Jul 312013
 
S&P500 daily at 3:19 EDT

S&P500 daily at 3:19 EDT

AM Update

MARKET BEHAVIOR
Stocks are higher, but retreated from an early assault on 1700.

MARKET SENTIMENT
Stocks stalled short of 1700 as buyers were unwilling to chase prices to new highs.  Some might claim this is a double top, but to be a real double top we need to exceed the previous high of 1699.  This triggers the last wave of breakout buying and short covering before demand dries up and we roll over.  Anyone waiting for a double-top should expect higher prices in coming days and reversing soon after the breakout makes an excellent shorting opportunity, but that is then and this is now.  Currently the market is holding up nicely and higher prices are in our future.  Where we go after breaking 1700 is still up for debate, but the market is certainly acting like new highs are on the to-do list.

As overly-bullish as everyone claims the market is, ironically enough, that is the majority opinion.  The masses remain pessimistic and fearful of a pullback in spite of, or because of the all-time highs.  In a Yahoo Finance poll, only 27% think the economy is improving.  That hardly qualifies as widespread optimism and bullishness.  Traders are notoriously afraid of heights and new highs frequently make traders nervous.

When it comes to contrarian investing, the mistake most people make is confusing price-action with sentiment.  When we are at all-time highs, most assume the market must be wildly overly-bullish, but unfortunately for these confused ‘contrarians’, the market’s been overly-bullish for the last 250-points.  What is high often keeps going higher because the crowd remains skeptical and those doubters provide fuel for higher prices.

Source: Yahoo Finance 7/31/2013

Source: Yahoo Finance 7/31/2013

Some claim one headline or another is responsible for a particular price move, but the reality is only buying and selling can do that.  Today we had a Fed statement promoting ‘modest growth’, a softening of their previous outlook.  These pieces of information only move markets if it causes people to change their mind, and as a result buy or sell stocks.  If it simply reinforces what people already believe, everyone keeps holding and the market continues doing what it was doing previously.  Today’s Fed statement isn’t going to change anyone’s mind and its impact will disappear as soon as news-driven traders take their lumps and move on.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  Most expect a pullback following the breathtaking rebound off June’s lows, but that expectation is what keeps us near all-time highs.  Those with a fear of heights locked-in profits weeks ago and most of that defensive selling is already behind us.  The current crop of holders are waiting for higher prices and their patience is keeping supply tight, making the path of least resistance higher.

The one head-fake to watch for is a quick whip under 1675, triggering a wave of stop-losses and sucking in short-sellers before bouncing back.  We must always sell when prices cross our stops, but that doesn’t prevent us from buying back in if the market rebounds.  Stay open-minded and trade the market without consideration to what we did or thought last week, yesterday, or this morning.

Alternate Outcome:
Traders remain cautious and wary, making a continuation more likely, but anything can take out the market’s legs at any time.  Many expect a pullback after too-far, too-fast, but this market clearly doesn’t care about gravity.  We will top, but it will not be because of something everyone is expecting and positioned for.  There is a hidden landmine lurking out there and it will catch us off guard.  That will finally be the catalyst that sends us lower.  Currently we are rallying as an overly bearish market warms to a gradually improving world, but inevitably we will be surprised by unexpected bad news.

Trading Plan:
Continue holding with a stop under 1675 and wait to see how the market responds to the breakout above 1700.  Quickly retreating under 1700 shows buying exhaustion and is shortable.  If previous resistance turns to support, we move up our stops and wait to see how much further this rally goes.  Obviously if we expect higher prices, this is a poor place to be short and it is best to admit defeat and take a small loss.

We remain in the summer chop.  The average trader can sit out this volatility and wait for a better risk/reward, likely coming this fall.

TSLA daily at 3:20 EDT

TSLA daily at 3:20 EDT

INDIVIDUAL STOCKS
AAPL is maintaining recent gains and is holdable as long as we stay above the 50dma.  There is not a fundamental catalyst justifying recent strength, but sentiment might have changed enough to finally put in a bottom.  If we break and hold $460, the next bogie is the 200dma and would be a nice place to take profits.

FB broke $38 and made headlines after finally regaining its IPO price.  Some consolidation here is normal and expected, but look for strength to continue as last year’s favorite became this year’s dog.  Prices move when people change their mind, with so much negative sentiment, there is still lots of upside left, but expect a bumpy ride as we struggle with resistance at $38.

TSLA is the momentum flavor of the month, yet bears continue standing in the way of this steamroller.  What goes higher often keeps going higher until everyone gives up fighting it.  I have no idea if that is $140, $160, or $180, but anyone holding out for $300 is getting greedy.  All the recent sellers and shorts following the GS downgrade need to buy and that is providing lift up to $140.

Plan your trade; trade your plan

 Posted by at 1:22 pm on July 31, 2013
Jul 302013
 
S&P500 daily at 3:25 EDT

S&P500 daily at 3:25 EDT

AM Update

MARKET BEHAVIOR
The sideways meandering continues as we started higher, fell under breakeven by midday, and regained positive territory by late trade.

MARKET SENTIMENT
After early volatility, the Summer Doldrums are finally here.  Big money decision makers are on vacation, meaning we are not seeing any material buying or selling.  The market largely came to terms with all the negative headlines from Obamacare to Tapering and we are in a holding pattern waiting for what comes next.

The last couple of weeks had multiple false selloffs that quickly bounced back.  This cathartic process is purging weak hands and tempting aggressive bears to short.  The thing these pessimists need to be wary of is how easy and obvious the bear trade is given “too-far, too-fast”.  The big red flag is the easy trade hasn’t happened after multiple opportunities.  When the market has a perfect invitation to break wide open, yet bounces instead, that is a cheap warning the bearish thesis is flawed.  Fortunately for bulls, most traders are stubborn and hold their position well beyond the obvious exit.  With each passing day, bear’s confidence grows and they are building short positions because this is finally their moment to shine.  Unfortunately for them, while the previous 130-point move exhausted demand, this sideways trade is setting the stage for the next round of short squeezes.  There is nothing wrong making a bearish bet after such a strong move, but when a trade fails to work as expected, that is the time to get out, long before mounting losses force us out.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the more likely a continuation becomes.  Unsustainable buying climaxes within days.  Support here shows buyers keep holding and the path of least resistance is always higher when supply is tight.

Alternate Outcome:
Three-months ago the market went too-far, too-fast, yet here we stand at all-time highs.  The more people fight something, the longer these things go, but no matter what, this rally’s days are numbered.  It isn’t that the pessimists are wrong, just early.  At some point buying will exhaust itself and we will collapse into a correction when everyone least expect it.  The best sign will be stalling after an obvious bullish catalyst.  If this rally fizzles after breaking 1700, that is a great invitation to short.  There will be a lot of money made shorting this market, but the bull thesis needs to fail first.

FB daily at 3:25 EDT

FB daily at 3:25 EDT

INDIVIDUAL STOCKS
AAPL is just shy of making its first higher high in nearly a year.  Clearly shorts are providing a lot of this fuel, making a great short-term buying opportunity, but the bigger question is if this rebound is sustainable or just another bull-trap.  Swing-traders should move up their trailing stop and longer viewed traders can continue holding with a stop under the 50dma.  It is hard to imagine AAPL regaining its former glory since so many were burned by the recent selloff, but there is a lot of money to be made buying weakness and selling strength.

FB is making a push for its IPO price.  This has been a perfect sentiment trade.  Everyone loved it when it IPOed, meaning it had nowhere to go but down.  Then it dragged along for over a year and became the butt of jokes, which was the best time to buy it.  There are a lot of people short this name and this rally is not done yet.  Much like how NFLX was reborn, FB is following the same game plan.  Many are hoping AAPL will do the same, but the difference is revenue is growing strongly at NFLX and FB, where it is peaking at AAPL.  Similar technical setup, but the underlying stories are day-and-night.

Plan your trade; trade your plan

 Posted by at 1:36 pm on July 30, 2013
Jul 292013
 
S&P500 daily at 2:38 EDT

S&P500 daily at 2:38 EDT

AM Update

MARKET BEHAVIOR
Stocks are down in early trade, continuing last week’s pattern of tight consolidation under 1700.

MARKET SENTIMENT
Traders are notoriously afraid of heights and hesitant to buy after a strong run.  Ten-percent in a month certainly qualifies as a strong run, but often what appears too-high keeps going.

There is a lot of crowd psychology behind the scenes that gives us insight into what comes next.  Stocks came a long way by steamrolling shorts and seducing momentum chasers.  This surge provided the powerful lift off of June’s lows, but the rebound stalled shy of 1700 a couple of weeks ago.  While short covering and momentum chasing are powerful forces, they don’t have staying power and quickly run out of gas.  This is exactly where we find ourselves and we must look for clues from other groups of holders and buyers for hints of what comes next.

Unsustainable buying often peaks and reverses quickly, but we have not seen that behavior in the recent consolidation.  This means while buying slowed down, we maintained current levels because existing holders are not interested in selling, keeping supply tight.  Traders often think of demand, but supply is equally important in determining price moves.  When the market hit recent highs, many short-sellers and profit takers sold shares, but this is a temporary weight on prices.  Once that selling abates, in combination with confident holders, the most likely outcome is a continuation higher.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the higher the probability this rally will continue.  Proactive sellers had their chance to sell and the market swallowed that supply without flinching.  I have no idea how much further this can go, but recent sideways trade indicates the next move is higher.

Alternate Outcome:
While every dip bounced, there comes a point when we run out of dip buyers and there is nothing to stop the next move lower.  Every selloff starts when traders are most confident and without a doubt recent strength is calming nerves, proving the doubters wrong, and encouraging buyers.  While the next move is likely higher, there are no guarantees in this game.  Even something with an 80% probability  of success should fail one out of five times.  No matter how sound and confident our analysis, we always need to look at the other side, and when all else fails, let our stops pull us out.

Trading Opportunities:
Recent stability suggests the next move is higher.  Shorts should reconsider, or at the very least use tight stops.  Aggressive swing-traders can hold with a stop under 1675.  Everyone else sitting on recent profits should wait for a better risk/reward, likely coming once the summer doldrums pass.  Expect volatility to continue and take profits early and often, especially on the short side.

AAPL daily at 2:38 EDT

AAPL daily at 2:38 EDT

INDIVIDUAL STOCKS
Deja Vu all over again.  AAPL retook the 50dma on better than expected iPhone sales and continues holding those gains.  Less-bad is rarely cause for exuberant celebration, but it was enough to give the stock some breathing room.  Recent speculation swirls around the iPhone5c, the colorful and cheap alternative to the more expensive flagship model.  Given the success of outdated iPhone 4 and 4s sales, any investor needs to come to terms with a material percentage of 5s cannibalization by the 5c.  Most people don’t need the power of  the latest and greatest and will be happily settle for the stylish younger sibling.  The bigger question for investors is if the hit to the flagship lineup will be offset by reclaiming market share losses to Android.  Technically speaking, all of AAPL’s previous bounces failed to make new highs and we need to trade above $460 to break the bearish trend of lower highs.

TSLA is burning the cynics yet again.  The stock was pounded a couple of weeks ago on an analyst downgrade, but those sellers are suffering regret as we make new all-time highs merely days later.  Stocks like this are not for the faint of heart a violent ride is par for the course.  Ignore the talking-head chatter, but fear signs the company is not living up to wildly optimistic expectations.  Maybe it is a PR snafu like NFLX’s bone-headed attempt to spit the DVD and streaming business, or tapering growth that took down the mighty AAPL.  Enjoy the ride up, but don’t get greedy and stay vigilant.

Sorry for missing a couple posts last week, but something came up that kept me away from my computer. Things are back to normal and look for the daily analysis to resume this week.

Plan your trade; trade your plan

 Posted by at 12:40 pm on July 29, 2013
Jul 242013
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks had their worst day in nearly a month, but all that highlights is what a benign ride its been.  Volume was below average, but the highest in recent days.

MARKET SENTIMENT
Rather than fear a 0.4% dip, we should embrace it.  Everyone knows we cannot go up every day, yet the first day we see any weakness and all of a sudden the sky is falling.  No doubt this could be the start of something larger and why it is always prudent to take profits after nice runs, but we are still well above support and claiming this is anything more than a normal down-day is trying to pick a top.

After such a strong rebound, we need selling to put fear back into the market and keep everyone honest.  The market doesn’t like being easy or predictable, so it throws in head-fakes along the way.  Of course it is up to individual interpretation to decide if the recent rebound or today’s weakness is the real head-fake.  There are always two sides to every market and only time will tell who is right.

TRADING OPPORTUNITIES
Expected Outcome:
As long as the market remains above support, we must assume the rebound is alive and well.  Countless bears have been carried out in body bags trying to pick a top and there is no reason to add to the body count here.  Recent support is 1675 and we only need to be concerned if we fall to hold that level.

Alternate Outcome:
I’d prefer seeing the market stall after breaking 1700 before placing a short.  A notable absence of buyers in a spot where buyers should pour in makes an easy short.  Stalling prior to 1700 is far less convincing and this could simply be a pause before attempting new highs.  This rally will eventually end like every other one before.  While it doesn’t feel like we are at the top yet, we must remain vigilant.  Slicing through 1675 is clearly bearish and likely means we will retest the 50dma.

Trading Plan:
Everyone wants a rally to pullback so they can buy more, but every time it pulls back, those same traders are too afraid to buy.

Holders can keep holding as long as the market remains above their stops.  Anyone with nice profits can lock them in and wait for the next trade.  Bears can short a violation of support and bulls can buy a bounce off it.  Chances are the summer volatility will continue, so take profits early and often because they will likely evaporate days later.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
Following last night’s earnings release, AAPL is higher in what could best be described as a relief rally.  Profits, selling prices, and margins were all down, but the damage was less bad than feared and the stock rallied.  The silver lining was higher than expected “old” generation iPhone sales, but is this really a good thing?  If new customers think old phones are good enough, is that an early indication the previously dependable 2-year upgrade cycle is coming to an end?  If current generation phones are good enough, does that mean we are moving to a 4 to 5 year upgrade cycle typically seen with PCs?  It will be interesting to see how bulls fit this earnings report into their return to dominance thesis.

People often forget how Steve Jobs turned AAPL around.  In the ’90s AAPL was a bloated, do everything for everyone company.  It gave customers what they asked for and the income statement bled for it.  When Steve Jobs returned, he showed up with a machete and cut to the bone, eliminating all but four computers, a pro desktop, a pro laptop, a consumer desktop, and a consumer laptop.  Less is more was always Jobs’ driving vision, but it seems the new AAPL is drifting away from that strategy.

The original iPhone was launched with one carrier, in one color and the only choice customers had was 4, 8, or 16GB of storage.  It stayed that way for the next three iPhone releases before AAPL finally relented and started making a CDMA iPhone  4 for Verizon.  The next year brought white phone, Sprint, T-Mobile, and finally an unlocked phone.  Currently AAPL stocks 30 iPhones 5s to cover all these customer options and people wonder why margins are falling.  Yet investors are clamoring for big phones, cheap phones, and more colors, and if you believe the leaks, they are coming.  Peak margins came when AAPL gave customers 3 choices, but for comparison, lets see how many phones AAPL will need to stock if it adds a cheap phone, a big screen, and three colors.

5 colors * 5 wireless carriers * 3 models * 3 storage sizes = 225 varieties!!!

They might sell more phones, but at what cost?  Everything for everyone rarely works and it looks like AAPL is going to learn that lesson all over again.  The company thrived under Steve Jobs because it did not listen to customers and investors.  Only time will tell what happens next, but it doesn’t look good.

Plan your trade; trade your plan

 Posted by at 7:49 pm on July 24, 2013
Jul 232013
 
S&P500 daily at 1:48 EDT

S&P500 daily at 1:48 EDT

AM Update

MARKET BEHAVIOR
Stocks trade sideways, just shy of the 1700 milestone.

MARKET SENTIMENT
All is good with the world.  Tapering is a distant memory and earnings are decent enough to keep us at all-time highs.  Summer volume is traditionally light while many of the big money managers are on vacation.  Low volume can exacerbate volatility when smaller positions start moving markets, but the last couple of weeks was relatively calm.  Holders keep holding and the resulting tight supply is propping up prices.  No one is excited to buy all-time highs, but they have no choice when few are willing to sell.

1700 is a psychological level and will likely lead to a short-squeeze and breakout buying when we push through it.  After that it is anyone’s guess how far we go.  Slow and steady is sustainable, a rapid surge higher is not.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  Holding the 1680 level for nearly two-weeks is supportive of a continuation.  Unsustainable buying typically exhausts itself within days.  Maintaining all-time highs this long shows few holders are cashing in and their confidence keeps supply tight.

Alternate Outcome:
Every rally ends and even as invincible as this one is, its day is coming.  We are more than eight-months into this rebound off the November lows and most of the cynics have grown tired of the humiliation from incorrectly calling a top, but when they are giving up is when we need to be most vigilant.  I’m still waiting for an all new headline that is not priced in.  It probably won’t come for another month or two, but that will finally be the thing that lets air out of this rally.

Trading Plan:
Own this market with a stop under 1670 or 1685 depending on your risk tolerance and outlook. Look for a pop as it crosses 1700, but if the breakout fizzles and retreats instead, buying is drying up and it is time to lock-in profits.  It might even be time to go short with a stop above 1700.  Stay nimble and always be prepared to take profits when the market doesn’t act as expected.

INDIVIDUAL STOCKS
AAPL is reporting after the close.  The bar is dramatically lower and we wait to see if the lower expectations are justified.  This earnings report is one of the last fundamental catalysts left to justify the bull case.  Anything short of shockingly good numbers will likely leave the stock stuck in the lower $400s.   Investor infatuation with AAPL came and went and there is little the company can do short of a revolutionary new product to become a market darling again.  If AAPL’s earnings disappoint, expect the last of the hope to deflate and the stock to tumble into the $300s.

TSLA daily at 1:49 EDT

TSLA daily at 1:49 EDT

NFLX stumbled following earnings, but given how far this stock came this year and the sheer number of traders gunning for it, down 3% is pretty much a win.  Sideways trade that allows the 50dma to catch up is supportive of a continuation.  It doesn’t matter how overpriced this stock is, it still wants to go higher.

TSLA recovered most of last week’s downgrade.  As we discussed at the time, analyst ratings are just opinion and have nothing to do with the fundamentals.  While this accusation might be unfair, most analysts are analysts because they cannot trade.  Upgrades and downgrades create near-term waves, but their impact quickly fades.  Far more concerning is a wave of highly optimistic analyst upgrades.  AAPL didn’t peak when analysts downgraded the stock, it peaked when many upgraded their price targets to $1,000 and beyond.

Plan your trade; trade your plan

 Posted by at 11:51 am on July 23, 2013