Monthly Archives: February 2013

Feb 28

PM: Sequester time

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks held yesterday’s big gains, but late selling on sequester worries is giving traders second thoughts.

MARKET BEHAVIOR

Stocks traded higher through the day but fell apart in the last two-hours, finishing near flat.

MARKET SENTIMENT

The market cracked after the Senate rejected two sequester proposals, but as worrisome as the last hour looked, the market still finished near Wednesday’s highs.  No doubt selling will continue Friday as the automatic sequester cuts kick in, but most of the weak holders already bailed in the recent dip, meaning a large part of that nervous selling already happened.  Everyone knows sequester is coming and most have so little confidence in our politicians that a breakdown in negotiations will surprise few.

Sequester gridlock could weaken the market, but it will come from a lack of willing buyers, not a flood of sellers.  Anyone who can’t stomach volatility sold earlier this week.  Remaining holders are more calm and confident and won’t stampede for the exits at the first signs of trouble.

Sequester cuts or not, the economy will continue improving no matter what happens and the stock market will quickly move past this drama.  Obviously cuts in govt spending won’t help the employment situation and it will delay the recovery, but we will get past it and any dip will be another buying opportunity.  If a financial meltdown, 10% unemployment, and European Contagion couldn’t kill this bull, what are the chances some govt spending cuts will?

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how weak the market is on Friday if a deal fails to materialize.  Will it be a 15-point dip or a 50-point plunge?  My money is on the former, but that is what stop-losses are for.  Most of the paranoid are already out of the market so I don’t expect a mad rush for the exits.  Between unemployment, money printing, deficit spending, stimulus, Obama’s reelection, the Fiscal Cliff, Debt Ceiling, and now the Sequester, anyone who thinks these things are a big deal is not in this market and their opinion no longer pressures market prices.

If sellers keep their cool, the future of this market rests in buyers’ hands.  Look for initial reluctance, but that hesitation will fade once the world holds together and life goes on.  The key level of support is 1500 and the rally remains intact as long as we hold this level. There are just a few weeks left in this quarter and the pressure will be on for underperforming money managers to catch this market.  Expect their buying to fuel the next leg of this rally.

Alternate Outcome:
If the Sequester negotiations get particularly nasty and entrenched, this could lead to more serious govt funding issues down the road (debt ceiling).  As we saw last week, the herd can panic on seemingly benign news from halfway around the world.  A sequester impasse could trigger another stampede for the exits if everyone starts selling just because everyone else is selling.  I don’t expect this, but we have to be prepared and stick with our stop-losses just incase.

INDIVIDUAL STOCKS

AAPL is barely holding $440 and broad market weakness will send it to a new low.  The stock would have bounced already if it was unsustainably over-sold, meaning it’s not oversold yet.   Stocks often bottom in a ‘V’ and if AAPL is going to do that, it needs to form the left side of the ‘V’.  Most likely there is one last flush lower before this stock will finally demoralize the hopeful and find a bottom.  Any long-term holder needs to be mentally prepared to sit through this kind of volatility.  The worst thing will be riding this stock all the way down, only to bail out just before it finally rebounds.

Stay safe

Feb 28

AM: Digesting gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

S&P500 daily at 1:12 EST

AM Update

MARKET BEHAVIOR

A quiet and uneventful morning after seven consecutive sessions of heart-pounding volatility.

MARKET SENTIMENT

Neither buyers nor sellers showed up in force and the market is digesting recent gains.  The last week-and-a-half humiliated bulls and bears alike as it duped many into making impulsive and ill-timed trades.  At present everyone is too shell-shocked and hesitant to make a decisive move, but this calm is an important step in regaining composure.

When in doubt, stick with the trend.  The high-volume selling purged all complacency and much of the fat that accumulated since the start of the year.  Technically speaking, the dip under 1500 cleared the minefield of automatic stop-losses, making that area far less dangerous to the market.  But chances are we won’t test this area again since all the sellers under 1500 now need to figure out how to get back in and their buying will prop up any potential dips.

When the market marches ahead, those left behind hope for a pullback.  We had that pullback this week, but how many jumped on the opportunity to get in?  My guess is not many.  In fact many of the holders who were lucky enough to be in the market were spooked out by the dip under 1500.  Now both of these groups need to figure out how to get back in and their chasing is the fuel that will keep this market moving higher.

Buying is only half the equation and we also need to consider sellers.  Anyone who held through recent volatility is feeling pretty good about themselves right now.  Maybe they held because of discipline, or they failed to sell because they froze under pressure, but either way they are congratulating themselves for sticking it out.  This affirmation and positive reinforcement makes them holders less likely to sell the next dip.  Add to this to all the buyers looking to get in and we have a recipe for higher prices.  At least until we run out of buyers…….

TRADING OPPORTUNITIES

Expected Outcome:
We might see some weakness if sequester negotiations bog down, but most holders expect this and are growing immune to the gridlock in DC.  The more interesting thing will be watching the post-sequester trade.  Will the market spike on a deal?  Is the market already expecting the deal and will selloff on the news?  Can it do both?

An interesting trade would be a surge higher on compromise out of DC, but if the buying comes in too fast, it could build the head of the head-and-shoulders.  A one-way run up to  1550 or 1575 should be looked at with a healthy dose of skepticism.  On the other hand, modest, measured, and earned gains are sustainable and indicate there is more left in this rally.  The recent dip to the 50dma refreshed and renewed the rally meaning we might only be halfway through this move.

Alternate Outcome:
After the Fiscal Cliff and Debt Ceiling scares and last second compromises, the market might be looking past the sequester expecting a deal is all certain.  The risk is if politicians say enough is enough and refuse to compromise any further, using a govt shutdown to prove a point.  Its happened before and the uncertainty will roil the markets.  While certainly a possibility, our politicians care more about their reputation than doing the right thing.  Look for them to be politically expedient and leave the hard work for someone else down the road.

AAPL daily at 1:13 EST

AAPL daily at 1:13 EST

INDIVIDUAL STOCKS

AAPL is finding support around $445 and is resisting a selloff after an uninspiring investor day yesterday.    $450 has been near-term resistance.  Breaking above and holding this level would be supportive of a swing-trade higher.  The stock already missed the opportunity for a quick rebound and any long-term investors should expect a 12 to 18 month.  In the meantime there is still a lot of money to be made swing-trading or selling options.  Just because this isn’t a set-it-and-forget it trade anymore doesn’t mean we should stop paying attention to it.

Stay safe

Feb 27

PM: Game on

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The rally is back on after stocks decisively recaptured 1500 and closed above 1515.  But on one of the biggest days of the year AAPL was MIA as investors were underwhelmed by investor day.

MARKET BEHAVIOR

Stocks had a good day, recovering most of Monday’s plunge.  Volume was average, but lower than the recent down-days.

MARKET SENTIMENT

Amazing the difference a couple of days make.  Monday afternoon markets were collapsing and bulls were on the menu.  Today the rally is back on and bears are in the fryer.  This is a very impulsive market and anyone listening to his gut is getting torn to shreds.  There was a ton of money to be made, but it took a cool head and a plan, something in short supply when the herd is stampeding one way or another.

Bears took solace from today’s light-volume and warn of lack of conviction, but like anything in the markets, there are two ways to look at it.  Stocks move on supply and demand, nothing more, nothing less.  Within supply and demand, we have 4 constituents that move prices; aggressive buyers, aggressive sellers, reluctant buyers, and reluctant sellers.  Most people intuitively understand the first two where people yell “buy, buy, buy” or “sell, sell, sell”.  This excitability is exhibited during high-volume moves.  But the market also moves on low-volume too.  This is when holders are unwilling to part with their stock at present levels, or buyers are unwilling pay current prices.  Today’s low-volume rally showed unwillingness from holder to let go of their shares.  This reluctance to sell limited supply and resulting scarcity drove prices sharply higher.

The last few days of selling flushed out many weak holders and the buyers who stepped in acknowledged the risk and are more comfortable sitting through some volatility.  Because these new holders are less likely to get spooked out of their positions, their resolve takes out supply and puts a floor under the market.  This is exactly what happened Tuesday.  Today’s 20-point surge further reinforced this phenomena as holders were rewarded for sitting through the dip.  Combine these factors and we have a core group of holders that is far less likely to sell into future volatility.  The interesting thing is this reluctance to sell volatility actually eliminates volatility because supply no longer floods the market.

As we’ve been discussing for weeks now, this market is not going to fall apart on news.  We’ve seen quick dips on the Fiscal Cliff, negative GDP, and now turmoil in Europe, but every time it was a buying opportunity.  We have sequester around the corner, but this is widely telegraphed and while it won’t be pretty, no politician wants to go down with the ship and it will get taken care of.  Anything short of a complete breakdown will just be a sideshow and the market has already priced in some delay.

If this market won’t fall apart on bad news, what’s left?  Running out of buyers.  As more people buy this rally, there are fewer left to buy it.  Once everyone is on the rally bandwagon, we no longer have new people to keep pushing prices higher.  This week’s decisive rebound went a long way to convincing people that the only way to trade this market is from the long side.  And while they are right, they are also late.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working.  The market clearly wants to go higher and look for new highs in coming weeks.  Today’s 20-point rally was huge and a modest pullback to digest these gains should be expected.  But given the decisiveness of this rebound, a dip back under 1500 is a serious failure and most likely signals the end of the rally.

This morning’s break above 1500 was obviously a good entry point, but for those that missed it, it is harder to get in now the market has moved this far.  Look for a dip back to 1510 and use that as an entry point.  No matter where you got it, a stop-loss just under 1500 is a good idea.

The next question is how much further will this go.  Barring a meltdown, 1530 is all but a done deal and 1550 is highly likely.  New all-time highs at 1575 is also on the table, but we need to see the market move ahead sustainably.  If the prices race ahead without taking a break, that will signal exhaustion and the end of this rally as it sucks in the last of the available buyers.  But a more measured and deliberate rally that takes its time is more sustainable and could carry us as high as 1600.  We will revisit the price-action and sentiment at 1550 to determine if we should hang on or take profits.

Alternate Outcome:
The market is an equal opportunity humiliator, zinging both bulls and bears over recent days.  While bulls have the upper hand, this could be one last bull-trap before collapsing on sequester worries.  In markets like these, we have two options, staying on the sidelines, or picking sides.  I’m on the rally side, but recognize that I could be wrong and will use a stop-loss under 1500 to get me out.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL sold off on one of the strongest market days of the year when Cook failed to impress traders at investor day.  There were rumors of stock splits and hopes of giving money to shareholders, but the wishful left empty-handed.  From a sentiment point of view, it is interesting watching the stock respond so strongly to rumors.  A few weeks ago it rallied to $485 before Cook spoke at a conference.  Yesterday it rallied $10 in minutes on rumors of a 10 for 1 stock split.  This reeks of desperation as bulls grasp at straws and jump on any rumor that comes around.  This shows there is still too much hope left in this stock.  When all the faithful already own the company, who is left to buy?

Stay safe

Feb 27

AM: Humble pie

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:11 EST

S&P500 daily at 1:11 EST

AM Update

Bears are humiliated today as the break above 1510 sent shorts running for cover.  AAPL’s investor day is uninspiring and the stock is sagging as another catalyst came and went.

MARKET BEHAVIOR

Stocks broke above 1500 and continued past 1510 in morning trade.  Runaway selling on Monday gave way to binge buying.

MARKET SENTIMENT

Two-days ago the world was ending and now it is saved.  Try as they will, fundamentalists, technicians, and the financial press cannot explain away these recent swings using headlines, data, or charts.  There is only one thing that moves markets, supply and demand.  Herd psychology is taking over as people make trading decisions exclusively based on what other people are doing.  Normal rules do not apply in times like these and is why it is so important to understand what people think, how they are positioned, and why they are doing what they are doing.

Shorts and breakout buyers are chasing this market higher and while their buying is not sustainable, the rally is sending a wave of relief through the market.  Traders who held the dip are feeling better and anyone who sold the dip is suffering a bout of regret.  The obvious short was anything but and bears have humble pie all over their face.

Reclaiming 1500 and 1510 is significant.  While volatility will persist, this rebound shows bears have less sway over the market than most thought.  The recent rebound further diminish their credibility and traders are becoming more comfortable holding this market.  But in one of the most ironic paradoxes of the market, the smaller a group, the more powerful it becomes.  As the bear contingent shrinks we need to become more fearful them.  The more bullish people become, the greater the risk of running out of new buyers becomes.  This is the psychology and structural trade that leads to double-tops and head-and-shoulders patterns.  The first breakdown typically fails and bounces higher because too much cynicism and doubt remains.  With each successful bounce, the rally bandwagon becomes more and more crowded, eventually succumbing to its own success when everyone is bullish.

TRADING OPPORTUNITIES

Expected Outcome:
This market is showing how important it is to trade proactively, not reactively.  There was a lot of money to be made using defined buy-points, stop-losses, and taking worthwhile profits.  Unfortunately for many, this has been a horrible couple days as they bought the rally and sold the dip.

The market reclaimed 1500 and has a comfortable cushion above this key support level.  The obvious stop-loss is 1495 and anyone who overcame their fear and bought the  break above 1500 is doing pretty well right now.  There is no reason to become complacent here, but so it looks like higher-highs are in our future.

Alternate Outcome:
Until the market makes a higher-high, the risk of a suckers rally is real.  Markets often bounce on their way lower, sucking in bottom-pickers and flushing out late shorts.  Any bull needs to acknowledge they can be wrong and this is where stop-losses are worth their weight in gold.  Success in the market isn’t about how much we make when we are right, but how little we lose when wrong.

AAPL daily at 1:11 EST

AAPL daily at 1:11 EST

INDIVIDUAL STOCKS

AAPL is down 1.5% halfway through its investor day as the market has been underwhelmed by what it heard.  There is still time to surprise the market in the Q&A, but if there was real meat to this story, Cook would have presented that early.  With another catalyst come and gone, look for the stock to resume its slide lower.  There are still too many hopeful holders in this stock for it to make a meaningful rebound without an insanely cool new product that will reinvent the company.  The iPhone6 or another me-too streaming TV device just isn’t going to do it.

LNKD is squeezing bears again as something that’s gone too-far, too-fast keeps going.

Stay safe

Feb 26

PM: Buy or sell?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market took a break after yesterday’s major slide and AAPL bounced ahead of Wednesday’s investor day.

MARKET BEHAVIOR

Stocks reclaimed a portion of yesterday’s selloff, but remain under 1500.  Volume was just 1% lower than yesterday’s plunge, showing a fair number of shares changed hands.  The 0.6% bounce was enough to recover the final minutes of Monday’s panic selling, but the market refused to climb above 1500, an obvious technical level for anyone who even casually follows stock charts.

MARKET SENTIMENT

Buyable dip or dead-cat bounce?  That’s the million-dollar question.  The market bounced off 1500 half a dozen times over the last few weeks, does it have one last helping hand for the market, or will former support turn into resistance?

1500 is the line in the sand.  Rallying above this key level will trigger a short-squeeze and send the market higher on a wave of short covering.  Momentum traders will jump on the bandwagon, helping propel the market through 1510.  Recovering the majority of the selloff will put peoples’ minds at ease and the rally continues.  Or the market bumps its head on 1500 and the selloff continues.

TRADING OPPORTUNITIES

Expected Outcome:
I still think the market has new highs in it, but what I think doesn’t matter and we need to follow the market’s lead.  A break above 1500 is buyable and a break below 1475 is shortable.  In the meantime, look for the market to oscillate between these levels.  It‘s entirely possible we see a third-wave of selling take us to 1475 before we finally bottom, reclaim 1500, and make new highs.  The obvious breakout trade is often too easy, so anticipate a head-fake or two along the way.

Take this time to plan your trade.  Will you buy a break above 1500?  What will your stop-loss be?  What profit target are you looking for?  Will you short resistance at 1500?  What stop will you use?  What is your profit target?  What about a break below 1475?  Plan your trade and trade your plan.

Alternate Outcome:

The expected trade is an eventual rebound to new highs, but this market could easily be topping.  The bears have reams of data showing how horrible the world is and they could be right.  We trade with stop-losses because it is impossible to be right every time.  Success isn’t about how much money we make when we are right, but how little we lose when we are wrong.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

Finally something new to talk about with AAPL.  The stock popped $10 after rumors surfaced that Cook will announce a 10 for 1 stock split at Wednesday’s investor day.  I’m not sure why people are so excited about this; maybe they are just bad at math.  When I was a kid, my dad was teaching my brother and I about money.  He offered to trade my 6-year-old brother’s $1 allowance for three-quarters.  My brother thought more was obviously better and took my dad’s offer.  That’s what I think of when people get excited about stock splits.

People will argue $45 is far more accessible than $450 and it will let little guys buy the stock, adding to demand, and pushing prices higher.  Of course on the other side, $450 is far more prestigious and impressive than $45.  Of all the exciting and innovative tech companies out there, how many have a stock price less than $100?  If AAPL is desperate enough to cater to the 20-year-old investor demographic, that will be a major turning point in a once proud company.

I have little doubt the stock-split crowd will bid up a split, but that is a selling opportunity, not a fundamental catalyst.   Far more interesting will be details of what AAPL plans to do with its cash hoard, but since the company has a history of under delivering in this regard, expect the market to be disappointed yet again.

Investors are waiting for more pioneering innovation out of AAPL.  The stock is lagging because competition is catching up, and in some cases exceeding AAPL.  Stock splits and dividends ignore the real reason AAPL’s stock is lagging.  Without addressing the root cause, expect the lagging to continue.

Stay safe

Feb 26

AM: Buy the dip?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:57 EST

S&P500 daily at 12:57 EST

AM Update

Selling abated and buyers are waiting for better prices.  AAPL is within a whisker of setting a new low as its underperformance continues.

MARKET BEHAVIOR

Selling took a break this morning and the market is vacillating between gains and losses.  While it is good the market broke the fever of impulsive selling, a material dip under Monday’s lows could set off another wave of reactive selling, pushing the market to the 50dma/1475 level.

MARKET SENTIMENT

While the market is still on edge, holders are no longer rushing for the exit and everyone is waiting to see what happens next.  Selling dried up but prices remain flat because opportunistic buyers are waiting for even more attractive prices before jumping in.  Over the near-term the most likely buyers are late shorts forced to cover on any strength.  While this is not sustainable buying, it will be enough to seduce dip-buyers to jump on the bandwagon.

TRADING OPPORTUNITIES

Expected Outcome:
Recent selling does not prove this market will not top in a more traditional double-top, head-and-shoulders, or exhaustion surge.  This dip is potentially forming the left-shoulder of the H&S or the middle pullback of a double-top.  Further, this might simply be an intra-rally check back to the 50dma, something common in extended rallies. Either way, expect new highs in the near-term.  Look for the market to bounce somewhere above 1475.  A lot of selling has already occurred and we are closer to the end of this dip.  While we might have a little further to go, shorts should lock-in profits before a short-squeeze wipes them out.

The most aggressive traders can buy this pause and use 1475 as a stop, but the safer move is waiting for the market to reclaim 1500.  The size and volatility of this dip did a good job of refreshing the rally and if we continue higher, look for 1550 or even all-time highs at 1575.

Alternate Outcome:
This really could be the selloff everyone’s been waiting for and talking about.  While I am suspicious of anything widely believed, sometimes the crowd is right.  There are countless reasons for this market to implode and yesterday’s Italian election added to the list.  Every rally ends and this could be the early stages of a massive correction.  While I don’t buy this story, stop-losses are the best way to protect my portfolio from hubris.  I’m okay with calculated 10-point losses when a trade doesn’t work, but that is a far different risk profile than holding through a 200-point collapse because I refused to admit defeat.

No matter which side of this trade you are on, plan your trade and trade your plan.  Identify buy/short points, stop-losses, and levels to take profits; then stick to these.  If the market reaches your buy point, buy.  If it reaches a sell point, sell.

AAPL daily at 12:58 EST

AAPL daily at 12:58 EST

INDIVIDUAL STOCKS

AAPL was within a dollar of making a new low.  In a day where the market is practically flat, AAPL fell nearly 1% in early trade.  Breaking $435 will trigger another wave of stop-loss selling and shorting by bears.  At this point even a broad market rebound cannot save this stock.  While it might initially bounce on market strength, look for the stair stepping lower to continue.  $400 is a major psychological level and expect the market to test it.  That is another 10% dip from here.  Current holders need to ask themselves how much further they are willing to ride this down.

Stay safe

Feb 25

PM: The Plunge

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The biggest down day since early November sent a chill through investors.  Was this simply a technical selloff that will recover quickly, or the start of something more sinister?

MARKET BEHAVIOR

Dramatic selloff in the markets with an intraday range exceeding 2.25%.  This was the biggest drop since the Wednesday following the election.  Volume was 15% above average, but lower than the selling volume last Wednesday and Thursday.

The market clearly sliced through support at 1500 and is now just 10-points above the 50dma and the 1475 high from last fall.

MARKET SENTIMENT

There was no legitimate fundamental reason for the selloff today.  The financial press is pointing to polling out of Italy, but everyone knows Euro Contagion is the Boy Who Called Wolf.  It’s been three-years without a collapse and we will still be talking about an ‘imminent’ collapse next year too.

The real story is sellers selling because everyone else was selling.  Herd psychology triggering this stamped plain and simple.  The market opened innocently enough, gapping up 0.5%, but quickly ran out of buyers after short-squeeze buying dried up.  By late morning it was stair-stepping lower on Euro concerns and the last hour was a mad rush for the exits as prices cratered when buyers failed to show up.

Much of the selling was technically based, especially in the last hour as the market broke substantial support near 1500 and automatic stop-losses triggered a cascading wave of selling.  Potential buyers were just as spooked by the selling and chose to wait and see.  Without buyers the market fell through a trapdoor.

Where does today’s selloff leave market sentiment and how are people positioned?

The interesting thing is today’s massive move came on relatively light-volume and was the lowest volume of the last three down-days.   While the drop was dramatic, the actual level of selling is decreasing and suggests fewer people are bailing out.  Today’s big drop had more to do with reluctant buyers than a mad rush of sellers.  If selling continues slowing down, that will create a near-term bottom and short covering will bounce the market higher.

This massive plunge from record highs and swelling volatility replaced complacency with fear. Any weak holders likely sold in today’s bloodbath.  But if the nervous are running for cover who is buying?  Buyers acknowledge the risk of further downside, but think the selling is overdone.  These new buyers are far more comfortable holding volatility and their resolve will give us more stability going forward.  Of course ‘more’ is a relative term and while volatility will continue, don’t expect another selloff of today’s magnitude in the near future.

TRADING OPPORTUNITIES

Expected Outcome:
Clearly my call to buy the 1500 dip last week was premature and as I often say, early is the same thing as wrong. Further, I might not even be early if the market continues selling off, but that is what stop-losses are for.  We identified 1505 as a valid entry and 1495 as the bailout.  While the trade worked beautifully until 10am this morning, the stop-loss got us out for a modest loss this afternoon.  As we discussed last week, a dip under 1500 was a realistic outcome and that made 1475 the next logical level for support.

There is no reason for the average investor to be playing these dips because it is too easy to get run over by the herd.  But if someone wants to trade the expected rebound, wait for the market to regain 1500 and use 1495 as a stop-loss.  The upside is a new high above 1530 and will most likely continuing past 1540.  5-points of risk for a 30-point gain is a very favorable risk/reward.  Waiting for the market to recover a key technical level avoids the risk of catching a falling knife and leaves a trader on the sidelines if the market continues breaking down.

Alternate Outcome:
If the expected outcome is a buyable dip, the alternative is a crash through 1475, breaking 1450, then 14245, and finally 1400. Expect a technical bounce at 1475, but if the market cannot regain 1500, look for more downside and that is where the short should be put on.  Don’t short this market here, wait for the bounce.

INDIVIDUAL STOCKS

NFLX held up surprisingly well relative to the rest of the market.  Its 0.3% loss is practically an up day when the indexes lose 1.8%.

AAPL actually didn’t do too bad, simply mirroring the indexes 1.8% loss.  The thing to watch is if it recovers when the market recovers or if it continues ratcheting lower.

AMZN failed to hold the 50dma.  High beta-stocks like AMZN rarely work when the market is falling apart and is why understanding what the broad market is key part of trading individual stocks. If the market bounces back, look for AMZN to follow.

Stay safe

 

Feb 25

AM: Bounce or breakdown?

By Jani Ziedins | Intraday Analysis

AM Update

Volatility is chewing up impulsive traders, but the rebound remains in tact as long as we hold 1500.  AAPL is holding $450, but what happens if the market takes a dive?

S&P500 daily at 1:15 EST

S&P500 daily at 1:15 EST

MARKET BEHAVIOR

Stocks gapped higher at the open, but slid through the morning, giving back all those gains and then some.  The intraday range already exceeded 1% and continues the recent trend of volatility and indecision.

MARKET SENTIMENT

The market is in a sucker’s phase where it throws in all kinds of fake signals to dupe impulsive traders.  In periods like this it is best to act proactively, not reactively.  Take profits into strength and buy dips.  Anyone buying strength and selling dips is having a bad time.  The safest trade is letting the gamblers sort this out while watching from the sidelines.

Early weakness is blamed on election polling out of Italy, but if the market is ignoring sequestration and negative GDP, why will it crash on European politics?  The ‘bad’ guys won in Greece a couple of years ago and we see what happened there.  Nothing.  Why will Italy be any different?

Of course this is the market we are dealing with and it doesn’t always act rationally.  We could implode in a cascade of irrational selling, but since that is what people expect, I have my doubts.  No one believes this rally and that is why it keeps working.

People trade their opinion and anyone suspicious of this market is already defensive and underweight.  There are far more available buyers than sellers here.  Recent support at 1500 shows most holders are comfortable holding through weakness.  This limits supply and puts a floor under the market.  On the other side, shorts and money managers feeling pressure to catch this market will be forced to buy any strength.  Limited supply and lots of demand is a recipe for higher prices.

This rally leg is getting a bit old and anyone calling for a pullback is right, just early and in the markets early is the same thing as wrong.  We will pullback, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
The market is still well above support at 1500 and until we violate this level, the rebound is alive and well.  No doubt I could be wrong and that is what stop-losses are for.  Markets like this are best suited for decisive traders who are willing to act early.  Anyone who bought the market in the low 1500s is still okay.  Those that waited for a confirmation of the bounce before buying are being flushed out for a loss.

To succeed in volatile markets like these, identify ahead of time levels that show support and resistance.  Plan trades around these levels and then stick to that plan.  Last Thursday breaking 1500 but quickly recovering showed strength and was a legitimate buy signal.  For those traders, stick with the trade until the market breaks under 1500 and don’t get sucked into the emotional selling today.  Chances are good we will not fall back to 1500 and it will be an easy hold.

Alternate Outcome:
Markets often reverses on seemingly benign news.  If reversals were obvious, everyone would be rich and we know that is not the case.  We make the high-probability trade, but use stop-losses to protect against flawed and incomplete analysis.  Without a doubt Italy could be the straw that breaks the camel’s back, but we need to stick with the high-probability trade and that remains higher.  But we cannot ignore the other side of the trade and that is a bigger market selloff.  The market can slice through 1500 but will likely find support at 1475.  Failing support at 1475 means this rally is done and we need to wait for the next high-probability opportunity.

AAPL daily at 1:16 EST

AAPL daily at 1:16 EST

INDIVIDUAL STOCKS

AAPL is mirroring the indexes, gapping at the open, but pulling back in midday trade.  So far there is nothing new from today’s trade and the trend is more likely to continue than reverse.  The bigger challenge for AAPL will be holding up through a 10% dip in the broad market.  Since AAPL is a high beta name, it can fall more than 2x the indexes.  A 20% drop in AAPL means there is potentially another $90 of downside risk left in the name if the broad market hits a rough patch.  Are long-term AAPL investors willing to hold through that kind of volatility?

Stay safe

Feb 24

LA: Buy the dip?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review and Look Ahead

Look for a quick bounce from last week’s dip as holders grow more comfortable holding.  This market will top, just not yet.  AAPL continues its 6-month trend of lower-highs and lower-lows.  Don’t bottom pick in this stock and wait for strength to come back before buying.

MARKET BEHAVIOR

Stocks recorded their first negative week of the year and shook out a pile of nervous holders in the process.  Weekly volume was light due to the holiday, but each day was near or above average, meaning it was not a quiet trading week.  The 10wma is catching the market and only 33-points behind.   The slower moving 40wma is still 100-points, but closing the gap.

While the market finished down just 4-points, the weekly range of 34-points was the widest we’ve seen in a while, setting a new high and temporarily dipping under support at 1500.  Obviously things didn’t workout as planned for anyone buying the breakout or shorting the breakdown and everyone will be watching anxiously for the market’s next move.

MARKET SENTIMENT

There are two kinds of pullbacks, those that go further than expected and those that bounce quicker than expected.  While there are no hard rules in the market, extended pullbacks are usually rooted in emotion.  Obama winning reelection and the Fiscal Cliff debate lead to a wave of emotional selling as traders left reason at the door and predicted an imminent collapse of the American way of life.  The subsequent rebound was equally impressive because the selling was unjustified.  Now compare this to the dips that were more structurally based and arose from buyers taking a break.  Selloffs caused by normal supply and demand imbalances are short-lived because the market is simply regaining its footing.

Many traders expect last week’s selling to continue, but it really doesn’t need to and in fact the high-probability trade is a quick bounce.  Of course quick is a relative term and can mean anything from 1 to 3 weeks, but the sheer number of people thinking this selling will continue leads me to believe it is likely done.  I could be wrong, but that’s what stop-losses are for.

TRADING OPPORTUNITIES

Expected Outcome:
The harder trade is buying the dip after only two-day, but the dramatic shift in sentiment and surge in the VIX suggests we already shook complacency from the market.  It is encouraging selling dried up on Thursday as holders kept holding after a dip under 1500.  And more than that, anyone who held the dip is feeling pretty smart and  even more committed to this rally.  That growing confidence among holders is why this market will not top on bad news.  No doubt the rally’s days are numbered, but the correction will happen from running out of buyers.  In the near-term continued strength will force bears to cover shorts and those trailing the market will keep chasing, meaning there is more buying left in this move.

Alternate Outcome:
Two-days of selling might not be enough and we could see another week or two of weakness before the market makes new highs again.  The deeper the selling, the more sustainable this rally becomes.  Shaking weak hands is what refreshes the market and clears the way for a move higher. If we resume the rally after just two-days of selling, the rally will be fragile and close to topping.  A deeper dip will let this market more thoroughly refresh, potentially extending into the 2nd quarter.

As for a trade, stay long the market as long as it holds above 1495 and look for a new high stretching past 1540 over the next few weeks.  A dip under 1495 means the market will test support at 1475.  No one knows for sure what the market will do next week and we will revise our outlook as the market gives us new information.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL fell 2% for the week and is resting at $450.  Upside resistance remains at $485 and the low of the move is $432.  Dropping under $432 will extend the pattern of lower-lows and a close above $485 gives the stock its first higher-high in 6-months.  It took rumors of an increased dividend to push the stock up to $485 two-weeks ago and it will most likely take another fundamental catalyst to get it back up there.  Without some great news, expect the stock to continue drifting lower.  The stock could rally on broad market strength, but use that as a selling opportunity and resist the temptation to buy strength until the stock regains $485.

Stay safe

Feb 22

PM: Bulls fight back

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market ended the selling and found support at 1500, bouncing back to resistance/support at 1515.  AAPL stopped the losing streak, but is just leading on hopeful holders and NFLX is taking a much-needed break.

MARKET BEHAVIOR

Stocks recovered all of Thursday’s losses and finished at the highs of the day.  Volume was fairly average, but quite a bit less than the elevated selling over the previous two-days.

The last few days of trade brought volatility back to the market and most tops involve elevated volatility leading up to the reversal point.  That doesn’t mean the market is about to collapse, we just need to be aware we are approaching that point.

Today shows 1500 continues to be a point where buyers are willing to step in.  The market finished at 1515, a level that provided both resistance and support going back to the beginning of the month.

MARKET BEHAVIOR

Today’s rally ended the selling streak and rewarded holders that sat through the weakness.  Low-volume show few were excited to buy, but more noteworthy is fewer were willing to sell as supply dried up and the market bounced hard.

All the hype that said this was the start of a big selloff spooked out most weak holders.  Once the paranoid finished selling, longer-viewed investors that already sat through the Fiscal Cliff and a negative GDP report were not spooked by some meeting minutes.  That bodes well for the continuation and supports the thesis that this market will top due to running out of buyers (optimism), not negative headlines (fear).

TRADING OPPORTUNITIES

Expected Outcome:
I still expect the market will make new highs before the end of the quarter, meaning we have at least another 15-20 points of upside left.  In reality the market will likely blow past the old high of 1531 as it triggers a new wave of short-covering and breakout buying.

Don’t get me wrong, I am not a raging bull and think the market is in the process of topping, I just don’t think the top is in yet.  For various psychological reasons markets most often reverse in double-tops, head-and-shoulders, and exhaustion surges.  So far I don’t see any reason this time will be different.  That means Tuesday’s high is not the top and the high-probability trade remains buying the dip.

Alternate Outcome:
Today’s rally could be a head-fake to suck in bottom-pickers before steamrolling them with another crushing down-day on Monday.  I don’t dispute the real possibility of another horrible week.  There are no grantees in the market and every trade involves risk, the difference is the savvy trader uses probabilities to move the odds in his favor.  I could be wrong about buying this dip, but that doesn’t make it a bad trade.  Savvy traders manage risk by looking for the high-probability trade and using stop-losses to protect against unexpected losses.

If weakness continues next week, look for a dip to 1475, but that will be another potential rebound point.  Failing support at 1500 doesn’t kill this rally, but dropping through 1475 does.

NFLX daily at end of day

NFLX daily at end of day

INDIVIDUAL STOCKS

AAPL finally saw its first up-day since Cook crushed investor’s hopes for an increased dividend/buyback.   If people are buying this bottom, I have a bridge to sell them.  I shouldn’t be so flippant because so many people are stuck in this trade, but I’ve warned about this for weeks now.  I was sucked into the AAPL earnings story just like everyone else.  The difference is I took my lumps after earnings came out, realized my investment thesis was flawed, sold out, and moved on.  We are in this to make money, not own stocks.  If something isn’t working, stop doing it and find something that is.

NFLX ran into some selling the last couple days.  Holding out for more than a 100% gain is just plain greedy.  It was obvious the stock would continue higher after earnings, just like it is obvious it will pullback after hitting ~$200.  That doesn’t mean the story is dead, the stock simply needs to catch its breath.  Look for a pullback to at least $160 before resuming the rally higher.

Stay safe

Feb 22

AM: Stocks finding a bid

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

S&P500 daily at 1:19 EST

AM Update

The market is finding support and recovering recent losses.  Should this strength be bought or sold?  AAPL continues its lifeless trade and AMZN is setting up to break either direction.

MARKET BEHAVIOR

Stocks are finding support above 1500 as the wave of impulsive selling abated and traders are using the pause to more rationally evaluate the market.

MARKET SENTIMENT

The last couple of days were dominated by “sell first, ask questions later”, but some sanity has finally returned after bottoming around 1500.  This is an important development because herd psychology can trigger massive selloffs when people start selling simply because everyone else is selling.  The most encouraging sign of support came yesterday afternoon when the market didn’t collapse after dipping under 1500.  That was the perfect setup for technical stop-loss selling to trigger wider selling.  Demonstrating support in face of all those automatic stop-losses showed selling was slowing down, not picking up.

Everyone acknowledged the recent series of non-stop new highs was getting frothy and this two-day pullback addressed that.  The bigger question is if this was enough of a dip to resume the uptrend, or do we need to see more selling before this thing finally bottoms?  Markets top on complacency and how quickly the mood changed once the selling started shows me this market is not complacent and traders are still cynical and edgy.  Topping complacency is when stocks start selling off a little at a time and no one seems to notice or care.  Clearly that was not the case here.

The encouraging thing for the bull is the recent dip created a new pool of potential buyers.  Recent shorts and swing-traders that jumped out will turn into buyers if the rally resumes.  Markets move on supply and demand only, this renewed pool of buyers gives us more fuel to keep the rally going.

TRADING OPPORTUNITIES

Expected Outcome:
Arresting the slide shows the emotional selling has dried up for the time being.  That doesn’t mean the coast is clear, it just says the risks of an avalanche of herd selling has returned to more normal levels and makes it a little safer to buy-the-dip.

Even thought we are seeing some calm here, this could simply be the eye of the storm.  We need to use stop-losses to protect our account we jump in too early.  A stop-loss at 1495 provides a reasonable level of protection while still giving the market enough room to move around.  Everything I see still points to new highs before the end of the quarter and set your profit target accordingly.  The only question is if 1500 is the bottom or we need to dip down to 1475 first.

Alternate Outcome:
This pause could simply be a dead-cat bounce on the way lower.  The market is the most humbling contraption ever created and if too many traders are betting on the bounce, it will humiliate all of us by continuing the selloff.  Of course if I were in charge and my goals was to crush as many traders as I could, I would let the market rebound before sending it down for real.  Rather than just zing bull or bears, why not get them both at the same time?

INDIVIDUAL STOCKS

AAPL daily at 1:19 EST

AAPL daily at 1:19 EST

AAPL is on pace to log its first green day in over a week.  While this is good, the lifeless sideways trade is showing little conviction supporting these gains.  As much as people hate to hear it, I still think there are new lows coming and any strength is a selling opportunity.

AMZN is doing its best to prove both bulls and bears wrong as it seems magnetically attracted to the 50dma.  Since everyone is expecting it to move one way or the other, the most frustrating trade is flat.  I don’t expect this will last and look for a break either way; buy $267 and sell $259.  Both the long and short trade have room to run; an upside breakout will make new highs and a dip will probably fall to the 200dma.  At this point it is a coin-flip and let the market show its hand first.

Stay safe

Feb 21

PM: Holding 1500 for now

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks find support at 1500 and finish off the day’s lows.  Is this the last chance to bail out before crash, or another golden buy-the-dip opportunity?  AAPL still cannot find a buyer and will likely see another leg lower before finally bottoming.

MARKET BEHAVIOR

The slide continued and the market tested support at 1500.  It briefly traded under this key level, but was able to regain it by the end of the day.  Volume was elevated as selling flushed another round of previously complacent holders out of the market.

The absence of a huge wave of stop-loss selling after dipping to 1497 is encouraging.  The other benefit is this knocked out stop-losses right under 1500, relieving potential selling pressure going forward.  If we dip under 1500 tomorrow, it will be less of an event because many of those stop-losses are gone.  If the market cannot hold 1500, the next level of support is the 50dma around 1475.

MARKET SENTIMENT

Is this selloff just getting started and we should load up on shorts, or are these the last gasps of selling and we should buy-the-dip?

Last week I talked about the need to lighten up and take profits, and seven-consecutive up-weeks is about as far at the market goes without a red-week.  I didn’t say these things would lead to market crash, but a healthy and normal pullback as part of continuing higher.  So far I’ve been right about the first part and the second part still on track

The dramatic dip over the last two-days combined with the uneasiness many have had with this market lead to a large number of weak holders bailing out   Shorts are also pouncing on what they see as the obvious trade lower.  What is the most unexpected outcome after the biggest two-day losses in months?  New highs, and that is where we are headed.

If we hold 1500 Friday, that means most of the selling has already taken place.  Without new supply to keep pressuring prices, there is no place to go but higher.  Once the market recovers 1530, look for shorts and underweight traders to scramble on board the rally bandwagon, but ironically their buying will bring us one step closer to the dip that doesn’t bounce back.

TRADING OPPORTUNITIES

Expected Outcome:
Rallies don’t simply roll over and die.  The change of power from bulls to bears is a messy process that includes lots of volatility.  We are seeing some of that volatility here, but we have not seen the last of the new highs yet.  I am not a raging bull, just an opportunistic trader.  I know markets don’t top like this and most often we see double-tops and head-and-shoulder reversal patterns.  The thing about both of these patterns is the market makes a new high after the initial selloff.  As the opportunistic trader, that means the high probability trade remains buying-the-dip.

Obviously we need to be careful when dealing with volatility like this, but if the market holds 1500 tomorrow, consider buying and holding through 1540 and using 1495 as a stop.  Depending on where we open, this is a pretty favorable risk/reward; 10-points of downside for 35-points of upside.  Of course if the market cannot hold 1500 in early trade, all bets are off and look for the market to test 1475, but then 1475 becomes the next buying opportunity.  If we cannot hold 1474, the rally is dead.

Alternate Outcome:
The market can keep sliding and that is a fact of life.   It doesn’t matter how creative and thoughtful our analysis is, the market is going to do what it wants to do.  We always need to use protective stops to mange risk incase we get the trade wrong.  But even if the market continues lower tomorrow, I still think this makes for a poor short.  If anyone is lucky enough to have short profits, harvest some of those gains because they might not be around much longer.

AMZN daily at end of day

AMZN daily at end of day

INDIVIDUAL STOCKS

AAPL is back under $445.  The quick rebound everyone was hoping for is deader than dead and it will take a long period of healing before this stock recovers.  In fact there is probably one last flush lower before this stock finally finds a bottom.  The stock peaked on the nice round number of $700 and it might finally bottom on the nice round number of $400.  Of course that is one of the better outcomes.  A 50% selloff to $350 is not out of the realm of possibility as many high-fliers drop 50, 60, even 70% after peaking.  What cannot get any cheaper usually does.  People will point to the fundamentals, but the company and the stock are not the same thing.

Even with all the broad market weakness, AMZN is still hanging above the 50dma.  There is not a lot of cushion left, but the expected rebound in the indexes will drag AMZN along with it.  This is a speculative trade and not many people should own it here, but please don’t short it.  There are far easier ways to make money than argue logic with the market.  Same goes for LNKD and NFLX, what cannot go any higher usually goes higher.

Stay safe

Feb 21

AM: Testing support at 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EST

S&P500 daily at 1:31 EST

AM Update

Stocks dipped and are testing support at 1500.  We could see a little more weakness, but this is a buy-the-dip moment, and those piling on the short bandwagon are going to have a bad time.

MARKET SENTIMENT

There are two kinds of holders, those that sell a 2% pullback and those that don’t.  Today we find out how large each contingent is.  New buying largely dried up because anyone already reluctant to buy the recent rally is not rushing in when the market is “melting down”.  The key to this pullback rests firmly in the hands of holders and how many are running for the exits versus those saying this is no big deal.

So far all the headlines say “buy protection while it is cheap”, “the pullback could be ugly and deep”, “correction”, etc.  It really is hard to find anyone shouting “buy the dip”.  When everyone thinks this is the real correction, I’ll take the other side.  I’m not saying this is the bottom and no doubt we could easily see further selling, but I do think we will make new highs before the end of the quarter.  That makes this a buy-the-dip opportunity, we just need to find the right timing to buy that dip.

Real tops happen when everyone is complacent and buying the dips.  When the guy running around saying the sky is falling is labeled Chicken Little and ignored.  Right now the guy promoting the rebound is the oddball and more likely to be ridiculed than the one saying the market is on the verge of collapse.

Why this matters is it gives us insight into how traders are positioning their portfolio.  Anyone who expects a major selloff is already out of, or short stocks.  These were the people who sold yesterday, but once they are out, they no longer have vote in what direction the market goes.  The only people with a say are those still holding and those contemplating buying the dip.  Those are the two groups we need to focus on when determining how to trade this market.

So far holders sat through too-far, too-fast, a negative GDP number, and everyone knows sequester is just around the corner.  I think it will be harder to shake these core holders out and this wave of selling could be short-lived.  The market is already finding support at 1500 as the selling is temporarily abating.  We have to be careful of the stop-losses sitting under 1500 because that could trigger one last wave of selling, but that will be the last of it.  Once those autopilot sell orders work through the system selling will climax and we will bounce higher.

Holders are just half the equation, we also need to consider who will buy this dip.  There are a lot of big money managers still underweight this market, wishing they bought the rally back at 1500.  Here is their chance and no doubt some are taking advantage of it.  Expect the buying to intensify if the market starts making new gains and big money fears being left behind for a second time.

This rally since November is running out of steam and we are closer to the end, but this is not that end.  Look for a more typical double-top or head and shoulders pattern before we see a bigger pullback.  That means new highs in the near-term and this dip is buyable.

TRADING OPPORTUNITIES

Expected Outcome:
I am looking for buying opportunities here, not shorting ones.   This selloff is too easy and once all the weak hands bailout, supply will dry up and we will continue higher.  I like going against the crowd, but that is different from catching a falling knife.  We need to look for a valid entry to buy back in.

The low of this pullback will be somewhere between 1500 and 1475.  If you are okay with another 25 points of weakness, buying now is not a bad thing.  Another strategy is putting a trailing buy-trigger just above the market.  Right now that could be 1506 or yesterday’s close of 1511.  This would let you ride the market down if it continues sliding, but will get you in when it is trying to rebound.  Another strategy is to wait a few days and let this market find and hold support. But either way I would not be short this market here, the high probability trade is a rebound, not a collapse.

Alternate Outcome:
The market can do whatever it wants and doesn’t stick to a standard playbook.  While most markets top with exhaustion, volatility, double-top, or head-and-shoulders, there is no rule that says it can’t just roll over one day and die.  While this is certainty a possibility  it is not the high-probability trade.  If you need a guarantee, get a savings account.  If you can handle a little risk when the odds are in your favor, look for the eventual top to be more consistent with history, making this a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL just cannot find a bid and is now under $445 now.  That is a 10% decline in 10-days.  Buyers are just not showing up because everyone who wants this stock already has some.  The high-probability trade is waiting for new lows and swing-traders to jump in and buy the dip after the stock hits $430.  This could lead to another bounce to $450, but that will be a selling opportunity.  There are still far too many hopeful holders in this stock for it to rebound and it will take time and volatility to grind that out.  Some people won’t ever give up, like the CSCO holders waiting for the bounce back to $50.  But that is a vice, not a virtue in the markets.

Stay safe

Feb 20

PM: Shaken nerves

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Today’s dip cleared the air of complacency and is making traders fearful again.  Is this the real selloff or just another buying opportunity?

MARKET BEHAVIOR

Biggest selloff of the year, down 1.25% and finishing at the day’s low.  While 1.25% is noteworthy, it isn’t nearly as dramatic as some in recent memory that dipped multiple percent.  Volume was 20% above average and typical of a selloff that takes out several layers of stop-losses.

The market broke through minor support at 1525 before ending a few points under 1515.  The next major support level is 1500 and is more meaningful because it goes back nearly a month.  If we trade near this level, be wary of a dip under because a huge pile of automatic stop-losses will push a wave of new supply on the market.  If we still cannot find a floor there, the next level is the 50dma down at 1475.

MARKET SENTIMENT

We finally have the selloff everyone’s been waiting for, and that is why this isn’t the real deal.  No doubt we could see further weakness, but this rally will most likely end in a double-top.  While Tuesday set a new high, a 0.7% gain on average volume is hardly exhaustion.  But even if the rally is not dead, that doesn’t mean we should rush out and buy stocks because an intermediate dip could easily take us back to 1475.

The excuse for today’s selloff was dissent in the Fed minutes over when to withdraw stimulus.  This is a two or three-year story, not an imminent change in Fed easy-money policy, but just a hint of withdrawing liquidity was enough to send already paranoid traders to the exits.  After that, selling accelerated as we tripped automatic stop-losses.

Today’s dip rattled the market and it led to a lot of selling.  We are left wondering if this is just another buy-the-dip opportunity or the start of something larger?  While I can’t give you answers right now, there are clues we can look for to guide our trading over coming days.

TRADING OPPORTUNITIES

Expected Outcome:
We have one of two likely outcomes, finding support tomorrow and bouncing back to 1530, or selling continues and we don’t find a bottom until 1475.  If the cascade of selling ends and we rebound, the rally is back on and look for a new high next week.  But if we keep taking out stops, don’t try to bottom-fish and let the market continue shaking out weak hands.

This market will eventually set a new high, the only question is if that is next week or next month.  Double-tops are one of the most common topping patterns and probability-wise we should expect this trade.  After that second top we can start looking for a bigger shorting opportunities, but until then take profits on shorts early and often.

Alternate Outcome:
Sometimes markets top without much fuss, but those are rare.  Usually we see elevated volatility accompanied by one last surge higher, a double top, or a head-and-shoulders.  Rarely do bulls simply give up and roll over without a fight.  While today could be the start of a bigger selloff, heading straight down from here is not the most likely outcome.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL daily at end of day

AAPL closed under $450 and has been down six-days in a row.  When the stock hit $485 last week, holders were most hopeful of a rebound when they should have sold.  The market loves to play head games and the most successful traders expect this; buy when you don’t want to buy and sell when you don’t want to sell.  If AAPL cannot find support at $450, new lows are just around the corner.  This is a swing-trading stock right now, not an investing one.  If you want to make money here, buy the dips and sell the rallies.

The market brought everything down with it, especially high fliers like NFLX, LKND, GOOG, and AMZN.  When the market has a bad day, there are few places to hide.  Look for these high-beta stocks to go down further than the market if broad weakness persists.

Stay safe

Feb 20

AM: Modest selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

S&P500 daily at 1:19 EST

AM Update

Modest selling after making a new high.  AAPL is still searching for a support.

MARKET BEHAVIOR

Stocks gave back some of yesterday’s gains in early trade, but are finding support around 1525.

MARKET SENTIMENT

This weakness is actually supportive of a continuation because it shows the market is still skeptical and chasing is not getting out of hand yet.  The trend to this point has been breakouts followed by sideways trade.  If the market holds these levels for a few days, look for another new high next week.

Yesterday’s surge into the close was largely driven by short covering and by itself is a temporary source of buying.  Now that shorts have covered, we need to find new people to buy this market.  Today’s restraint shows many traders still on the sidelines are holding back.  We will be close to the end when this dam of restraint finally breaks and buyers fight each other to get in the market.

Looking at the calendar, there are five-weeks until the end of the quarter.  Big money managers underweight this market and overweight AAPL are getting nervous, but they are hoping the expected market pullback and AAPL rebound will save their quarter.  They still have time to move into high-beta stocks to catch the market if they need to and the pressure won’t really set in for a couple of weeks.  Desperate money piling into high-beta stocks will cause some fireworks.  Of course the above scenario only applies if we keep making new highs into early March.

TRADING OPPORTUNITIES

Expected Outcome:
While we need to exercise restraint here, the trend is still higher.  This is the time to be collecting winners, not initiating new positions or going short.    Each trade has a different risk profile and a good time to take profits is not automatically a good time to put on shorts.

The market is retesting support at 1525, which is normal and healthy.  If we hold this level for a few days, an aggressive and nimble trader could buy back in and squeeze a little more upside out of this market.  But for the average trader, its been a good run and there is not much left in this move.  We could continue up to 1550, but the risk of melting down increases by the day as the supply of available buyers is used up and lack of demand could trigger a larger wave of selling.  Is another 20-30 S&P500 points worth the risk?  For some yes,others no.

But that is the trade as it stands right now.  A modest dip and sideways trade for a week or two clears the way for a continued move higher and that is buyable for most traders.  I don’t know what the market will do and simply look for the best trade at any given time.  Today it is cautious optimism and restraint, but that could change next week if big money keeps buying every dip.

The hardest part of trading is selling winners on the way up and very few people trade this way.  But if most people don’t make money in the market, maybe we should consider using a different strategy than everyone else.

Alternate Outcome:
If the expected outcome is a little more upside, the alternate is an imminent collapse.  The sequestration fight is heating up and could take the air out of this market any minute now, but I don’t expect it.  Anyone who sold/shorted the Fiscal Cliff lost a lot of money and they are not about to repeat the same mistake here.  In fact, I’m wondering if we are seeing some buy-the-rumor, sell-the-news here as the market is rallying into an expected budget deal.  What is the least expected outcome?  A market selloff on a budget deal, and that is why we might actually see it.  This is pure speculation at this point, but the closer we get, the more clues we will have about the market’s intentions.

INDIVIDUAL STOCKS

AAPL daily at 1:19 EST

AAPL daily at 1:19 EST

AAPL’s sell-the-news keeps on selling as the stock dipped under $450 this morning.  This is no longer a fundamental story, it is a supply and demand trade.  It doesn’t really matter what Apple the company does here, the stock is stuck in a rut because it cannot find new buyers.  This is the most widely owned stock by both retail and professional investors.  This means everyone who wants some already has more than they need, and beyond just a lack of demand, this also creates a huge pool of potential sellers.  Gigantic supply of potential sellers and small pool of available buyers is why this great company’s stock is down 35% in just a few months.

NFLX is seeing a little selling pressure here.  After running up nearly 100% since earnings, a pullback to $160 should be expected.  I’d still be afraid of shorting this stock because it is so heavily shorted it could pop 10% at any moment, but holding a long here is getting greedy.

AMZN put the hurt on more bears as it traded up to $275, but that squeeze didn’t last and it since pulled back to $270.  So far the stock looks like it wants to set a new high above $285.  What cannot go any higher usually keeps going higher.

Stay safe

Feb 19

PM: All is well with the world

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The rally continues and all is well with the world.

MARKET BEHAVIOR

Stocks jumped to fresh highs and finished at the top of the day’s range.  Volume was slightly above average.

MARKET SENTIMENT

The market is running in clean air, meaning we don’t have overhead resistance from regretful owners looking to get out at break-even.  Everyone with a diversified portfolio is sitting on profits and that is a big reason traders are willing to hold through modest pullbacks.

Many traders were burned by selling the post-election/Fiscal Cliff dip.  They also bailed after the Fiscal Cliff pop went “too-far, too-fast”.  But as the rally continued, most who sold anytime over the last several months have come to regret that decision.  Fool me once, shame on you; fool me twice, shame on me.  The sellers that bought back in and those that held through the dips are more confident in the market than they have been in quite some time.

What this means for the rest of us is this market will not collapse in a wave of panic selling.  It rallied on negative GDP and it clearly knows sequestration is just around the corner, but it doesn’t care.  If those headlines won’t spook this market, anything short of a terrorist nuclear bomb detonation will not dent it either.

If this Teflon market won’t fall on news, the only thing left is running out of buyers.  The calm and steady climb higher is seducing the remaining holdouts and momentum chasers and shorts covering provided much of the buying today on a headline-free jump to new highs.  This market is no longer trading on fundamentals, but supply and demand.  Holders are not selling and former cynics are chasing.  This is a recipe for price increases, but it is also a short-lived phenomenon.  We will eventually run out of chasers and the last people in the door will have little profit cushion, causing them bail at the first signs of weakness.

This chasing rally can last for weeks or even months, so don’t short this market.  But if we know what we are looking for, we will be better positioned to trade the top when it finally happens.

TRADING OPPORTUNITIES

Expected Outcome:
There are two things the market can do tomorrow, continue higher or pullback to support and consolidate.  A continued surge is unsustainable and will end in an exhaustion top.  A modest pullback to support will spook out some of the momentum traders and tempt bears to re-short this market.  That repositioning clears the way for the sustainable grind higher.

Either way we are getting closer to the end of this run and it is better to be taking profits than initiating new positions.  The time to buy was two and a half months ago when the world was ending, not now when everything seems fine.  There is some upside left in the market, but holding out for top-dollar is often a fool’s game.  We are in this to make money and you can only do that by selling winners.  It is hard to close a position making money, but if the most successful traders sell too early, maybe we should do it too.

I sold half of my SPX trade late today.  I had a trailing stop that let me ride up to the close, but ending at the day’s highs made me take some profits off the table.  We could see this continue higher tomorrow and that will probably get me out of the rest of my position, but if we pullback and find support for a few days, I will look to buy back in.

Alternate Outcome:
Without a doubt this market could go higher and I probably sold too early, but that is what a disciplined trader does.  If this rally is sustainable, there will be other opportunities to get back in.  If it runs up in an exhaustion top, I’ll miss a few dollars of upside, but I would probably end up selling too late and miss the top anyway.  At least when I’m out of the market and have a clear head, I will be better positioned to look for the next trade.

INDIVIDUAL STOCKS

AAPL fell under $460 early and while it recovered from the day’s lows, it was unable to close above $460.  Some of the focus on price levels seems arbitrary, but the power comes from other people trading these same levels.  If everyone looks at $460 as support and places their stop-loss at $459, when the stock dips under this level, it sets off a chain reaction of stop-loss selling.  That is exactly what sent AAPL to $453 in early trade.

Between $460 and $485 the stock is in no-man’s land.  If it cannot regain $460, look for new lows.  If it climbs above $485, look for a run back to $500.  $500 will be a major milestone and significant resistance, but if it breaks through and holds above this level, the rebound is real.

AMZN turned premature shorts upside down again.  In cases like this is it better to be a little late to avoid getting whipped around.  AMZN is a legitimate short, but wait for the stock to dip under the 50dma first.  As long as it holds above this level, the stock is still a buy.

NFLX is within a couple of dollars of $200.  We are getting close to the end of this run and look for a pullback and consolidation before continuing higher.  I still wouldn’t short this stock, but taking profits here after it ran 100% in a few weeks is the smart move.

GOOG daily at end of day

GOOG daily at end of day

GOOG is making new all-time highs in an apparent, “what is bad for Apple is good for Google”.  GOOG is a money-printing machine, but most people forget they don’t make any money selling Android phones; it all comes after the fact from mobile search.  Google’s financial statements don’t care if you buy an Android phone or an iPhone, because both use Google as the default search engine.  This can change as we saw with Apple producing their own mapping application, but after that fiasco, I suspect Apple will think long and hard about replacing Google’s search on the iPhone.  Until then don’t get too excited about Android market share gains on the iPhone because it will not translate to the bottom line.

Stay safe

Feb 19

AM: New highs again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EST

S&P500 daily at 1:23 EST

AM Update

New highs in the market as all is well with the world.  AAPL struggles with $460, AMZN is holding the 50dma, and NFLX is close to breaking $200.

MARKET BEHAVIOR

The market made new highs in early trade and is holding those gains through midday.  What cannot go any higher keeps going higher.

MARKET SENTIMENT

No one wants to sell this market and anyone watching from the outside is developing second thoughts about sitting this one out.  There are few motivators more powerful than seeing everyone else make money and that is why so many former cynics are quickly forgetting their fear of heights.  The calm and complacency of the group is infectious and there are fewer and fewer people warning of imminent doom with each passing day.

The gradual shift in market sentiment is what heightened my senses.   There could easily be days and weeks left in this rally, but we are far closer to the end than the start.  From a risk versus reward analysis, the remaining reward is shrinking by the day and the risk becomes more and more real.  We could easily see another 25-points to the upside, but on a 180-point move from November’s lows, holding out for those last few percent could lead to “tripping over pennies”.  Buy when everyone is fearful and sell when everyone is greedy.

TRADING OPPORTUNITIES

Expected Outcome:
The market is rallying here, but don’t become complacent.  This is not a time to short the market, but it is a good time to start locking in profits, especially if the rate of gains increases.  This would be the last of the holdouts chasing the market and once they buy-in, demand will dry up and we will finally have that pullback everyone’s been calling for.

It’s easy to predict the market because it always does the same things.  A pullback is a no-brainer because markets always pullback……eventually.  The money is made in correctly timing these moves and that is the hard part.  I don’t know exactly when this market will top, but I suspect it is coming.  No doubt I’ll get out of this market early, but I’m okay with that because top-picking is a fool’s game.

Alternate Outcome:
Markets often go further and longer than anyone expects.  We could see this rally continue higher for weeks, even months, but that doesn’t make it a high-probability trade.   This market has already gone further and longer than anyone expected, already up 60-points from the Fiscal Cliff pop.  We are approaching the point where cynicism gives way to greed and that is when markets top.

If someone wants to play both sides of the fence, a trailing stop is not a bad idea.  It leaves the door open to further gains, but locks in profits if the market does start dipping.

INDIVIDUAL STOCKS

AAPL daily at 1:23 EST

AAPL daily at 1:23 EST

AAPL couldn’t hold $460 and stop-loss selling pushed it down to $453.  The real test will be if the stock can reclaim and hold $460 or if this level becomes resistance again.  The sell-the-news dip continues following last weeks push up to resistance at $485.  Last Tuesday Cook quashed hopes of an imminent increase to the dividend/buyback program and without that catalyst  the stock has drifted lower.  I still don’t know where the next buyer will come from or when the next revolutionary product will be released.  Until those questions can be answered, the stock will probably retest recent lows as it continues purging hopeful holders.

AMZN is finding buyers above the 50dma and the stock looks like it wants to keep defying bears and shorts.  Owning AMZN here is a pure speculation trade and based entirely on the next greater fool theory, but it seems likely that greater fool will be shorts rushing to cover as the stock trades back above $270.  This stock will unravel at some point, but it is a bad short right here.

NFLX continues its assault on $200 and is less than $10 away.  Anyone who thought the 30% post-earnings pop was waaaaay over done missed a great trade.  Remember, the contrarian trade isn’t going against the chart, it is going against the crowd.  If the crowd thinks something went “too-far, too-fast”, the contrarian trade is betting on a continuation.

Stay safe

Feb 18

LA: What to look for

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Look Ahead

How far can this streak of up weeks continue and where is the incremental AAPL buyer going to come from?

MARKET BEHAVIOR

Stocks were up for the seventh consecutive week.  Over the last few years this is as long as any streak lasted and we should expect a red-week simply based on historical precedent.  While I’m sure there are many times over the last 100-years where the market strung together a larger number of winning weeks, trading is a game of probabilities and we need to trade what is most likely, not what is possible.

MARKET SENTIMENT

The recent rally and absence of volatility is making the market feel safe, something we need to fear.  I’m not promoting a crash, simply a red-week or two to keep traders on their toes.  How people respond to the dip will tell us how far it will go.  If the prevailing attitude is complacency and buy-the-dip, look for a deeper pullback.  If everyone starts yelling fire and rushing for the exits, look for another quick rebound.

The rule of thumb is trade the opposite of what most expect.  The sharp pullbacks to 1,500 two-weeks ago got traders attention and excited bears.  This was finally the pullback everyone was waiting for, but the market rebounded and is now 20-points higher.  That episode ago humiliated bears and sellers who jumped on the pullback bandwagon only to watch the market pop higher.  Now this group of potential sellers is less likely to pile on board a similar dip in the future.

This matters because nervous sellers and shorts have a limited war-chest and run out of ammunition quickly if bigger money doesn’t join the selling.  That is exactly what happened two-weeks ago.  But what happens if the nervous sellers are already out of the market and bears are reluctant to re-short the market?  That means the next dip isn’t manufactured selling, but real selling.  This is the fundamental difference between a buying-the-dip opportunity and a real market reversal.  If you know who is selling, you have a better chance of accurately anticipating the move.

The above scenario describes the way these things normally play out.  I’m not exactly sure where we are in this process and that is why we need to keep looking for clues from the market’s behavior.  The trend remains higher, but we need to be increasingly cautious with each passing day.

TRADING OPPORTUNITIES

Expected Outcome:
Look for a small red week this week or next simply because history says this is about as far as these things normally go.  This could be a small pullback, or the start of something bigger.  We need to keep a close eye on how the market and sentiment responds to any weakness, looking for clues on where this market is headed.

Alternate Outcome:
While seven up-weeks is a lot, it is not impossible for us to string together several more.  The momentum is clearly higher and reluctant buyers are finally starting to wade in.  Their buying will keep propping up the market until they run out of money and that will be when the market finally noses over.  Running out of buyers, not complacency is what finally causes a market to top.

The outcome I am most hoping for is a strong push higher because that is unsustainable, will clearly signal an intermediate top, and be an attractive place to short the market.  This grinding higher stuff is far harder to predict and time.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is struggling again and the last few weeks of buying sucked in many of the bottom-pickers.  The question any AAPL bull has to answer is who is the next buyer that will keep the rebound going?  Markets are driven by supply and demand, so where is this new demand going to come from if all the AAPL bulls already own the stock?

My opinion is there is still too much hope and optimism left in the stock to stage a quick recovery.  The most likely scenario is the most loved stock will need to become the most hated stock before selling and hope finally exhaust themselves and the stock can bottom.  The other red flag is any weakness felt by the broad market will be exacerbated in AAPL shares.

Stay safe

Feb 17

WR: Amnesia

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR

Stocks closed flat for the week, up less than 2-points.  The range was tight, 0.7%, with a low of 1514 and high of 1525; both of these levels representing near-term support and resistance.

Exchange volume was right around average, but since it was option expiration week, volume was actually a little light.  The slow trade allowed the 10-week moving average to catch up and it is now just 48-points under the market and the slower moving 50-week moving average is trailing by 110 points.

MARKET SENTIMENT

Holders have not been interested in selling this market.  We’ve seen multiple dips to support, but nothing achieves critical mass and inevitably rebounds quickly.  If there was one trade that worked well with the indexes the last couple months, it’s buying anything, dips or not.  A few weeks ago traders were afraid of this too-far, too-fast market, but now that every sale, stop-loss, and short has been a mistake, cynics are finally coming around.  But the thing to be careful of is this shift in sentiment is what causes an intermediate market top; after everyone buys, demand dries up, and stocks dip.

There were tons of reasons not to buy this market a few weeks ago, but a relentless series of new highs is giving traders amnesia.  Everyone isn’t sold on this market yet, but they are coming over in larger numbers with each passing day.  How much longer this can keep up is the big question.

I don’t expect the market to collapse because there are still too many cynics remaining, but there is no more effective persuader than seeing everyone else make money.  This means there are two ways we can move ahead.  One is directly and the other is after a nerve rattling dip.  Straight up will suck in the last of the fence-sitters and exhaust demand in one final push higher.  Typically this happens on the largest weekly gains we’ve seen since the early days of the rally.  This would be the quickest route to a material pullback.

The slower, but more sustainable trade would be dipping dramatically to flush out some of this new-found complacency.  To continue sustainably the market needs to shake out recent buyers and tempt aggressive bears to short the market.  Once this limited selling runs its course, look for the market to find support and resume its rally.  A mid-rally dip like this could last a couple of weeks before resuming higher, but expect it to feel like the real selloff because that sense of panic is what will refresh the rally.

TRADING OPPORTUNITIES

Expected Outcome:
Look for near-term weakness from a sustainable rally or a strong push higher out of a topping pattern.  We are half way through the first quarter, meaning there are at most six-weeks left in this move, and possibly less.  The conservative trade is taking profits and the aggressive trade is squeezing out a little more.  If you like sleeping at night sell some stocks, if you enjoy the thrill of the chase, tighten up your stops and get ready to hang on.

The advantage of selling into strength is you don’t have to guess if a dip is just a dip or the start of a real selloff.  Chances are weakness next week will be another buying opportunity, but there are no guarantees and the aggressive trader will have to decide wither or not to sell.

Alternate Outcome:
The market is not always predictable and a strong break higher could be a buying opportunity, but that is a low probability trade and one I’ll just have to sit out.  I don’t need to make all the money, just the easy stuff.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL finally had a down-week after two-weekly gains following the post-earnings plunge.  Was this two-week rebound the dead-cat bounce or is this week’s weakness just a dip on the way higher?  The stock ran into psychological resistance at $485 and is currently retesting support at $460.  A dip under $460 would trigger more stop-loss and short-selling, pushing the stock back down to recent lows of $430.  To resurrect this stock from the dead, it will need to regain and hold $500, but in the near-term the stock will make for a far better swing-trade than buy-and-hold investment.  Buy the dips and sell the rallies and the stock swings between extremes of hope and despair.

Stay safe

Feb 15

PM: Complacency creeping in

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The S&P500 finished the week nearly where it started and volatility dropped off dramatically.  AAPL is testing support at $460 and AMZN is trying to find a direction.

MARKET BEHAVIOR

Stocks traded flat again with support near 1515 and resistance at 1525.  This was the fourth-day within this 10-point range  as volatility virtually disappeared   Obviously this cannot last and it will be interesting to see if the rally uses this quiet period to launch another move higher, or a plunge lower to shakeout complacent and greedy holders.

MARKET SENTIMENT

The market is stuck in this tight range because 1) no one is buying and 2) no one is selling.  Obviously this is only figurative because we had 37 million shares change hands on an options expiration Friday, but for every seller there was an equally willing buyer.

It will be interesting to see how the market trades next week since many trader’s put protection expired today.  This could make it easier to shake these previously steady holders out of their position and would add to down-side volatility next week.  But this factor might be mitigated by the increasing complacency and greed felt by current holders.  Every dip since November has been a buying opportunity and anyone shaken out in a bout of weakness was made to regret that emotional impulse as the market bounce back not long after.  This shame over selling prematurely makes traders less likely to sell the next dip and explains a lot of the recent reluctance for holders to sell dips.

Obviously complacency and greed is a key component of a market top, but they do not lead to a top immediately. A prevailing sense of complacency and greed brings in the last of the reluctant buyers and that forms the top of the market.  Even though we are getting complacent here, there are still reluctant traders left to push the market higher.  Their final buying will likely trigger that last surge higher before the market corrects.

TRADING OPPORTUNITIES

Expected Outcome:
While we are still looking for one last push higher, we might see another dramatic selloff along the way.  The market hates being easy and right now it is pretty darn easy to buy-and-hold.  I have little doubt some heart racing volatility is around the corner, but it won’t get too carried away, maybe a precipitous drop to 1505 before bouncing back.  Tops usually get more volatile as the battle between the bears and bulls evens out and the market’s indecision intensifies.  For those with a weak stomach, it would be far easier to sell into some strength and wait for the next buying opportunity.

Alternate Outcome:
The market could plunge, takeoff, or stay flat next week.  If this predicting stuff were easy we would all be rich right now.  We evaluate the situation, make our best guess, place our bets, and then wait for confirmation or invalidation, and that is what we need to do here.  There is no reason to trade this late in the market rally and often holding out for the last few dollars causes people to give back all their earlier profits.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL daily at end of day

AAPL dipped to $460.  While not a long-term support level, it has been a key level since earnings last month, initially providing overhead resistance and now acting as support.  There are many people trading this same level, so a dip under could trigger a wave of stop-losses and short selling, intensifying pressure on the stock.  If the stock bounces here and breaks above $485, that would qualify as making higher-highs and higher-lows, which would be extremely bullish.  Unfortunately sentiment wise there is still too much optimism and hope in the stock to have realistically put in a long-term bottom.

LNKD and NFLX continue inching higher on the backs of pessimists.  Short these at your own peril.

AMZN pulled back to the 50dma but found support for the time being.  A lot of traders are watching this level and look for a move in either direction to pick up speed as swing-traders jump on whichever bandwagon shows up first.

Stay safe

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