, we need to spot group think and exploit opportunities where the crowd is getting it wrong.  For the near-term trade that is hard to do here because it seems both sides are equally matched.  A bad headline could trigger an emotional selloff, or the pervasive pessimism could continue fueling a rally that discounts every piece of bad news thrown at it.

TRADING OPPORTUNITIES

Right now it is hard to get ahead of this market because there is no obvious group-think skewing the crowd one way or the other.  From here the best play is waiting for the market to reveal its hand and then jumping along for the ride.  Holding above the 50dma for a couple more days makes this a buyable rally.  Dipping under the 50dma shows buyers are unwilling to support these prices.

And of course lets remember we don’t always have to be in the markets.  Don’t trade just for the sake of trading.  If you don’t have an edge on the market, take some time off and come back when there are better profit opportunities.  Volume for the rest of the year will trend lower and volatility will pick up as smaller players will be able to push the market around.  That could be enough of an excuse to take a break and come back in January with a rested mind.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had its worst week in a years.  Resistance at the 200dma turned the stock back down and most of the traders who piled in on the recent rebound from $500 are now under water.  Funny how the market manages to turn the easy trade into the wrong trade.  There are a dozen psychological and economic reasons this happens, but it boils down to if it is easy to buy, it is probably a bad idea.  AAPL’s bounce off $500 sucked in a lot of people and this second pullback barbecued them.  AAPL is quickly going from a buy-and-hold stock to one that should be sold any time you have a profit because two days later it will reverse hard and you’ll be in the red.  The shocking thing is how volatile such a large company is when there is no real news to speak of.  There is no scandal at the top, no PR disaster, no major accident, strike, or disruption, AAPL is making these dramatic swings just because.  You’ll get a dozen reasons out of the financial press and analysts, but the truth is the stock was over-owned and ran out of buyers.  Without buyers, fundamentals don’t matter.

Sunday we’ll look forward to what we might happen next week.

Stay safe

PM: What short-squeeze

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

What happened to today’s short-squeeze.  We closed higher, but it should have been a lot higher.  Did this give us a clue about how this market is positioned and where it is headed?

MARKET BEHAVIOR

Markets closed above the 50dma for the first time in nearly two months.  This would be considered a big win except it came on the heels of a strong employment report that failed to excite traders.  Volume was well below average and it seems many traders have cutout for the rest of the year.  Low volumes can lead to increased volatility as it becomes easier for smaller trades to move the market, so we might expect more unpredictability from the markets in coming weeks.

MARKET SENTIMENT

It was surprising to see the market’s underwhelmed reaction to an unexpectedly good jobs report and drop in unemployment to 7.7%.  The market even traded in the red for part of the day.  It was encouraging to see the market rally into the close and finish near the highs, but it is still curious the market failed to rally strongly on good news given how negative sentiment seems.  In times of extreme pessimism, the markets will vault higher on something as little as less-bad news, yet here we have good news and the market shrugs it off and only squeezes out a 0.3% rally on light volume.

We might infer from the lack of a meaningful short-squeeze the markets are not overly pessimistic.  This is good news for bears and bad news for bulls.  The last few short-squeezes sent bears into hibernation and that lack of shorts in the market is why we didn’t see more upside from today’s news.  The apathetic rally also means there are not a lot of buyers on the bull side left to push us higher either.  Earlier in the week I was reconsidering my thoughts regarding a pullback because of the seemingly widespread negative sentiment, but today’s price action shows bearish positioning is not as prevalent as it sounds.

TRADING OPPORTUNITIES

While we finished the day strong and closed above the 50dma, I’m not sold on this rally just yet.  It still has to prove other buyers are willing to step-in at these levels and we won’t slip back under the 50dma due to lack of follow-on support.  Today’s price action nudged me slightly more negative than I was coming into the day.  I don’t have a lot of conviction in this bearish view, but today’s moves seeded to indicate there is not a lot of upside left the markets right now.  But just to clarify I only expect a brief pullback relating to emotional Fiscal Cliff worries and this will create a buying opportunity once the Fiscal Cliff is in the rear view mirror.

For a near-term trade, look to short the market if we break under the 50dma again and consider buying the market or at least covering shorts if we hang above the 50dma for three days.  Of coures all bets are off if our politicians surprise us all and come up with an agreeable compromise next week.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues acting like a drama-queen swinging between bouts of enthusiasm and despair.  Everything was great on Thursday and it was all broken again on Friday.  While it doesn’t feel helpful, this price-action is necessary to cleanse an over-owned stock.  Analysts will point to this or that for why we are selling off, but they are overlooking the simple and more accurate reason of supply and demand.  AAPL was perceived as the safest stock in the world and it was flooded with overly optimistic and slightly naive owners who assumed it was a sure thing.  But once everyone and their grandmother had as many shares as they could fit in their mattress, there was no one left to buy and gravity took over.  Now all these late comers are selling for a loss and gladly selling their stock for a steep discount just so they don’t have to endure any more pain.  But their pain is someone else’s gain.

Stay safe

AM: Employment Surprise

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EST

Surprise employment numbers fails to excite the market.  Is this giving us valuable insight into the market’s biases and disposition?

MARKET BEHAVIOR

Interesting price action this morning as the market shrugged off a far better than expected employment report.  It is noteworthy when the market fails to respond to positive news and can be a red flag signaling near-term weakness.  If good news can’t lift the market, what will bad news do?

We opened above the 50dma, but fell back under this psychological level within the first hour of trade.  Failing to hold this level for the second time in just over a week is not encouraging.

MARKET SENTIMENT

The market popped at the open, but quickly fizzled.  The gap was quite modest and short-lived, so it doesn’t count as a short-squeeze because it never put much pressure on shorts.  Most likely early gains were people rushing out to buy the headline and follow-on buying never materialized.  The early rally could be a victim of lack of buying rather than hit by a wave of selling.

People are tearing apart the employment report looking for reasons to doubt the headline number, but that is their cynical bias showing through.  They don’t want to buy this market and are looking for an excuse to ignore an otherwise positive result.  Remember, news doesn’t move markets, people’s reaction to the news does.  This is a subtle, but important distinction.  No piece of news is 100% positive or 100% negative.  There are always nuances to every story and depending on the mood of the market, it can grab on to either side.  With today’s employment report it would be extremely easy for traders to focus on to the headline number and run with it.  But it takes a bullish bias to ignore the negative aspects of part-time work and discouraged job hunters leaving the labor force.  We fell on the other side where the market ignored the headline and sold off due to the negative nuggets contained in the report.  This shows a bearish bias toward the news as traders fretted over details buried in the story.

The employment report is now in the rearview mirror and the market’s attention has already shifted to the next thing.  But we can use this result to gauge the market’s sentiment going forward.  Today’s early price action shows a lot of bearish cynicism and could set the tone for the coming weeks.  If good news cannot lift the market what will?

TRADING OPPORTUNITIES

The unexpected surprise from the employment report didn’t produce the bounce it could have.  That is a very ominous warning.   Of course we need to watch how the market trades through the rest of the day.  Cynics could have taken hold early on but might lose control this afternoon.  This is a volatile market and often the initial reaction to a major story has been wrong.  Which will turn out to be the head fake, this morning’s pop, or the subsequent selloff?  One of them is wrong but it is too early to say.  In recent history, the wrong move corrected within hours.  Will we see the same here?  How the day closes will give us more information.  A weak close could be bad news for the markets as we get closer to the Fiscal Cliff.  A strong close will show traders are already looking ahead and less worried about what is in front of us.

AAPL daily @ 1:06 EDT

INDIVIDUAL STOCKS

AAPL is giving back some of yesterday’s big pop, but still well above yesterday’s lows.  This is turning into a highly emotional stock as it whips around.  Every moment of relief has been followed by another bout of terror.  And this isn’t a one way story, both bulls and bears are getting shredded by this volatility.  This has become a great swing trading story where you sell the rallies and buy the dips.  It will probably keep this up for some time to come as the stock turns over its core ownership base from complacent speculators to steadfast value investors.  Unlike spectacular breakdowns in NFLX and GMCR, AAPL has the fundamentals to back up its valuation.  Heck it is undervalued as compared to the broad market given its dividend and growth.  This is one of the most successful companies in the world and it is trading at a legacy company valuation.  But that doesn’t mean prices can’t continue to decline as emotion overtakes reason.

Stay safe

PM: What to look for tomorrow

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets finished higher by 0.3% Thursday.  Volume was less than average as traders paused before Friday’s employment report.  We continue trading between the 50dma and 1400, but find ourselves at the upper end of the range, within easy striking distance of an upside breakout.  Of course that also means there is more of room on the downside before we find support at 1400.

MARKET SENTIMENT

Employment numbers will be off slightly due to Sandy’s disruptions, but everyone is expecting that.  The question is how the market will respond to the numbers we do get.  Sandy gives traders a lot of leeway to trade their preexisting bias.  They could say the numbers are disappointing and hit the sell button, or they could rationalize away awful numbers by saying it was just a temporary blip due to Mother Nature.  Either way they have a free pass to trade their bias and we’ll learn a lot about what the market is thinking here.  The other thing to watch for is if the market’s initial reaction is the wrong reaction.  Lately the market has moved strongly after news, but quickly reversed and ultimately sustained a move in the other direction.  Keep an eye out for a similar head fake tomorrow.

Sentiment has been highly bearish surrounding the Fiscal Cliff and it seems few are expecting a last-minute deal.  If that is the majority’s opinion, then it is already priced in.  And honestly, these Fiscal Cliff debates are mostly about what gets cut and who pays more.  It is no longer debating if we get austerity, but who and  what feels the pain.  If we look at it more broadly from a macro-economic view, a compromise will largely have the same effect regardless of who it falls on because austerity is austerity.  The only exception is if they ultimately decide to kick the can down the road and continue the current policy in the name of economic stimulus.

TRADING OPPORTUNITIES

The market is holding up surprisingly well in the face of the political stalemate and near certainty we’ll plunge off the Fiscal Cliff.  If we continue holding up, I’m getting ready to reverse my expectations of a near-term pullback.  I thought there would be an emotional trade lower, but we’re not seeing it and the bearish side of the trade is getting a bit crowded.  It feels too easy to short the market here and you’d have to be crazy to buy this market.  Often the hard trade is the right trade.

As I shared the other day, there are great arguments to be made for a move in either direction.  When we don’t have a clear edge, it is best to let the market make its move and we jump in a little late.  Right now I think the smart trade is to let the market show it’s hand and then jump along for the ride whether it be lower or higher.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL staged a huge upside reversal on the largest volume since the Nov 16th bottom.  The stock probably put in a short-term bottom, and by short-term I mean the next few days.  We could see lower prices, but this volatile trade is flushing out most of the nervous AAPL holders and in their place far more confident buyers are stepping in.  Anyone buying here isn’t going to be scared by a pullback here or there.  They are in this for a longer-term trade and willing to hold through some volatility in order to get the profits they expect once some sanity returns to this name.  It will be these new owners who bring stability and take supply off the market, clearing the way for a rebound higher.  This doesn’t happen all at once and we could still see some wild swings in coming days and weeks.

Stay safe

AM: Anticipating employment

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:17 EST

MARKET BEHAVIOR

Seems we are in a holding pattern after yesterday’s whipsaw action and anticipating tomorrow’s employment numbers.  It is still early in the day and the markets could make a break one way or the other, but so far things are steady to slightly positive.

MARKET SENTIMENT

Is this the calm before the storm?  What will send us higher or drop us lower?  The impact of Sandy will be in this employment  survey as business and consumption on the east coast was interrupted.  But everyone already knows that, so rational expectations will be for a weaker number.  Of course if the market is predisposed to selling off, it could use that weak number to justify liquidating shares.

The interesting thing to watch is if the employment will be the catalyst to get this market moving again, either up or down.  The Employment Report will be long forgotten by late morning as traders refocus on political risk, but if employment kicks off a wave of buying or selling, it could last for a couple of days.

TRADING OPPORTUNITIES

Currently we are pushing back toward the 50dma.  Holding above that key psychological level would be bullish, but don’t buy the first break above the 50 and wait to see if the breakout fizzles and reverses again.  There is more profit potential by being early, but there is also significantly more risk and more often the risk/reward doesn’t pan out of the overly-agressive trader.

A market refreshes itself by either pulling back, or trading sideways.  We came a long way in a short time the last few weeks and one way to clear the path higher is pulling back to the 200dma, the other is churning here for a bit.  A couple of months ago we churned above 1400 for a month before making a 50 point surge in just over a week.  I’m bullish over the intermediate-term, but more cautious here.  This is a great place for a value investor with a 6+ month time horizon to buy in.  For a more nimble trader, wait for the market to make its next move because you might see modestly more attractive prices if the coming days.

It seems a lot of traders are adjusting their portfolios for non-fundamental reasons, namely tax motivated selling.  This selling could create a buying opportunity leading into next year as stock rebound from this artificial inflation of supply.  And beyond that, we could see this same money pumped back into the markets in the near future.  What was weakness becomes strength.

AAPL daily @ 1:18 EST

INDIVIDUAL STOCKS

AAPL is having a wild ride today.  It gapped lower at the open and traded as low as $518 before rebounding back to $550.  There is a truckload of emotion tied to this stock right now and many of the investors who had a set-it-and-forget-it mentality regarding AAPL are freaked out right now.  Their sure-thing doesn’t feel so sure anymore.  Anyone who bought in the last 10 months is sitting on a loss.  How can it be possible to lose money on the surest of sure things?   While there is a lot of talk about tax selling, the thing people are overlooking is there are hundreds of millions of shares underwater right now, many of those held by late-to-the-party retail investors.  This kind of flush out isn’t surprising and is clearing the deadwood.  I’m not an AAPL bull and don’t know how much more upside is left in this name, but I think this selloff is getting out of hand and is creating a buying opportunity.  Buying here is catching the kinife and that is rarely a good idea, but if someone was wiling to hold for 6-12 months, they will be rewarded by stepping in front of this un-fundamental selling.

Stay safe

PM: Much ado about nothing

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

The market was all over the place Wednesday.  Broke below 1400 in early trade, popped above 1415 in afternoon trade, and ultimately closed near break-even   Today’s price action did a good job humiliating bears and bulls alike and the multiple head-fakes triggered the strongest volume we’ve seen in a while.

For all the excitement, we are still suck between 1400 and the 50dma and today’s move didn’t shed much clarity on where the market is headed next.

MARKET SENTIMENT

Bears were sucked in with an early selloff, but were squeezed out a couple of hours later as the market surged higher.  Bulls jumped all over this rebound, but were ultimately let down as the market soldoff into the close.  What does this mean?  The market is still emotionally charged and short-term traders are trying to jump ahead of the next move.  These aggressive and premature traders are the source of this volatility and the market probably needs to marginalize these traders before the market can reveal its true intentions.  A couple more wild days like today will convince many of these short-term traders to stay away for a while.  Once they are out of the picture, the market will make its next move.

TRADING OPPORTUNITIES

Today’s move chased out a lot of weaker hands on both sides and there is a strong possibility the next move outside the 1400 to 1415 range will signal the market’s near-term intentions.  Or it could be just another head fake intended to humiliate and demoralize all the traders trying to jump ahead of the market.  This whipsaw selloff very well could have refreshed the rally and made room for further upside progress, it could also be the last gasps of the rally before nosing over, or it could be the just the start of a volatile trading range.

On this blog I often talk about high-probability trades, but right now a valid and solid case could be made for a move in either direction.  Pessimism remains at elevated levels and most traders expect us to fly off the Fiscal Cliff, meaning it is already priced in.  But at the same time the market rallied on hope that the Fiscal Cliff wouldn’t be such a big deal and we have corrected very little since negotiations in DC started bogging down.  This is turning into one of those situations where the probabilities are fairly well-balanced, making it nothing more than a flip of a coin.  To make money we need to see more of an imbalance and extreme in sentiment and we just don’t have that here.  At times like these it is best just to sit on cash and wait for more information.  The biggest mistake most traders make is needing to be in the market nearly all the time.  If you don’t have an edge on the market, take a break and go fishing.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL was pounded relentlessly today.  This is what happens when a stock is over-owned and someone yells fire.  AAPL closed down 6.4% on no news as investors climbed over each other trying to get to the exits.  Lets be clear, AAPL is not a GMCR or NFLX with an astronomical and unsustainable valuation based on outrageous growth expectations.  But AAPL does suffer from being one of the most owned stocks in the world and it has run short buyers.  Blame it on tax increases next year, Android, supply chain issues, or whatever else people are talking about.    But the truth is everyone who wants some AAPL already has some AAPL and there is no one left to buy shares from the guy who wants to cash in.  It is anyone’s guess how far this selloff will go, but unlike other bubble stocks, AAPL is the real deal and it isn’t about to implode in on itself.  If anything, the street is under appreciating its growth, cash flows, and profit margins.  We might see a double bottom form, but recognize over the near-term this stock has transitioned from investment grade to trading material.  Expect the stock to remain volatile until we have concrete fundamental data out of the company, most likely the Q4 earnings.  Until then trading AAPL will just be legalized gambling.

Stay safe

AM: 1400 bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:57 EST

AM Update

Markets tried to selloff and no doubt hungry bears piled on the early weakness.  But just as quick, the market bounced off 1400 and sent late bears running for cover.  Did this rally correct enough to refresh itself and is resuming the uptrend, or was this simply a false bottom on our way lower?

MARKET BEHAVIOR

Wild early trade.  Markets opened higher, then slid through he first couple hours before bouncing off the 1400 level and jumping back to new highs.  AAPL was pounded and no doubt contributed to the index’s early weakness.  The market flirted with 1400, a level that provided support multiple times going all the way back to August, before surging back above 1410.  Is this another legitimate bounce off 1400, or just a fake rally to suck in premature bottom-pickers and flush out aggressive shorts?

MARKET SENTIMENT

Last week everything was looking up and now everything is falling apart.  It is maddening how the market switches personalities like this, unless you understand how the market works and then these swings become profit opportunities.  As anyone who has been reading this blog for a while knows, we try to get ahead of these moves, not whipped around by them.

Everyone gets to contribute their ideas about what the market does, and they do this by buying or selling stocks.  But unlike the traditional one-person one-vote, in the markets some people’s opinions count a lot more due to the size of their trading account.  But the interesting thing about voting in the stock market, once you place your vote, you no longer have a say and are just along for the ride until you buy or sell more shares.  It is this ‘along for the ride’ period where interesting things happen.

This phenomenon was on display the last few weeks.  The markets sold off hard after Obama’s reelection as a mass of disappointed Republicans voted with their money and pulled out of the market in droves.  But after a certain point all these disappointed Republicans sold and they were no longer influencing the market’s direction.  At this point other investors saw an opportunity to buy heavily discounted shares on the heels of an emotional selloff.  These new buyers poured money into stocks, but after a couple of weeks they also ran out of money and after all the buyers bought, demand dries up and markets fall under their own weight.

While it seems like the market is changing personalities, it is simply reflecting the opinions of the traders actively buying or selling at that moment in time.  Recognizing what actually makes the markets move brings you one step closer to figuring out how to win at this game.

TRADING OPPORTUNITIES

Selling has modest to this point and we’ll most likely continue lower until we drop where it rattles some of the more confident traders.  But expect the market to saw tooth its way lower as bottom pickers and late shorts create these rallies.

Of course the market can go either direction and regaining and holding above the 50dma would signal this rally is back on.  We have the November employment report this Friday and that might be the catalyst to nudge the market one direction of the other.  Since we have rallied strongly the last couple weeks, expect and upside move to be more limited than a move lower that still has lots of room to run.

Stay safe