Monthly Archives: April 2012

Buy the dip or sell the rally?

By Jani Ziedins | Intraday Analysis

Indexes are selling-off modestly for the first time since breaking above the recent trading range.  Is this a good time for people who missed the recent run to get in, or a last chance for those still holding stocks to get out at a decent price?  In typical fashion, the arguments for both directions are equally compelling.

If we use the strength of the follow through day and the performance of the recent rally’s general, AAPL, as a benchmark, it seems less than an ideal foundation for a material move higher.  But on the other side, the markets often climb a wall of worry and it is this very uncertainty that provides the best opportunity to buy early weakness and hold for a profit as other investors slowly come around.

 

I am fighting a negative bias and I don’t want to let it skew my outlook, but I still find myself suspicious of this rally.  There are a lot of good stocks holding up well in this weakness, but I have yet to pull the trigger on any of them since the follow through day.  FRAN is having a great day, up 5% in a continued bounce off of its 50dma.  LNKD is also showing impressive strength after its own 50dma bounce.  SWI is holding on to an impressive move off of last week’s earnings.  On the other side, AAPL is extending a 3-day slide after its blow-out earnings.  It is pushing down toward its 50dma and a bigger risk will potentially be a test of the recent $555 low.  It seems at the moment everyone who wants AAPL already owns AAPL and no one is left to rush in and prop up the declining price.

Indexes continue holding gains

By Jani Ziedins | Intraday Analysis

The indexes continue to hold recent gains and are edging higher. The S&P500 is above 1400 and sitting above the recent consolidation area. Today the NASDAQ joined the S&P500 by also poking its head above its recent range. These developments continue to be constructive and supportive of yesterday’s Follow Through Day. With this positive price action, there is no reason not to venture in and try some promising stocks. Start with 1/2 positions and add on as the market continues to move up.

From a sentiment point of view, it seems like the number of bulls and bears is fairly balanced and the lack of a disproportionate disparity most likely means the moves going forward will be more modest.  Extremes in the market tend to coil up the spring and today there is not much energy bound up in the spring.  Of course this balance rarely holds up and over time we’ll see the market skew one way or the other based upon headlines, price movements, and group think.

There are some interesting individual stock stories (AAPL, AMZN, SWI, GNC, etc), but as far as the indexes go, they are fairly boring at the moment.  Give it a few weeks and no doubt traders will find some kind of drama to start obsessing about.

Markets Flat after IBD calls Follow Through Day

By Jani Ziedins | Intraday Analysis

IBD called yesterday’s 1.4% gain on the S&P500 a day 11 follow through and we are back in a Confirmed Uptrend by their measures. But waiting more than two weeks for the follow through, having average volume on the FTD, and making just 1.4% gains are three separate signs that this FTD is less potent than ideal. That doesn’t mean this one can’t work, just in the past FTDs with this less than compelling action are more prone to failure. No doubt we can find weak FTDs that worked, but on average they have a lower success rate than more powerful ones. The best thing we can do is watch the subsequent price action and not jump into this market head first without waiting for more compelling evidence to support this FTD, namely positive price gains. Start buying good looking positions and then add on when the price increases. This will let you in the market, but also manage the risk if things breakdown.

As for where we are, the markets are mostly flat today on light volume. The SPX is at the upper end of the recent trading range, just poking its head above. The NAS is in the upper half of the range, but still has a bit more progress before breaking above it. The market seems unsure of itself at these levels as neither the bear nor the bulls have the courage to buy or short this market and it is a staring contest between the two to see who will blink first.

So far the market has found good support at the 1360 level as we bounced off of that twice. A third trip to that level would be fairly bearish as there is no such thing as a bullish tripple-bottom. On the upside, we have taken a few weeks to digest recent gains and flushed out some of the irrational exuberance leading up to the end of the first quarter. The bulls were humbled by the pullback and the bears will humbled by the bounces off of support. So in these regards, the clock has been reset for both groups and we are just waiting on the price action to see which side has greater strength. Being at the upper end of the trading range means the bulls have a slight edge and just need to push us a tad higher before traders start buying the breakout. But given the positive sentiment over yesterday’s price move and regaining the 50dma, it is disappointing that there is not more follow on buying today. No doubt this indecisiveness will continue the lower volume trading we’ve seen over the last few months. But as traders, price is truth no matter what the volume is.

We have seen positive price action from the leaders that weathered the storm and there look to be good buys to invest in. I continue to be cautious and am not sold on this FTD yet, but further gains will get me in the market with both hands. If we can’t hold above the recent consolidation, there is most likely more left in the downside move.

AAPL does it again

By Jani Ziedins | Intraday Analysis

AAPL blew away estimates again and is single-handedly lifting the market today.  Most of AAPL’s strength comes from iPhone sales in China as they missed iPad and Mac expectations.  The one upshot is these quarterly results don’t include a Chinese release of the new iPad, which will provide a big boost for next quarter’s results. But AAPL is warning of a slowdown in iPhone sales going forward as customers hold-off in anticipation of an iPhone5.

As for how this affects the rest of the market, we are experiencing a nice pop today and all three major indexes retook their 50dma, but are still within the previous consolidation range, so not a technical breakout yet.  Today’s 1% and 2% gains are great to see after the recent weakness, but don’t constitute a follow through day because declines over the last few days reset the rally count.  This is day two for the S&P500 and day one for the NASDAQ.  We need a strong follow through day on Friday or next week to signal this market is ready to rebound.

And given where we are, it seems prudent to allow the market a couple days to prove itself since today’s rally is the result of a single company.  The challenge will be to see if AAPL’s results can reverse the bearish sentiment we’ve seen in the markets as of late.  Is AAPL stronger than the markets, or are the markets stronger than AAPL?  And of course it doesn’t have to be an either/or as AAPL could decouple from the markets and continue higher in the face of wider weakness.

But again, sit tight and wait for that confirmation to demonstrates it is safer to venture into the market.  We give up some profit by waiting, but we decrease the risk of losing money by being patient.

Waiting for AAPL

By Jani Ziedins | Intraday Analysis

The markets are flat to up modestly this morning as we digest yesterday’s sell-off.  Is this the level were value buyers are attracted to the market and that is who is supporting us here?  Or are we being propped up by swing traders foolishly trying to pick a bottom?  One group has a lot of weight and conviction behind them and the other is a 90lb weakling that will bail at the first sign of trouble, so it really does matter who is buying at these levels.

The one slight positive is we no longer seem to be triggering an avalanche of selling at each weak patch we encounter.    Yesterday we sliced through the 50dma and found a bottom early in the trading day and climbed from there.  But the other side of the coin, if we are not seeing panic induced selling by weak-kneed traders, then what we are seeing is real selling by institutions, and that is a lot more meaningful.

The market moving earnings release will come from AAPL after the close.  AAPL was the general that lead the Q1 rally and it also represents ~12% of the NASDAQ index.  Any weakness in AAPL will surely affect the tech trade, if not the entire market.  But on the other side, a strong result from AAPL could kick off the next bull leg higher.  Given AAPL’s 50% price gain over the last few months, it really is hard not to think AAPL shares are priced for perfection and the bar is set extremely high for them.  And on top of that, virtually every ‘expert’ I’ve seen is saying you should buy the dip on AAPL.  When the market gets so one sided on a stock, it inevitably goes the other way because of the supply and demand imbalance.  Is AAPL at that point?  In a few hours we’ll know the answer.

NASDAQ continues under-performance

By Jani Ziedins | Intraday Analysis

A rough start to the week for the markets as we are down 1%+ in the first couple hours of the day with all three major indexes crashed through their 50dma.  The S&P500 and Dow are still trading in their recent consolidation areas but the NASDAQ broke support and is making a new relative low. This continues the trend of under-performance by the NASDAQ and demonstrates weakness by technology and smaller, growth companies.  Given the huge run-up and out-performance by the NASDAQ in Q1, profit taking and rotation out of this sector should not come as a surprise.

Traders watch moving averages and trade off of them, but are secondary in psychological impact when compared to technical levels represented by concentrations of actual buying and selling activity.  It is one thing to see your stock fall under a moving average on volume, but seeing your stock fall under its purchase price generates far more anxiety.   This causes breaks under support to be far more powerful than drops under moving averages.  The NASDAQ broke under its support, but the other two indexes are holding up for the time being.  A break by those over the next couple days could signal this correction still has room on the downside.

It is not uncommon to see the markets retrace ~33% to ~66% of a move as part of a normal and healthy correction.  This is just part of the natural two-steps forward, one-step back process the markets use on their march higher.  On the S&P500 this gives us a pullback range of 1347-1275 if we use the Dec dip as the start of the current move, or 1321-1222 if we use the Oct low.

No matter what metric we use, we still have a little more to go to make this a normal and healthy correction.  As for how to trade this, we should continue to sit tight and wait for the upside confirmation before buying back in.  As for using this weakness to initiate short positions, I’m not sure this down-leg will produce the profit potential necessary to justify the risk.  As opposed to bear market conditions that make for the best shorting opportunities, this appears to simply be a normal pullback from overbought conditions.  No doubt money could be made on the short side, but you need to be very nimble with your short trades and take profits early and often because this downward move doesn’t appear like it will cover a lot of ground.  Rather than look for shorts, I think the smart move is searching for buy candidates holding up well in this sell-off so you are ready for the rebound.  But of course markets top when everything looks good so we always need to be wary of what we least expect.

Up, down, up, down…..

By Jani Ziedins | Intraday Analysis

The market again continues to hang out right at the 50dma and neither the bulls or bears have the strength to break the market from these levels.  It is still early in the day and we could see a more directional move this afternoon.  Today is options expiration so volume will be inflated, but it will still take a price move greater than 1.5% to trigger a follow through day.  Ideally we’d like to see volume far higher than yesterday to demonstrate the elevated volume isn’t simply a technicality due to the options market, but is really institutional investors getting behind the upside move on the long side.

The one helpful part of hanging out at the 50dma is the average has been inching up with every passing day and so while we are sitting on support, the market is still in a modest up trend.  But of course the real tell will be when we break above or below this consolidation in volume.  The last few weeks has done a good job of bloodying premature bulls and bears anticipating technical breakouts and they are getting far more gun-shy with each successive humiliation.  What this means is the next move out of the trading range is more likely to be the real deal because fewer premature day traders are artificially pushing the market.  With a diminished influence of technical and momentum traders, the next price move will be more influenced by institutional investor supply and demand and thus more likely to stick than the recent peak-a-boo breakouts that quickly retreated back into the trading range.  There is no grantee the next peak-a-boo won’t also retreat, but the probability of the market showing its true colors increases with each failed peak-a-boo due to the decreased influence of technical and momentum traders.

Again, no reason to trade these daily swings and it is best to wait for a confirmation either direction.  It is better to give up a little upside in order to improve your odds of success by waiting for a higher probability trade.

Treading water

By Jani Ziedins | Intraday Analysis

The indexes continue treading water near their 50dma in a frustrating fashion.  Up, down, up, down and repeat until thoroughly confused and demoralized.  Just like its been for the last week, this price action continues to support both a bullish or bearish setup and the only way we’ll find out is when we get a confirmation from the indexes when they actually move out of this range in a compelling manner.

So far all this trading range has accomplished is chewing up and spiting out any premature bulls or bears with overly tight stop-losses.  Neither side has the conviction or money to push us outside this range and we will continue to hold here until either the buy-the-dip crowd or the sellers lose the battle when they finally run out of funds to support their cause.  This is turning into an endurance race between the two camps and at this stage I really can’t say which side has an edge.  Both sides seem well represented in media making it hard to use a contrarian analysis to get a sense for what is the path of least resistance.

As far as CAN SLIM rules go, sitting and waiting is exactly what we should be doing right now when current outlook is market in correction.  We need to give the market time to prove itself and when deciding how to manage your portfolio, remember it is better to be out of the market wishing you were in than in the market wishing you were out.

Aside from the indecisive indexes, we have seen good price action out of some leading stocks.  FFIV popped on strong earnings and retook it’s 50dma on a gap-up this morning.  Today’s move puts it back in line with its recent highs after dropping under it’s 50dma on large volume a couple weeks ago.  This price action demonstrates how difficult it can be to respond defensively to a stock by waiting for weakness to sell.  Very few stocks make big moves that are easy to hold and often the biggest winners are highly volatile and do their best to shake traders out prematurely.  There was no reliable way to identify FFIV’s April 10th and 11th plunge was just a regular shakeout and not the start of a larger decline.  For my personal trading style, I don’t want to be stuck trying to decide if a pullback is just a normal correction or the end of a move and is why I prefer selling into strength after a nice run-up.

No follow through

By Jani Ziedins | Intraday Analysis

Yesterday’s low volume failed to trigger a follow through day for the market and the lack of conviction by buyers makes it appear the sharp rally was largely driven by short covering coming from bears who piled in on the short side last Thursday and Friday after the market cut under the 50dma.  Yesterday’s lack of meaningful follow through seems to be confirmed by today’s listless open and modest decline in the first couple hours of trading.

This back and forth action seems to be driven by a small group of eager and premature bull and bear traders who are jumping ahead of the market in anticipation of their predisposed view of the market.  But once this smaller group of traders blows their load on a position, the market quickly reverses because big money investors don’t get on board with the move.  And given the back and forth with no real net movement, it really seems like big money is taking a wait and see approach.  As CAN SLIM investors we follow big money’s lead and that means we should also be sitting tight.

Now the last couple weeks have highlighted the difference between selling early and holding through a correction.  No doubt sitting through 10-20-30 percent corrections in a stock is demoralizing and challenges a person to maintain their composure.  There are two ways to make money in this game, one is by trading and the other is by investing.  Obviously trading is short term in nature and the trader has to follow the market closely to time his buying and selling.  But on the other side of the spectrum is the investor who finds great stories to invest in and then holds for an extended period of time and sits through multiple price corrections.  Psychologically the big difference between the two approaches is the trader watches the market daily, hourly, and even by the minute because he has little conviction in his positions and is mostly catching technical and momentum waves.  This is contrasted with the investor who buys stocks he has a lot of conviction in and because of that he is comfortable ignoring price data for weeks or months at a time because he knows his fundamental analysis will hold up regardless of short-term market fluctuations.

The problem a lot of amateur traders/investors run into is blending these two strategies in incompatible ways.  This would be the investor who follows a stock’s price action daily and thus subjects himself to the emotional turmoil of watching his position go up and down and ultimately tempts himself to bailing out at the exact wrong time on inevitable weakness.  And the other side is the trader who doesn’t react to the market’s price moves and allows a small loss spiral out of control as he is waiting for it to recover.

The challenge for the CAN SLIM trader who is looking for the home run is we tend to follow the market closely and the method to our making money is riding waves of hot stocks.  This daily following of stock prices makes it a challenge to hold through pullbacks, as many people are experiencing right now.  This is why some experienced traders recommend having two completely different accounts segregated between trading and investing.  This allows you to follow your trading positions daily and largely ignore your long term investments, greatly reducing the emotional urge to sell your home runs at every pullback.  Just something to think about as you hone your approach to the markets.

As for the current market, we continue to hold in the trading range around the 50dma as big money is sitting on their hands.  Trading sideways is often supportive of these price levels, but the longer we sit at these levels makes a potential downward move larger in size.  A good analogy would be a coiled spring.  The longer we sit at one level, the more potential energy is wound into it and the larger the resulting move will be.

For the time being I tend to be slightly more bearish simply because of the strong rally we recently had and how this affected the expectations priced in the market.  The bar set for many of these companies is 30, 40 and 50 percent higher than it was last fall and that will make for an interesting earnings season.  The thing about the markets is it takes unexpected good new to drive it higher.

Follow through day in the works?

By Jani Ziedins | Intraday Analysis

In typical bi-polar nature the market has completely reversed yesterday’s losses and then some as all three broad market indexes jumped back above their 50dma.  While it is still early in the day, the move has the potential to turn into a follow through day for the S&P500 and Dow if we continue higher and the volume kicks in this afternoon.  The NASDAQ undercut its recent low yesterday, resetting its follow through day count and is currently the lagging index as traders appear to be rotating out of first quarter’s hot tech stocks.

Demoralizing sell-off yesterday, euphoric rally today, maddening isn’t it?  But if the market was easy, everyone would be rich and we all know it doesn’t work that way.  Currently the market is doing its best to embarrass and humiliate both bulls and bears, and all this back and forth action looks like it is doing a good job of it.  One day the market is spooking weak holders and tempting premature shorts and the next it has the buy-the-dip crowd rushing in with open arms and shorts running for cover.  And within a couple days both sides have been bloodied and regretting their hasty trades.

So what can we make of this price action?  On the positive, we continue to find support at the 50dma and are holding the recent consolidation area.  We have also been able to avoid a cascade of panic selling and so far most sell-offs have been been blunted by the buy-the-dip crowd.   For the negative, volume has been low, showing a lack of conviction and each rally is missing follow through buying and has reversed.  In addition, it seems like we lost the leadership of the tech sector and laggard industries are leading the S&P and Dow moves higher.  Can these lagging sectors really sustain a move higher?

But as I mentioned, we continue to hang around the 50dma and it will take a decisive break away from this to establish the next trend and that is what we need to keep an eye out for.  Further gains on substantial volume today would be a signal to start venturing back in.  But without that clear-cut signal, it is best to continue waiting for a confirmation because without conviction behind today’s rally, we could easily continue this bi-polar nature and see a pullback reversing all these impressive gains later in the week.

If we do see a follow-through today, the real challenge we be sifting through the rubble to find leading stocks that had a healthy pullback and filtering out those that appear broken.  AAPL’s earnings release next week will also be a big catalyst for the market and tech stocks since it has been the general leading the charge higher over the last several months.  A sneeze by AAPL could give the entire market a cold.  But at the same time, another blow out quarter could reignite the tech rally.  Given the recent price run, simply meeting expectations will probably disappoint the market and we’ll fee the heavy burden of the recent rally.

Opening strength turns down quickly

By Jani Ziedins | Intraday Analysis

Markets opened up, but right out of gate gave it all back and then some in just a few minutes.  Not an encouraging way to start the week.  Opening strong and finishing weak is a common trait in declining markets.  Typically this pattern is due to amateurs bottom-picking with their overnight orders that fill at the open and then institutional investors using that strength to sell into.

This sell-off is especially hard on tech stocks that lead the huge first-quarter rally.  NASDAQ and AAPL lead on the way up and seem to be leading on the way down.  The NASDAQ sliced through the 50dma today and the disconcerting thing about AAPL is it didn’t even participate in last week’s two-day rally and has been down five days in a row in an accelerating fashion.

AAPL’s is finding support at $580 from its recent gap-up, but if that doesn’t hold, the 50dma is clearly in play and we’ll see if it find support at the $550 level where the rally paused back in Feb.  No doubt this is a favorite stock and it will find lots of bids on the way down, cushioning any weakness it might encounter.  But the harder part is deciding if smart money is buying AAPL’s dip, or selling the weakness.  And of course it doesn’t have to be an either or proposition.  AAPL could be a short-term sell and a long-term buy, so it really comes down to a trader’s time-frame.

It is still early in the day and an afternoon rally could completely change the tone of this morning’s price action.  If the buy-the-dip crowd shows up in force and steals control from the bears, that would would be extremely bullish.  But if the bulls rollover here, we could see the market slide a bit more before this sell-off is done.  But for those trying to hold, remember the market often bounces at the point of maximum pain.  Keeping that in mind, use the rules you previously set out for yourself and stick to them.  For those that raised cash recently by selling into the strength, keep an eye out for a buying opportunity that could be just days or weeks away.  As with most sell-offs, they tend to be a bit overdone and will bounce off of their oversold levels once the market finally finds its footing.  Other trader’s emotional impulses are your buying opportunities.  But don’t try to bottom pick and wait for an upside follow-through to get you back in the market.  It is better to be a little late than a little early.

Stay safe.

Indexes retesting the 50dma

By Jani Ziedins | Intraday Analysis

The market opened slightly lower and continued its slide through the early morning, down ~1% as I write this.  The markets have retreated to the 50dma, with the SPX slightly under and the NASDAQ a little above.  Volume is tracking marginally higher than yesterday, but that is typical of down-days and is not at alarming levels.

Unfortunately this price action continues to be ambiguous because this retreat/retrench can support both both the bull case and the bear case.

BULL:  The market doesn’t go straight up and a retest of the 50dma is not unusual given the two big up days we just had and the chorus of experts calling for a correction.  The high volume sell-off on Tuesday and then today’s decline is shaking out the weak holders and letting premature bears set up short positions.  With all the people calling for a correction, we are getting a lot of traders position themselves ahead of the ‘inevitable’ pullback and that is what is pressuring the market.  But all this bearish trading is setting up for a short squeeze as all those positions have to be bought back when the market resumes higher.

BEAR:  The rally over the previous two days was nothing more than a short squeeze to punish anyone who sold into or shorted the sell-off prematurely.  The market doesn’t like to be obvious, so what appeared to be the obvious collapse when the market broke the 50dma turned out to be a false start.  After a quick short squeeze, we are ready to resume the move lower as the buy-the-dip crow is finally running out of money and we are ready to start the correction that is long overdue.

Both sides have a very compelling argument and it will take a confirmation in either direction to demonstrate which camp has control and who is giving up the ghost.  A material drop under the 50dma would show a lack of conviction from the buy-the-dip crowd.  But holding at the 50dma for a few days will show support at these levels and there is a good chance the uptrend will resume.  As I said yesterday, it could take two days to figure out what the market wants to do and it seems like we will need to wait until Monday, unless the market tips its hand this afternoon and makes a strong move either direction.

Constructive price action

By Jani Ziedins | Intraday Analysis

Indexes are up for the second consecutive day after the recent sell-off.  The SPX decisively regained the 50dma this morning and the NASDAQ extended its bounce off of it.  While the price action is very compelling, the volume is mediocre at best, exhibiting modest excitement by market participants about this rebound.

LNKD is using this strength to launch up 7% and other high beta growth stocks are also up nicely.  But while the two-day rebound is encouraging, the market still needs to do a bit more to prove this isn’t just a suckers rally.

No doubt Tuesday’s breach of the 50dma flushed out a lot of weak holders and triggered a wave of stop-loss selling.  But we quickly  regained our footing after that autopilot selling exhausted itself and now many of those sellers are regretting their momentary weakness.  So where does this leave us?  The bears are uncertain of their position given the recent rebound and the bulls are uncertain given the recent sell-off.  If the recent sell-off was the best the bears could manage, we’ll head higher from here.  But on the other hand, if the last two-days mediocre volume rally is the best the bulls can muster, then we could very well head lower once the buy-the-dip crowd runs out of money.

The truth is I have no idea what direction this market is leaning and it could break either way and we simply need to wait for that confirmation, either a follow-through day to the upside, or a breakdown to the low side.

But this recent check-back to the 50dma has been productive given how long we were above it and it will make it easier to resume the uptrend.  There are plenty of examples over the last few years of a quick 50dma check before resuming higher.  This quick pause and refresh keeps the indexes gains healthy and sustainable.

If we do resume the uptrend, look at stock that withstood the sell-off by staying within their recent trading range, these are the stocks showing broad support and will likely continue their climb higher.  This will make for good longer-term holds.  But popular stocks that sold-off and tested their 50dma, and even broke it, will have the best opportunity for a quick profit as they bounce back.  But rather than try to pick a bottom, wait to buy the high volume bounce.

The next two days will tell us a lot about the quality of this rebound.

Rebound from sell-off

By Jani Ziedins | Intraday Analysis

The S&P500 rebounded nicely this morning, up 1% and is back in line with the ~1370 support level.  Is this the all clear signal to start buying again?  It would be nice if the market was that predictable, but one day does not make a rally.  Using CAN SLIM follow through rules, it takes at least 4 days to signal a legitimate rally attempt.  By showing constructive price action over 4+ days holds the market to a higher standard and helps us sidestep inevitable head-fakes and false bottoms.  Having a delayed confirmation might make us a little late and miss some bottom-picking profits, but the lower risk of getting caught up in a false-positive makes waiting the prudent move.  People buying at these levels are simply trying to catch a falling knife and most often that is a fools game, but that sure doesn’t stop people from trying.

We are just one week removed from 4-year highs in the S&P500, so this wouldn’t even qualify as a correction if we are bouncing already.  Typical corrections last several weeks, so if anyone feels that a correction is in order, they should be highly suspicious of this rally attempt.

Many leading stocks are taking a drubbing over the last few days.  INVN looks downright broken, but the upshot is it continues holding at previous support at $15.  This level is probably make or break for the stock.

KORS took a hit yesterday, dropping 8% after holding up so well over the last couple months.  But it is finding support at the 50dma and still holding comfortably above the gap-up on last quarter’s earnings.  This will be one to keep an eye on for when the market firms up and resumes the uptrend.

LNKD has traded sideways since its earnings gap, but given the price action of the rest of the leaders, sideways is actually demonstrating strength.  Again another one to keep an eye on.

Other names are finding support at the 50dma too like BWLD.  Depending on the length of this market pullback, if it is a short one, 50dma bounces could be the best way to get into leading stocks that were previously extended from buy-points.

And of course there is everyone’s favorite, AAPL, that is marching to the beat of its own drummer and completely oblivious to any weakness in the broader market.

Complacency turning into anxiety

By Jani Ziedins | Intraday Analysis

Rough morning for the markets as the SPX opened above the 50dma, but soon sliced through it on elevated volume.  The period of complacency is quickly coming to an end and there is a lot of stop-loss selling as we fall through the recent support level of ~1370.  Of course the ironic thing is this accelerated selling is exactly what we need in order to find a bottom. The rush for the exits will allow us to flush out the weak holders and set the foundation for a bounce once this surge of selling exhausts itself.

For anyone sitting on cash, hold tight for the moment as the selling might not be done just yet, but we are getting closer to the point of maximum pain that will trigger the bounce.  Now is the time to start looking for buying opportunities as other people are cutting bait and rushing for the exit.  Their impulse is your opportunity.

But while we will see a bounce over the new few days, the bigger question is if this bounce will resume the uptrend, or be a sucker’s rally before turning lower.  At this point it is hard to gauge because we still have not had a chance to get a sense of investor attitudes after the sell-off and bounce.  The more fearful the sell-off is, the better the probability for a sustained bounce afterward.  But if we get too many buy-the-dip people rushing in too soon, we’ll probably have some additional downside remaining and will probably see a two leg correction. So until we have more information, it would be best to view the upcoming bounce as a short-term trading opportunity and then let the sentiment and price action determine if you need to cash out for a quick profit or hold on for more gains.

As always, stay safe.

Testing Support

By Jani Ziedins | Intraday Analysis

The indexes are down just over a percent this morning in reaction to Friday’s jobs numbers.  This drops us down to previous support/resistance levels and slightly above the 50dma.  So far the sell-off has been fairly orderly and the indexes are trading in a tight range.  This is fairly constructive as the sell-off didn’t trigger a snowball of additional sell orders.  Volume is again fairly light, exhibiting a lack of concern by most security holders.

Technical and psychological support at these levels was inevitable.  Over the last 3-months, selling into any weakness has been a mistake and the best money was made from buying these dips.  And that is exactly what it appears people are doing as we find support at these levels and a cascading sell-off has been avoided to this point.

But the lack of fear in the markets and traders resolve to hold their securities and not get shaken out is what makes me cautious.  The best example of this is AAPL.  Again AAPL seems to be the hideout of choice for traders who want to weather the storm as AAPL is up on a big down day in the markets.  AAPL was a safe haven during last summer’s sell-off and it seems to be filling the same role this time around.

But in a lot of ways AAPL is reminding me of gold last year.  Gold bugs were saying  gold is good for inflation, deflation, slow economy, and hot economy.  Gold was the be-all, end-all, cure-all for anything that ailed your portfolio.  And this year, AAPL seems to be that same elixir.  Up-market?  Buy AAPL.  Down-market?  Buy AAPL.  Strong economy?  Buy AAPL.  Weak economy?  Buy AAPL.

Since everyone is so bullish on AAPL, the real question is under what conditions should we sell AAPL?  When no one can answer that question is when you need to get nervous.  Right now the biggest liability I see for AAPL is the relative ease of buying a new iPad since its launch.  Did AAPL ramp up pre-launch production to avoid shortages and back-orders we’ve seen in the past?  Or was the demand for the new iPad less than what we’ve seen in the past and that explains the availability?  (Most likely a combination of those two factors.)

But as with gold last year, it was a great trade as long as you knew when it was time to get off.  No doubt AAPL can and will continue to ride higher, but remember what WON says, “All stocks are bad, unless they go up.”  Don’t fall in love with Apple and remember it is just a trade.  As always keep a lookout for a good time to lock in profits on a winning trade.

Bad Friday

By Jani Ziedins | Intraday Analysis

We’re somewhat lucky the markets are closed today with the monthly employment number coming in far under expectations.  The consensus estimate was for 210k new jobs, the actual number was just 120k.  No doubt that would have exacerbated the weakness we’ve already seen in the markets and most likely pushed us down to the lower end of the trading range and challenged support.  The one upshot for the market is this jobs report is so bad it could be good if it makes further quantitative easing by the Fed more likely.  It will be interesting to see how the market responds on Monday.

2011: Major market bottom or continuation of ’09 bull? rally

By Jani Ziedins | Intraday Analysis

Here are my thoughts on where we are in regard to the bull market cycle.  Remember, this and $3 will get you a cup of coffee.

Looking at a weekly chart dating back to 2009, visually it appears the most recent follow-through rally is simply a continuation of the 2009 bull market and not the start of a new bull.

1. We didn’t undercut the 2010 summer doldrums in 2011, so by that measure we didn’t reset the rally clock back to zero.
2. Given how powerful the 100%+ rally since the March ’09 bottom has been, a 20% decline in 2011 is kind of smallish given the scale of the rest of the move.
3. And lastly, the 2011 sell-off was a panic-driven, single-leg down that lasted just a couple weeks before finding a bottom.  In comparison, most major market bottoms are a reversal after prolonged declines comprised of multiple legs down.  In that context, it seems the recent rally is nothing more than a rebound from the panic induced selling last summer that turned out unjustified.

Using this context, if we were labeling things, we might call the Summer of 2011 an abrupt correction and not a full-on bear market.  It also appears to be a continuation pattern for the 2009 Bull.  But semantics are semantics and hopefully we don’t care nearly as much about labels as we do about anticipating future price action.

Now this is moving into soft science along the lines of reading tealeaves, but it looks like we could be in the 5th wave of an Elliott Wave.  (You can find good  information on Elliot Waves on Wikipedia.)

Why this is important is if we really are in wave five, that potentially means the next wave will be the start of the three-wave counter trend.  Paraphrasing W. O’Niel, if we get the direction of the market wrong, then most everything else we do will be wrong too.

Elliott Wave Theory is built on human psychology and shows up time and time again, but it is hard to use for timing trades because placing wave lines in real time is highly subjective.  In reality, it is a big picture tool to use occasionally to put market moves in perspective and it is most useful for reinforcing other ideas you are seeing.

Here is a second chart of the last few years with intermediate waves drawn on the chart showing the a smaller Elliott Wave pattern within each of the primary waves.  These patterns show up all the time, but the thing to be careful of is our natural tendencies to see patterns even when none exist.  But the intermediate waves seem to fit Elliot Wave Theory like a glove with their 5 waves up and 3 waves down.

Based on other signals in the market and economy, I don’t see a material corrective trend in our near future and this wave 5 still has a bit more room to run.  Maybe next year if economic growth pauses, that will provide the catalyst for a corrective trend.  But the two important things I do see happening due to the age of the bull is the rate of gains made in the markets will start to taper off as the bull gets older. And as part of this, we might see less correlation among stocks, making this the first time in years where stock picking has been important.  Over the past 4 years, you could have made a bunch of money (or lost a bunch of money) simply by owning any random stock.  Now we are getting to a place where simply holding random stocks will not give you the same bang for the buck and quality will start mattering again.  (recent gains in AAPL and other leaders are impressive, but pale in comparison to the 100% moves seen in broken names like SHLD, BAC and NFLX)

We just can’t keep up the pace of broad market gains we saw in 2009 and 2010.  After we reach a higher level of complacency, I expect we’ll see the corrective trend.  But this will still be part of a larger decade long secular bull market we started back in 2009, so view most pullbacks as buying opportunities.  And if you have a buy-and-hold portfolio, have the courage to hold through the dips.

Market showing weakness

By Jani Ziedins | Intraday Analysis

The indexes opened lower and have since retreated further on reports the Fed is less likely to pump more money into the system via QE3.  This strengthened the dollar and sent the US markets down. But that is just what the financial press is reporting.  The news is random, but the market’s reaction to it is not.  So it is somewhat telling that the market declines when the Fed say the economy is strong enough not to need another dose of quantitative easing.  In many ways that is far more bullish than an economy that requires additional intervention.  But the side effect of a less accommodating policy by the Fed is a stronger dollar, which recently has been inversely correlated to the US markets.  Anyway, headlines are headlines and price action is price action.  We make or lose money based upon price action, so that is what we need to watch.

While we are lower, we are still well within the consolidation range of ~1385 to ~1420 going back to early March, so directionally today’s price action is inconclusive and we are still waiting for a definitive signal one way or the other.  On the lower side we have a potential region of support at 1387, 1378, and 1370 from the recent the Mar 23 low, Feb 29 high, and 50dma.  Chances are we will fall closer to that region before the buy-the-dip folks come back in to support the market.  Then the real challenge will be seeing who has a larger following, the sellers or the buy-the-dip crowd.

So far buying the dip has been the smart move and I have no doubt we’ll see traders try it again.  But every with sell-off bounce, the probability the next one will bounce declines, if for no other reason than we are one bounce closer to the one that doesn’t bounce.  But either way I expect the market will throw a head fake at us with a breakout above or below the range before switching directions.  If the path is lower, then Monday’s new high was the head fake.  But if the trend is higher, we’ll probably see a head fake lower before heading higher, most likely by dropping through the 50dma before bouncing.

And the longer we can stay in this sideways range, the more supportive and bullish it becomes.  With major news events around the corner with the employment numbers this Friday and earnings starting soon, there are catalysts for launching the next move.  At the moment it feels like the market is a little extended due to the long run and without any external inputs, we’d probably drift lower.  But there are still enough skeptics sitting out this bull rally and they could push prices dramatically higher if the economy produces shockingly good employment numbers or companies continue to post record earnings.

As for how to trade this, there is nothing wrong with locking in some of the great profits from the first quarter.  Remember, it is much better to be out of the market wishing you were in, than in the market wishing you were out.  But with a couple key catalysts on the horizon, we could see another strong move higher if investors are caught flat footed again and have to start chasing this quarter too.

Stay safe.

New closing high

By Jani Ziedins | Intraday Analysis

The SPX made a new multi-year closing high Monday, recovering all of last week’s sell-off.  As encouraging as the price action was, the low volume is hinting at a lack of conviction among market participants. But, as we’ve seen over the last six-months, the market can rally substantially in the face of lackluster volume.

While Monday was not a definitive buy signal, it does indicate it is time to watch closely for convincing price action indicating there is substance to this rally and time to move back into the market.  Part of the goal of selling early is to move on and look for the next opportunity.  If that opportunity presents itself this week, then we need to jump back in when the original bear thesis is violated. In the market, it is okay to be wrong, but it is suicidal to stay wrong.

A close higher in strong volume Tuesday would send a strong bullish sign.  But on the other hand, lackluster volume and price action could signal the current bounce is running out of steam.  My inclination is to believe the last couple days have been a bounce preceding a move lower, and the buy-the-dip crowd is about to run out of gas, but I am not stuck on this position and will be ready to get long when the bulls show they have control.  But if we do move higher, I will still be cautious because we are on thin ice with such a long move behind us and a relatively high distribution count.

As always, stay safe and remember there will always be future profit opportunities, so don’t force a bad trade.