Jani

Apr 282016
 

Screen Shot 2016-04-28 at 8.58.53 PMEnd of Day Update:

Japanese turmoil infected global markets Thursday after the Bank of Japan declined to enact additional stimulus to combat that country’s deflation. European markets tanked and the S&P 500 gapped half-a-percent lower at the open. But the panic was short-lived as we rebounded into the green by lunchtime. Japan hasn’t been on the market’s radar with most traders fixated on China and oil prices over the last six-month. Initially it seemed like that trend was continuing until a late selloff clipped 20-points from the S&P 500 in less than an hour, easily shoving us under the morning’s lows. Early relief quickly degraded into fear of owning stocks overnight and a stampede for the exits.

Fear of this market is well founded since events in Japan will likely get worse before they get better. Very rarely are 3.6% selloffs an isolated incident and most likely there is more pain in store for Japanese markets. The question is if U.S. investors will continue ignoring Japan’s problems, or if Thursday’s price-action shined a light on the next big thing for traders to fret over.

As I’ve been discussing on these pages for a few weeks now, we’ve come a long way from February’s lows and it is normal and natural for the market to cool off following such a hot run. This vulnerability means we need to be especially careful here. One false step could kick off a larger wave of selling that pushes us back to 2,000 support.

I don’t expect Japan to be any more of a problem than Chinese slowing or plunging energy prices, meaning this shall pass too. But between now and then we could experience a fairly dramatic dip. While it will feel terrifying, this is just the market’s normal two-steps forward, one-step back. Just when everyone is predicting the end of the world, we will bounce and resume our march to all-time highs.

The most nimble traders can move to cash or even short the market Friday if we continue trading weak. Most likely this won’t be a major selloff, but dipping another 70-points to support creates a great swing-trading opportunity. If prices stabilize and we finish strong Friday, then this is little more than indigestion and we should cover our shorts and position ourselves for a run to all-time highs above 2,130. For those with a longer-term horizon, ignore this noise. We will stumble and everyone will claim the sky is falling, but this is a great opportunity to buy your favorite stocks at a discount.

Jani

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 Posted by at 9:48 pm on April 28, 2016
Apr 212016
 

Screen Shot 2016-04-21 at 10.56.26 PMEnd of Day Update:

The S&P500 slipped back under 2,100 resistance two-days after closing above this level for the first time in six-months. This tepid response to the breakout tells us few are excited to buy these 2016 highs. We rallied nearly 300-points from February’s lows with nothing but modest dips along the way. While it’s been a great ride, at some point this rebound will exhaust the supply of available buyers and we will slip into a very normal and health pullback.

There is nothing to fear from a routine stepback following such a large price move. In fact we should embrace a cooling off period because the higher we go without one, the larger and more violent the inevitable pullback. Sentiment has recovered to more normal levels after reaching nearly historically bearish levels only a handful of weeks ago. StockTwits $SPY sentiment reclaimed 50% bullishness for the first time in recent memory and AAII bearish sentiment is well under historic averages. Nothing like a 300-point rebound to calm previously frayed nerves.

Not so long ago traders couldn’t make a move without first seeing what happened overnight in China. Then oil became the obsession. Three-months later and the global economy is still standing as most of these fears faded into the distance. While things could have been ugly, most often the market fears the worst and reality turns out far less bad. Nearly four-months after January’s sell off started, things don’t look so bad.

Even though the world looks less bad than many predicted, we shouldn’t rush off and buy stocks with reckless abandon. Risk is a function of height. The higher we are, the more vulnerable we are to a pullback. While we feel better about the market, this is actually the riskiest it’s been since the start of the year. The time to dive in was back when everyone was fearfully selling stocks at steep discounts and we were 200 and 300 points lower. Now that stocks are selling at full price, they are far less attractive from a risk/reward perspective. Given how far we’ve come, this is a far better place to be taking profits than adding new positions.

While every dip over the last three-months has bounced, we are not far from the one that keeps falling. It concern me that few buyers showed up after we broke through 2,100 resistance. Without new money it will be hard to keep the momentum going. Typically these things rollover fairly quickly, so if it’s going to happen, it should happen over the next couple of days. A little profit taking soon turns devolves into waves of anxious selling. If on the other hand we continue hanging out near 2,100 resistance for several days, that tells us few owners are taking profits because they are waiting for higher prices. No matter what the experts think should happen, when confident owners refuse to sell, supply gets tight and prices rally.

I’m concerned about Thursday’s inability to hold the 2,100 breakout. For those that have profits, this is a good time start thinking about locking them in. The most aggressive can look at shorting this weakness with a profit target of at least 2,060 support. Fail to bounce there and the 50/200dma and 2,000 support are in play. But if bears cannot get the ball rolling, look for the rebound to continue up to all-time highs near 2,130.

Jani

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 Posted by at 10:58 pm on April 21, 2016
Apr 192016
 

Screen Shot 2016-04-19 at 10.03.26 PMEnd of Day Update:

The S&P500 climbed above 2,100 for the first time in nearly six-months as oil prices rebounded and fear of a global slowdown fade into the distance. We came a long way from the fear driven selling that dominated the first couple months of the year, but like what happens all too often, following the crowd’s lead turned out to be a terrible trading strategy.

While I’ve been cautious following such a strong rebound, last week when the S&P500 failed to break down multiple times, I told readers to expect a near-term continuation of the uptrend. When the market refuses to do what it is “supposed” to do, braces yourselves for a move in the other direction. And that’s exactly what happened as we find ourselves 40-points higher.

But that was then and this is now. While we can pat ourselves on the back for riding this move up to 2,100, this morning’s price-action concerns me. We smashed through 2,100 resistance in early trade, but rather than cheer the news, traders started taking profits. This quick reversal tells us there is not a lot of demand above 2,100 and we are quickly running out of chasers.

If anyone is lucky enough to have profits, failing to hold 2,100 is a good signal to start locking-in those gains. If we cannot hold 2,100 Wednesday, this presents an interesting short entry. Weak demand and tons of air underneath us creates an attractive risk/reward that favors a countertrend trade. It’s not that I expect the market to breakdown, just recognition that we take a step-back for every two-steps forward. If we open under 2,100, use that level as a stop-loss and the 200dma and 2,000 support are interesting targets. But stay nimble since counter-trend trades are always more risky.

Jani

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 Posted by at 10:04 pm on April 19, 2016
Apr 122016
 

Screen Shot 2016-04-12 at 9.33.12 PMEnd of Day Update:

On Tuesday the S&P500 rebounded decisively from Monday’s selloff and is again challenging 2,060 resistance. This was a welcome relief since five of the last seven-trading sessions ended near the bottom of the day’s trading range.

While the popular market truism is “it’s not how you start, but how you finish”, Tuesday’s rebound went against this popular convention. While it would be easy to feel bearish about the recent price-action, when taken in context, it is highly noteworthy that these five-attempted breakdowns failed to build momentum. It’s like jumping on a frozen pond. Never a good idea, but the risk of falling through the ice drops dramatically after the first few jumps. If you haven’t fallen in by the fifth jump, then chances are pretty good the ice beneath your feet is solid and more than enough to hold your weight. The same can be said about the stock market holding up after probing 2,040 support the last several days. If we were going to crash, it would have happened by now.

Even though I’ve been cautious the last couple of weeks because of how far we’ve come since the February lows, the market is proving incredibly resilient. This choppiness has chased off many of the weak owners and the remaining ownership base is stronger as a result. Since we haven’t fallen through the ice yet, that means the higher probability trade is sticking with the uptrend for the near-term.

While the next move is most likely higher, it is still open for debate how we get there. 2,060 has been acting as clear resistance the last couple of weeks. We could simply break through this level Wednesday and not look back. The other possibility is Wednesday we retreat back into the 2,040/2,060 trading range and retest the lower end of the range. The ideal buy-point is falling under 2,040 support but rebounding when confident owners keep supply tight.

Jani

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 Posted by at 9:38 pm on April 12, 2016
Apr 052016
 

Screen Shot 2016-04-05 at 8.50.47 PMEnd of Day Update:

Tuesday the S&P500 stumbled into its biggest losses in nearly a month. Overseas weakness spread to our shores and this time dip-buyers were helpless to stem the tide of selling. While we are only a few points from recent highs, this dip felt different.

As we discussed last week, the move to a new quarter often brings a change in investor strategy. In March big money was caught off guard by the swift rebound from February’s lows and these managers were forced to buy back the stocks they sold earlier in the year. Their insatiable need to rebuild their portfolio pushed us higher all month. But now that the calendar’s rolled over and managers are given three-months of breathing room, there is less pressure to buy every dip. This vacuum of demand was fully evident Tuesday. We slipped and there was no one to catch us. This is why we finished at the lows.

While one data point doesn’t establish a new trend, it should be enough to give us pause. We rallied 15% in two-months. That’s a huge number by any measure and it would be foolish to expect this rate of gains to continue. Now that we moved into the second-quarter, will money managers continue buying with reckless abandon? Tuesday’s price-action suggests otherwise and we should prepare for a bumpier road ahead.

If we truly exhausted the supply of willing buyers, prices should continue slipping over coming days. The most obvious support level is 2,000. Fail that and the 50dma and 1,940 are the next logical levels to bounce at. Now don’t get me wrong, I’m not predicting a crash and return to February’s lows. But a cooling off period is warranted given how far we’ve come. Two-steps forward, one-step back.

That said, if we bounce Wednesday and recover Monday’s close, dip-buying is alive and well. That means there is no vacuum of demand and the good times are still rolling. Selloffs are swift and if Tuesday’s weakness doesn’t spread, then this was just another dip on our way higher.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
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 Posted by at 8:52 pm on April 5, 2016