Jun 282013
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks bounced between 1600 and 1615 as the market searches for its next move.  We are currently stuck in the middle of support at 1600 and resistance at the 50dma.  Since both are widely followed levels, watch for a wave of breakout/breakdown trading when we move out of this range.

MARKET SENTIMENT
Trading sideways at first glance looks like a draw between bulls and bears, but in reality, stemming the selloff and holding recent gains is supportive of this market.  Selloffs are swift and rallies grind higher.  Trading sideways following recent gains is grinding and more consistent with a continuation than a breakdown.

Why did we bounce?  Most will point to comments by policy makers, but the only time words move markets is when they change people’s minds.  Remember, prices only move when people buy and sell, and people only buy and sell when they change their mind.  The question we must ask ourselves is if recent comments from Fed members changed OUR mind and outlook?  I expect most who were bears last week remain bears, and bulls are still bulls here.  The market didn’t bounce because someone reassured us, it bounced because after the emotional panic selling exhausted itself, no one else was changing their mind and we returned to equilibrium.

Source Yahoo Finance: 6/28/2013

Source Yahoo Finance: 6/28/2013

This is a difficult concept for many to grasp because it is so different from how we were taught to trade the markets.  We crave logical reasons behind market moves.  We want to read the news and understand right away how it will affect the market.  We want to see the market break key technical levels, setting up an easy momentum trade.  But any experienced trader knows the market doesn’t move reliably on technical or fundamental indicators.  That’s because the only thing that changes prices is buying and selling.  Nothing more, nothing less.  Focus on what people think and how they are positioned.  From there it is easier to understand these seemingly irrational moves. Focus on the crowd and the pieces start falling together.

TRADING OPPORTUNITIES
Expected Outcome:
The selloff fizzled and bounced because we ran out of sellers in what remains an overly-bearish market.  If it was as overly-bullish as most claim, we’d still be falling.  And beyond the price action, there is other evidence showing just how bearish the market remains.  A poll on Yahoo Finance today shows 64% of respondents are either out of the market or selling here, while just a third is putting money to work here. People claiming this market is overly-bullish are a dime-a-dozen while it remains difficult to find a real bull in the flesh.  

BBRY Sentiment: Source Stock Twits 6/28/2013

BBRY Sentiment: Source Stock Twits 6/28/2013

Alternate Outcome:
While this market isn’t overly-bullish, we could still collapse on lack of buyer confidence.  From there, emotion and panic consumes previously confident holders and they rush for the exits.  We saw that last week and could go through round two next week.  No one has a crystal ball and even the best often get it wrong.  The only thing that protects us from the emotional turmoil is our discipline and stops.

Trading Plan:
There are several ways to trade this market here.  A bull can buy and hold the break above 1600 with a tight stop under this level.  The bear should short falling to reclaim 1620 with a stop slightly above it.  The swing trader could lock in profits and wait for the break above 1620 or below 1600.  No matter what way we come at this market, expect volatility to continue and buy strength and sell weakness.  Keep taking profits early and often because they will likely evaporate days later.

Of course the easiest trade here is avoiding the summer chop all together.  We don’t need to participate in every market and too often we give back all our profits when we force trades in volatile markets.

BBRY daily at end of day

BBRY daily at end of day

INDIVIDUAL STOCKS
The big trade of the day is BBRY‘s collapse.  I haven’t followed the stock closely, but I know it is a cult favorite and routinely challenges AAPL for the most tweeted stock on StockTwits.  The concern I have for any BBRY holders just how stubbornly bullish they remain.  Reading the $BBRY stream on StockTwits, it is really hard to find anyone with a negative outlook.  Everyone claims this is an overreaction that will bounce.  Others say new products are just around the corner and ready to make the stock surge.  But all I see is unbridled hope and optimism.  Where are the pragmatists?  Where are the doubters?  And to back up my observations, StockTwits sentiment indicator shows their users are 91% bullish and only 9% bearish.  I don’t recall ever seeing any other stock’s readings so heavily skewed and helps explain today’s 28% plunge.  One of the more insightful posts, even thought it was from a raging bull, said this stock will either go to $50 or $0.  Well, today’s price action is likely telling us which one.  Stay away from stocks everyone loves because that means there is no one left to buy.

Plan your trade; trade your plan

 Posted by at 8:26 pm on June 28, 2013
Jun 272013
 
S&P500 daily at 2:44 EDT

S&P500 daily at 2:44 EDT

AM Update

MARKET BEHAVIOR
Stocks pushed toward 1620, recovering two-thirds of the Tapering selloff.  The market is just shy of the 50dma, which could act as overhead resistance for this three-day old rebound.

MARKET SENTIMENT
Buying opportunity, dead cat bounce, or sideways chop?  That’s the million dollar question.

The irrational, panic-driven selling ended when we bounced off 1560 Monday morning.  Since then we rallied 60-points on the back of dip-buying, short-covering, and seller exhaustion.  Talking heads attribute this strength to comments out of random Fed members and Japanese policy makers, but they overlook the simple fact market prices respond to nothing more than supply and demand.  It makes no difference what some policy maker says or doesn’t say, markets bounce when we don’t have enough supply to meet demand.  If markets reacted in logical and predictable ways to fundamental news, this stock market game would so much easier and we all know that’s not the case.

No one can accuse the market of discrimination because it is clearly an equal opportunity humiliator.  Last week bulls got whacked, this week it’s bears turn.  Anyone trying to make a directional bet in this chop is giving money away.  The best strategy in volatile periods is avoiding allegiances and biases.  Be an opportunist, not a bull or bear.

TRADING OPPORTUNITIES
Expected Outcome:
The market is stalling just shy of the 50dma.  Are we hitting our head or simply pausing while bears use this obvious resistance level to short the market?  We will know the answer soon enough.  Without a doubt some traders are selling this level, expecting another leg down, but the key is how the market responds to this challenge.  If it swallows all this selling as nothing more than a speed bump, that shows there is plenty of resilience left in this bounce.  If buying dries up and selling takes over, we are running out of dip-buyers.  No one has a crystal ball, but we can gain insights into trader’s views and positioning by how the market responds to these key levels.

Alternate Outcome:
As we just witnessed, the market likes to disguise its true intentions.  What looks like a bounce, ends up breaking down.  Something else appears like a crash, but it bounces back.  We trade moves through support and resistance, but we must be prepared to deal with the inevitable head fake.  This is a volatile and emotional market and it will send of plenty of false signals before revealing its true intentions.  Discipline is the only tool we have to get out of these head fakes in a timely manner.

Trading Plan:
The challenge putting on a trade here is we are in “everyman’s land”.  There is a solid case for the bull, bear, and swing-trader.  Bears can short the rebound to resistance.  Bulls can buy retaking major support at 1600.  And nimble-swing traders can lock in profits, look to add position if we break resistance, and short stalling at the 50dma.

There is really no wrong trade here as long as we follow our plan and honor our stops.  Bulls can buy/hold with a stop under 1600.  Bears can short with a stop above 1620.  And swing-traders can lock in profits and wait to trade the breakout/breakdown from the test of resistance.  We remain in a volatile market, so keep taking profits early and often.  And perhaps the easiest trade is taking the summer off.  Most traders give all their hard-earned profits back by forcing trades in emotional and volatile markets.

TSLA daily at 2:44 EDT

TSLA daily at 2:44 EDT

INDIVIDUAL STOCKS
Institutional investors are not coming AAPL‘s rescue here.  Cash horde, dividend yield, absurdly low P/E, brand equity, ecosystem, pipeline, etc, none of it matters as the greatest buy of the decade keeps getting cheaper.  AAPL’s problem isn’t that no one believes in it, paradoxically it struggles because everyone believes in it.  Everyone loves the company and its products, but that also means they already own the stock and there is no one left to buy.  Stock prices are not driven by fundamentals, technicals, opinion, or any of that other stuff the talking heads obsess about.  They trade on supply and demand.  When everyone who wants some already has some, we run out of new demand and there is nowhere to go but down.

The same logic explains why GLD struggles here.  “Everyone needs some gold in their portfolio”  or at least that’s what some people say.  And that is great when gold is going up, but I’ve never been a fan of broad diversification in a trading account.  Does it make any sense to offset our winners with losers?  Own it when it works and dump it when it doesn’t and clearly gold is not working here.

TSLA is putting the hurt on bears again.  There is no logical reason to own this stock here, but it is suicidal to short this stock.  Between the astronomical short-interest and the all the shares tied up by management and loyal investors, this stock will not act rationally.  It will come down at some point, but not before it defeats and bankrupts all those bears.

Plan your trade; trade your plan 

 Posted by at 12:47 pm on June 27, 2013
Jun 262013
 
S&P500 daily at 2:31 EDT

S&P500 daily at 2:31 EDT

AM Update

MARKET BEHAVIOR
Markets are up for a second day following Monday’s plunge.

MARKET SENTIMENT
Panic driven selling is taking a break, giving holders and prospective buyers the opportunity to think rationally and act deliberately.  Stability and sanity is supportive of markets and hopefully we reached a place where cooler heads prevail.  That doesn’t eliminate the possibility of further declines, but it greatly mitigates the probability of an out of control crash.

The market hates uncertainty and things it doesn’t fully understand.  There are times when we only see the tip of the iceberg, like the period building up to the 2008 Financial Crisis.  The market was oblivious to the underlying risks, leading to a large and painful selloff.  Right now the market is fretting over the timing of Tapering, but it is hard to claim that is an iceberg.  In fact, failing to taper will likely lead to greater risks of bubbles and inflation.  While some will argue we already passed that point, that is a different debate.  Even thought exact timing of Tapering is up in the air, we know it will happen at some point over the next few quarters and it will be a gradual implementation.  There are plenty of icebergs out there, but this is not one of them.

TRADING OPPORTUNITY
Expected Outcome:
The plunge trade is over as we recover 1600.  No one knows how high or long this bounce will last, so the best approach remains buying weakness, selling strength, and locking in profits.  Don’t chase market moves and take profits early and often.  In volatile periods, never feel bad about selling early and only capturing 20-points of a 50-point move.  Those that hold on too long will see all their profits evaporate days later.

It is easy to make money in the markets, the hard part is keeping it.  Traders reacting to these volatile swing are giving back months of profits.  Even if we sell early, I guarantee you locking in a 20-point gain is better than most who are riding the yo-yo of buying high and selling low.

Alternate Outcome:
This bounce could be nothing more than a bull trap on the way lower.  The market saw a nearly non-stop rally from 1350 and the recent selling is just scratching the surface of what could be a normal and healthy pullback.  The biggest challenge to the rally is hitting its head on 50dma resistance.  No one knows for sure what the future holds, the best we can do is identify opportunities and uses stops to protect us in case we are wrong.

Trading Plan:
The recent bounce is putting the squeeze on late shorts and recovering 1600 will keep the pressure on.  Look for resistance at 1620, consider locking in profits, and even go short if we run into a wall.  If the market breaks above the 50dma, look for a continuation to the middle of the 1600/1700 range.  Stay nimble, trade proactively, and take profits.

GLD daily at 2:30 EDT

GLD daily at 2:30 EDT

INDIVIDUAL STOCKS
AAPL‘s struggles continues as it doesn’t enjoy today’s broad market strength.  We are under $400 and any dip buyers need to be extremely careful here.  On the other side shorts can press their luck with a stop above $400.  Many of the expected catalysts came and went without pumping life back into the stock.  Anyone who believes in this story is already fully invested and there are few prospective buyers left to bid up the stock price.  The biggest hope was placed on the dividend increase, but even that could not attract buyers willing to pay premium prices.

GLD fell out of bed again this morning.  This is an ugly trade for anyone who bought the bounce above $140 a couple of months ago.    Much like AAPL, Gold was an over owned asset.  Everyone who wants gold already has all they can hold, meaning there is no one left to buy.  Normally something falling so far creates a buying opportunity, but there is no reason to rush in and buy because there is still room for more panic driven selling.

Plan your trade; trade your plan

 Posted by at 12:33 pm on June 26, 2013
Jun 252013
 
S&P500 daily at 1:50 EDT

S&P500 daily at 1:50 EDT

AM Update

MARKET BEHAVIOR
Stocks recovered most of yesterday morning’s plunge and are just shy of 1590.  Obviously the market is volatile and that trend will likely continue.

MARKET SENTIMENT
The market hates being predictable.  The obvious bounce off 1600 fizzled and collapsed another 40-points, but not long after the obvious breakdown bounced right back.  The market has no allegiances will and humiliate both bulls and bears any chance it gets.    This behavior isn’t vindictive, simply a function of supply and demand.

When everyone anticipates the bounce off support, they keep holding, knowing it would be foolish to sell just before the market rebounds.  When it doesn’t, they rush for the exits at the same time as their stop-losses under support are triggered.  This wave of selling sends the market sharply lower.  But just when everything looks the most hopeless, the market bounces back because everyone already sold ahead of the expected market crash.  Once that wave of impulsive selling passes, there are few sellers left and the market bounces back.

Volatility will continue for a while as those paralyzed by fear and indecision during the previous plunge sell every bounce as the market recovers to levels they wish they sold at on the way down.  This entire process goes back and forth over a period of weeks with the amplitude diminishing with each whipsaw until stability and sanity returns and we continue the prior trend.

We might still see lower lows, but holding in this area for another day greatly mitigates the probability of a market crash.  The end of emotional selling and coming to terms with Tapering is what will let this market settle down, building the base for the next leg higher on improving economic news.

TRADING OPPORTUNITIES
Expected Outcome:

Holding 1560 through Wednesday is an encouraging sign the wave of selling is abating.  While the coast is never clear and there is no such thing as a safe time to invest, it shows much of the emotional selling is behind us.  Tomorrow could bring something new, but stability here shows the market is coming to terms with Tapering.

Buying the dip with a stop under yesterday’s low is not a bad trade if someone has an itchy trigger finger, but for the average person, trading the sideways chop is an exercise in futility.  Stay in cash, but if you have to trade, take profits quickly.

Alternate Outcome:
While the market might be coming to terms with Tapering, volatility in Asia is waiting to take us down.  No matter what we think, we initiate all new trades with defense in mind.  We cannot get it right every time and stop-losses are what keep us out of trouble.

AAPL daily at 1:50 EDT

AAPL daily at 1:50 EDT

Trading Plan:
Volatility will persist and we must lock in profits when we have them because they will likely be gone days, even hours later.  Yesterday’s 30-point dip didn’t even last 24 hours before most of it was reclaimed.  This applies to both bulls and bears.  Buy weakness and sell strength with stops just on the other side of support/resistance.  We must trade this market proactively, anyone reacting to the whips is going to give money away.

A dip under 1560 over the next two days likely means this market is pushing toward the 200dma, but barring that, assume the market put in a bottom.

INDIVIDUAL STOCKS
AAPL is not enjoying the broad market’s rebound and is just a few cents above $400.  This level is a major psychological milestone and expect many of the recent dip buyers to call it quits if drop much further.  The optimistic swing trader could trade the bounce off of $400 with a tight stop, but this is just a trade.  The stock is acting like the selloff is not done and look for a dip to $350 before all the hopefully are finally driven out of this name.

Plan your trade; trade your plan

 Posted by at 11:58 am on June 25, 2013
Jun 242013
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks fell over one percent, continuing the recent selloff.  The silver lining is the midday bounce from much lower levels, but a loss is still a loss.  Volume was well above average as traders dump shares by the truckload.  There is modest support back near 1540 from March and April, but the next major level is the 200dma just above 1500.

MARKET SENTIMENT
Huge trading volumes over the last three-days as the market is anything but complacent.  The alleged rumor is Ben Bernanke yelled fire and everyone rushed for the exits.  Of course no one personally heard him say fire and is panicked simply because everyone else is.

The Fed is still has their foot on the gas and is pumping $85 billion of liquidity into the markets and will continue buying bonds well into next year, but never let the truth get in the way of a good story.  As we’ve long discussed on this blog, markets don’t trade fundamentals, they trade investor perceptions.  Right now investors are acting like three-year olds, throwing a tantrum because Uncle Ben won’t promise easy money for ever and ever.  Without a doubt the market is overreacting, but doesn’t mean the selling will stop and we could easily see another couple of legs lower before this is all said and done.

TRADING OPPORTUNITIES
Expected Outcome:
The high volume selling is flushing out many previously confident holders, creating the next pool of buyers to push this market higher in the future.  But that is still a ways out.  The real savior of this market will be the deep pocketed value investor who sold out when values got too rich last month and is eager to buy back in at these discounted levels.  The biggest question is if these levels are too attractive to resist yet.  Once their buying puts in a bottom, the panic selling will subside.

Given the huge flush in volume, I’d say we are getting close to the capitulation point where most of the weak hands sold impulsively to far more confident value investors willing hold through some uncertainty.  Of course the bottom will remain volatile and we should continue buying weakness and selling strength.

Alternate Outcome:
The market can continue selling and there is nothing more unnerving than seeing our accounts meltdown before our eyes.  Everyone has their breaking point and even the most resolute holder will cave if we keep falling.  The only thing that protects us is our stop-losses and hopefully no one has ridden this down all the way from the peak.

Trading Plan:
The aggressive can continue buying the dip with a tight stop under recent lows, but for the rest of us, the safer play is waiting for the market to bottom.  Wherever this ends, we will likely consolidate sideways and there will be plenty of time to buy back in over coming weeks and months.  In the meantime, both bull and bear should take profits early and often as the volatility will continue for the remainder of the summer.

Plan your trade; trade your plan

 Posted by at 11:03 pm on June 24, 2013