Apr 232014
 
S&P500 daily at 1:54 EDT

S&P500 daily at 1:54 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are down fractionally in midday trade.  So far the market is holding 1,875, but struggling with former resistance at 1,880 that stretches back to early March.

MARKET SENTIMENT
The bears identified a mountain of reasons this market should breakdown, but instead it holds within 1% of all-time highs.  There are times the market does what we think it should, and there are times we are wrong.  When the market doesn’t behave as expected, it means our analysis is flawed and there is something big we overlooked.

This morning bears are pounding the table over Ukrainian tensions, earnings, weakness in momentum stocks, head-and-shoulders tops, low-volume up-days, among many other things.  So why isn’t the market cracking wide open?  The short answer is supply and demand.  Most of the problems bears are promoting have been around for a while.  Anyone who fears these issues already sold in the dip to 1,815.  That means everyone left holding isn’t worried about these fears and they are priced in.  While there are scary things abound, we cannot forget markets only move on supply and demand.  When everyone already sold these headlines, there is no one left to sell and the market firms up on the resulting tight supply.

But supply is only half the equation.  For this strength to continue, we need fresh demand.  The last time we were at these levels, buyers refused to step up and is why we slipped to the low 1,800s.  Will this time be any different?  The most obvious near-term buyers are shorts, momentum chasers, and breakout buyers.  All three of these groups react to prices moves, not underlying fundamentals.  The higher we go, the more these guys buy the market.  Until we clear old highs, expect these traders to keep buying this strength.

TRADING OPPORTUNITIES
Expected Outcome: Pushing toward the upper end of a trading range.
All the Chicken Littles running around because of a 5-point selloff need to tone it down a notch.  Two-steps forward, ones-step back.  Everyone knows that, so why do they overreact to the smallest gyrations?  While buying here is late in the game, we most likely still have upside and a shot at cracking 1,900 in coming day.  But at the same time I expect we are still in an extended trading range and this strength will not trigger the next rally leg.  Instead we will drift back into the 1,800/1,900 trading range and stay there through the summer

Alternate Outcome:
Bears might be right.  This could simply be a false bottom and we have a date with the 200-dma in May.  While I’m not a big believer in “Sell in May”, it only matters what other people think.  If they start selling head of summer vacation, that will push us lower.  Once we break recent lows, people start selling for no other reason than everyone else is selling and we continue lower in a downward spiral.

Trading Plan:
It is too late to buy the dip after six-consecutive up days that recovered 60-plus points.  While we still have some upside left in this move, the risk/reward does not favor new positions.  At the same time, it is early to short the market and bears should wait for that last surge higher before trading against this strength.  For those with long positions, start looking for an exit and either sell proactively or use a trailing stop to protect recent profits.

Plan your trade; trade your plan

 Posted by at 11:56 am on April 23, 2014
Apr 212014
 
S&P500 daily at 2:31 EDT

S&P500 daily at 2:31 EDT

Intraday Update

MARKET BEHAVIOR
Not a lot happening following the three-day weekend.  The market is up 0.3% in late-day trade and continues holding the recent rebound.  We remain above the 1,850 support and are 1.5% from all-time highs set a few weeks ago.

MARKET SENTIMENT
While the market appears quiet, that speaks volumes since few are fading this bounce.  Anyone who doesn’t believe in this market sold or shorted recent weakness, meaning there are few left to sell.  Those sellers were replaced by more confident buyers willing to own the volatility and downside risk.  The more confident owners are, the less likely they are to sell headlines and dips.  This churn in ownership is what set the stage for the bounce from 1,815.  Now that dip buyers are sitting on profits and owners who held the weakness are breathing a sigh of relief, the current group of owners is less likely to sell because their decisions to hold this market was reaffirmed.  Under most circumstances, confident owners means few sellers and tight supply.

TRADING PLAN
Expected Outcome: Pushing toward upper end of trading range.
If we close in the green today, that will be the 5th consecutive up-day and we all know even the strongest markets have down-days sprinkled in.  Currently we are running into resistance near 1,870, but no doubt many shorts placed their stops just above this level and we will likely see another short-squeeze when we move above this level.  From there the next big resistance level is 1,900.  But we are slipping into the summer trading session and are more likely to see sideways trade than the next rally leg.

Alternate Outcome:
If this market stalls at 1,870 and falls under recent 1,815 lows over the next few weeks, then we are on our way to the 200dma.

Trading Plan:
The best profit opportunities come from the seemingly riskiest trades.  This is buying when everyone else is selling at a discount and selling when everyone is buying at a premium.  While there is a little more upside as we approach the upper end of the trading range, it is far riskier buying the dip on the 5th consecutive up-day.  Swing traders are better served looking for opportunities to harvest profits than adding to their positions.  Bears should wait for a little more upside before fighting this market.  Stalling near 1,900 could be the next good shorting opportunity.

Plan your trade; trade your plan

 Posted by at 12:33 pm on April 21, 2014
Apr 172014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks traded quietly ahead of the three-day weekend.  We continue holding recent gains and remain above prior support at 1,850 and the 50dma.  This bounce recovered more than half of the recent 80-point sell off and puts the market on more solid footing.

MARKET SENTIMENT
The selloff for no reason was met by the rebound for no reason.  Big moves are driven by traders changing their outlook on the future due to unexpected headlines.  Smaller moves are the result of the natural ebb and flow of supply and demand.  The recent selloff was nothing more than a modest pullback when demand dried up near 1,900.  While the selloff felt dramatic and spooked many traders, nothing happened over the last couple weeks that changed traders’ economic expectations.  Those that expected the economy to continue improving two-weeks ago still feel the same today.  We didn’t get fundamental data that made big money managers adjust their economic outlook lower and is why we bounced sooner than many predicted.

Last week’s reactionary selling wasn’t due to people thinking the economy was taking a nose dive, but because they thought the market was going to take a nosedive.  That a key piece of information technicians miss when they lump all trading activity together in a chart. Supply and demand moves are smaller and more common than fundamentally driven ones.  While many were calling for a 10 or 20% correction likes we’ve seen in years past, what these prognosticators forget is those corrections were driven by dramatic headlines that forced traders to adjust their economic outlook.  Euro Contagion and the downgrade of US debt threatened the viability of our financial system and is why those headlines lead to big selloffs.  Traders were no longer confident about what the future held.  This time around we didn’t have gut-wrenching headlines backing up this selling and is why I felt fairly confident this move would bottom while others were predicting we were falling off a cliff.  While the chart looked scary, we lacked a fundamental reason to drive confident owners out of the market.  While this weakness spooked out impulsive and reactive traders, there was little substance to rattle the nerves of more confident owners.

TRADING OPPORTUNITIES
Expected Outcome: There is still more upside left in this rebound, but it is unlikely to lead to a new rally leg.
Traders are breathing a sigh of relief as the emotion driven selling abates.  We will likely see more buying next week as people feel more comfortable owning this market and they chase the bounce.  While this move largely puts fears of a 20% correction behind us, the coast is not clear.  The market will likely remain in a trading range through the summer.

Alternate Outcome:
Big declines often have multiple false bottoms along the way and this weeks strength could just be a sucker’s rally.

Trading Plan:
It is a little late to buy the dip.  The best trading opportunities come from the most uncomfortable situations.  Buying after four up-days is hardly uncomfortable.  We will likely see a few down days next week that flush out the late dip-buyers and tempt the bears to go short.  While I still think there is more upside in this rebound, most of the easy money is behind us and the next couple dozen points of upside will be more bumpy.

Plan your trade; trade your plan

 Posted by at 10:05 pm on April 17, 2014
Apr 162014
 
S&P500 daily at 2:11 EDT

S&P500 daily at 2:11 EDT

Intraday Update

MARKET BEHAVIOR
We broke through the 50dma and 1,850 barrier as this rebound continues.  This puts us back above key technical levels and gives this move credibility.

MARKET SENTIMENT
Last week many were convinced we were on the verge of a larger correction, but this week we’ve done nothing but go up.  And that is how the market works.  Everyone who expected a prolong selloff dumped shares reactively, but as soon as they finished selling, supply dried up and we bounced.  No matter what the headlines or traders’ expectations, market prices only respond to supply and demand.  Even when the crowd is pessimistic, we rally when we run out of sellers.

Volatility like we’ve seen over recent weeks churns ownership in the market.  The dip forced many weak hands to sell reactively and tempted aggressive bears to go short.  While all this aggressive selling continued the move lower, what is going on under the surface is these sellers are transferring ownership to more confident buyers willing to hold the risk and volatility.  They confidently buy the discount and patiently wait for the market to bounce.  Since they willing stepped into this uncertainty, they are more comfortable holding a declining market.    But the paradox is the more willing these new owners are to hold weakness, the less likely it is we will see that weakness.  When they confidently hold, then we run out of sellers and the market finds a bottom.

TRADING OPPORTUNITIES
Expected Outcome:
 Look for the bounce to continue into next week.
This rebound should continue at least until we recover April 10th’s selloff.  From there we will have to see what traders think and how the market responds before we decide if this move continues to all-time highs or stalls out.

Alternate Outcome:
Last week we saw a painful false bottom that caught many dip-buyers off guard and the same could happen here.  Short covering pushed us back above technical support, but we need wider buying for this strength to continue.  If demand dries up, we could easily stumble back to the lows.  Undercutting 1,810 in coming days means this selloff is going to get a lot worse and the 200dma is in play.

Trading Plan:
It is getting a little late to buy the dip since we are near the middle of a move back to 1,900.  The best opportunities arise from the most difficult trades.  Buying the third consecutive up-day is late to the party and exposes a trader to greater risks of an intermediate dip.  As for bears, it is still early to short the bounce and the next shorting opportunity would be if the market stalls near 1,870.

Plan your trade; trade your plan

 Posted by at 12:13 pm on April 16, 2014
Apr 152014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Fascinating day as we traveled well over 60-points intraday.  We surged higher at the open, collapsed near recent lows by midday, only to see us race back up to the early highs by the close.  Volume was elevated and one of the busiest days we’ve seen this month.  We finished a hair under the 50dma and just a few points from prior support near 1,850.

MARKET SENTIMENT
Did today’s trade signal a capitulation bottom?  It sure felt like it.  Early strength pushed us to the 50dma, a technical level that often acts as overhead resistance.  Bearish traders used this mark to open the floodgates and their selling sent us down 30-points.  But as just quickly as the selling started, it exhausted itself and we rallied 30-points on tight supply.  No doubt this whiplash carried most reactive traders out on a stretcher.

This volatility is cathartic as it flushed out weak traders and seduced bears to short with both hands.  All that selling clearly pressured the market, but the frenzy stalled midday when there was no one left to sell.  When we run out of sellers, supply dries up and there is nowhere to go but higher.  And this strength is likely to continue given our proximity to the 50dma and 1,850.  Modest gains Wednesday could send shorts scrambling for cover and set off a dip-buying frenzy.

TRADING OPPORTUNITIES
Expected Outcome: We most likely put in a bottom to this modest selloff.
The most profitable trade of 2014 has been buying weakness and selling strength.  It appears this is no different.  The best time to buy is when everyone fears we will continue lower.  Anyone expecting lower prices already sold and they were replaced by confident dip-buyers willing to own the risk.  Purging weak-hands and infusing strong-hands is the best way to turn this market around.

Alternate Outcome:
Every dip is buyable until the one that isn’t.  While I still believe we need a headline event to dramatically lower investor’s expectations of future profits and earnings, sometimes fear is all it takes to turn confident owners into panicked sellers.  Even as this volatility flushed many weak holders, without a doubt we could easily see another leg lower before this is all done.

Trading Plan:
The best trades are often the hardest to make.  Buying recent weakness was not easy and will likely turn out to be the right trade.  Shorts should consider locking in profits, or at the very least protect themselves with a trailing stop.  Dip-buyers should get ready to ride the short-squeeze higher.  Since we are in the middle of a holiday shortened week, we should expect continued volatility due to lighter than normal volume.

Plan your trade; trade your plan

 Posted by at 11:07 pm on April 15, 2014