Apr 222015
 

End of Day Update:

Stocks rebounded following early weakness and are within a dozen points of all-time highs. Bears have a million reasons prices should collapse, but the market doesn’t care. That leaves us with only two possibilities, either bears are wrong, or the market is.

Since people love to argue with the market, I’ll start with reasons why it could be wrong. Independent markets are surprisingly efficient even if the participants are irrational. When traders arrive at their opinions independently, one irrational bull is canceled out by an equally irrational bear, leaving us with an astonishingly accurate mid-point. But the key is independent. The system breaks down when groupthink creeps in and skews the results one way or the other. Bubbles are perfect examples of self-reinforcing groupthink on one end of the spectrum. This is the classic, “Their logic seems suspicious, but they’re making money so I’ll follow them anyway.” When enough people suspend their disbelief, we lose independence and the validity of the underlying price.

On the other side, how could bears be wrong? What if instead of evil “market manipulation”, a poor understanding of how markets work is causing bears to lose money? What if the market already fully factored in all of their criticisms and this is the price it arrived at because of, not in spite of, these flaws. Maybe we would be higher without these looming structural problems. Many of these criticisms are recycled headlines that have been around for months, if not years. As a general rule of thumb, if average traders are talking about it, then we can safely ignore it.

So which side is right? Why not both? In the market, being right isn’t good enough. In fact, the only thing that matters is timing. Having done this for long enough, I’d gladly take good timing over being right every day of the week. And so back to the question, most likely both sides are right, but over different timeframes. Bulls will continue being right in the near-term since prices are defying the skeptics. But over the longer-term, nervous traders will forget their fear as they see everyone on the other side making money. Once groupthink is the norm instead of the exception, then we will be ready for the next material correction.

Jani

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 Posted by at 9:26 pm on April 22, 2015
Apr 212015
 
S&P500 4/21/2015 intraday chart

S&P500 4/21/2015 intraday chart

End of Day Update:

Stocks gave up early gains and finished near the lows of the day. The daily chart leads one to conclude this is weak, bearish price-action. But the intraday chart tells a different story. Most of the selling occurred in the first couple hours of the day after the market hit its head on 2,110 resistance. But, following the initial 11-point slide, we largely trade sideways for the remainder of the day and closed only one-point under the lows hit at 10:30am. The intraday chart contradicts the daily because it shows supportive price-action as few owners joined the morning’s selloff. When the market is given a perfect invitation to selloff, yet hold firm, that is bullish price-action even if we finished in the red.

While we cannot read too much into one day, it suggests the next few points will be higher. That is as far as this analysis can take us. We will have to reevaluate sentiment and price-action once the market tests prior highs near 2,120 before deciding to buy the breakout or sell the strength.

Jani

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 Posted by at 10:21 pm on April 21, 2015
Apr 202015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Updates

Stocks recovered from Friday’s selloff, reclaiming the psychologically important 50dma and 2,100 level. Volume was conspicuously absent, but by itself is not automatically a reason to doubt the rebound.

Last week we crumbled as plunging overseas markets spilled over to our shores. Todays low-volume recovery shows the remaining owners are not concerned and we bounced as a lack of selling constrained the available supply. No matter what people think the market should do, the path of least resistance is higher when stubborn owners refuse to sell.

It’s been a volatile but largely unproductive year. Buy-and-hold investors are up less than one percent, but by many measures they are the lucky ones. Any bull or bear coming to the market with an agenda is getting slaughtered buying strength or selling weakness. The only ones doing well are swing-traders betting against each move.

Source: Stocktwits 4/20/2015

Source: Stocktwits 4/20/2015

The trading range for the year has been ~2,000 to ~2,100 and we’ve been stuck between ~2,050 and ~2,110 since February. Today’s move leaves us near the upper end of that trading range. There are only two things that can happen here. Either we blow through resistance and launch the next rally leg, or this up-move stalls and we remain stuck inside the trading range.

While it would be nice to see the market march higher, Friday’s dip did little to reset the bullish sentiment that is creeping into the market. The most profitable upside moves are born from pessimistic ashes. Today’s low-volume rebound tells us owners remain confident and optimistic. I’d much rather see pervasive gloom and doom before betting on another rally leg. While the bounce can push us back to old highs, this is most likely another selling opportunity, not a buyable breakout.

Jani

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 Posted by at 9:01 pm on April 20, 2015
Apr 162015
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The market closed short of all-time highs for a second day. Depending on your outlook, this is either pausing or stalling. Volume is finally making a comeback. Yesterday’s up-day occurred in enthusiastic trade while today’s modest dip hit the average mark, something that’s been hard to do recently. This shows traders are finally starting to pay attention.

This week’s AAII investor sentiment survey mirrored the market’s gains and inched modestly in the bullish direction. The most interesting thing remains the heavy overweighting of neutrals. The historic average is 30%, yet we find ourselves over 45%. That tells us both bulls and bears are growing fatigued by this zigzagging trading range and giving up the fight. They’re not willing to change sides yet, but are far less confident in their outlook.

Technically we find ourselves near the upper end of the trading range. Two previous attempts to break 2,120 failed. Will the third time be the charm? We should know in coming days. Either way this is an important turning point for the market. If we cannot break through, bulls will likely give up and it will be a rough summer. If we smash through resistance, the nearly four months of sideways trade this year built a solid foundation to launch the next leg of the rally.

While many pundits and gurus claim to know what the market is going to do next, at this juncture it could go either way and we are best served following its lead. Buy the breakout or short the stumble.

Jani

 Posted by at 9:50 pm on April 16, 2015
Apr 132015
 

End of Day Update:

Stocks woke up to early gains, but stumbled into the close. Volume was even lighter than the below average trade we’ve gotten used to. That tells us few were changing their mind and buying or selling these early gains or late losses.

Last week’s AAII Investor Sentiment survey shows an interesting result where the percentage of BOTH bulls and bears declined precipitously. That’s because both sides piled into the neutral outlook. It seems bulls have grown tired of being burned by false breakouts and bears are afraid of another breakdown rebounding in their face. We’ve been stuck between 2,040 and 2,120 for two-and-a-half months and it seems many traders are finally waking up to the realization that we don’t always go up or down. Of course the crowd giving up on a directional move means we might finally breakout out of this trading range.

Technically we reclaimed 2,100 resistance Friday but were unable to hold it through Monday’s close. The lack of breakout buying and short-covering tells us most of this buying is already behind us and we could drift lower on weak demand. It shouldn’t surprise anyone to see us dip to 2,080. The real insight will come from how the market responds to this test of support. Is this just another pause before resuming the climb to all-time highs? Or will we slice through support and crash back down to the 200dma?

We should either buy the dip or sell the weakness, but we won’t know the answer for a couple more days. Trade sideways in this area for the remainder of the week and that stability tells us it is okay to hold for higher prices. But if we crash through the 50dma and the selling shows no signs of letting up, then expect us to blow right past recent lows and continue to the 200dma at 2,020.

Jani

 

 Posted by at 9:50 pm on April 13, 2015