Jani

Aug 132014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Buyers jumped back in following yesterday’s minor dip.  Volume was modestly higher, but still well under average as the trend of apathetic trade, or more accurately a lack of it, continues.  Owners are comfortable owning and few are selling the strength.  Those that don’t believe in this bounce already sold it, with the more bold going short.  And most with cash are reluctant to bid up prices in anticipation of future gains.  Those factors conspired to leave us slightly above the recent 1,910/1,940 consolidation.  While today was technically a breakout, the lack of follow-on buying was uninspiring.  Of course the more widely followed and significant level is 1,950.  That has history going back to early June and will likely generate far more trading activity than a minor break of 1,940.

Tuesday evening I said Wednesday would be a big day because either we breakout to the upside, or slip back into the consolidation.  And wouldn’t you know it, the market made a liar out of me by doing neither and instead creeped higher, but fell shy of a 1,950 breakout.  Being so close to a major technical level is too tempting for market makers and bots to not push us through, triggering all the automatic breakout buying and short-covering that would follow.  But what happens after that is what we are most interested in.  Do we find support and continue higher, or is this the last gasp of the rebound before retreating back into the consolidation?

If I am right/wrong:
At this point the market could go either way.  We are nearly exactly in the middle of the 1,910/1.990 trading range that began in mid-May.  At the halfway point it is hard to claim we are overbought or oversold.  Without an edge one way or the other, the best trade is to wait for a better trade.  If forced to choose, at this point I would stick with the up-trend simply because that is where the momentum is.

Trading Plan:
Holding above 1,950 and ignoring fearful headlines is bullish.  Stalling and retreating back into the trading range is not necessarily bearish, but at best it means the rally needs more time before continuing.  Looking ahead, most likely the real trading opportunities will come after Labor Day and everything before then is just noise.

Jani

 Posted by at 10:15 pm on August 13, 2014
Aug 122014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

And on the third day the market rested, giving up a fraction of a percent following a two-day, 30-point rebound.  Volume continues falling off a cliff as every day over the last five finished with less volume than the day before.  Some claim low volume is bearish, others say it is bullish.  But what we know for sure is traders are growing comfortable with their positions and simply waiting for the market to make its next move.

Wednesday is an important day.  Either we breakout and reclaim 1,950 support, or the rebound stalls and we fall back into the consolidation.  Obviously a breakout is bullish, but slipping back into the trading range is not necessarily bearish.  It could mean the market needs more time before resuming the up-trend.  But the risk is the longer we stay inside the trading range, the more vulnerable we are to slipping under 1,900 support and triggering all the technical stop-losses littered under this widely followed level.  That could kick off another round of emotion selling.  But rather than fear this, we should embrace it because it will likely form a capitulation bottom and set the stage for a sharp, and profitable, rebound.

The one warning I have bulls is rebounds from oversold conditions snap-back with ferocious force.  Trading between 1,910 and 1,940 for nearly two weeks shows the market is clearly not stretched to unsustainable levels.  Either that means we have more selling left before finally reaching extreme levels, or the market is content hanging out here and we should expect a more protracted consolidation.

If I am right:
Most of the time markets trade to extremes, meaning there is a good chance we will slip even further before this pullback is done.  Often corrections find support halfway through the move as dip-buyers rush in and prop up the market.  But if we cannot find a more diverse pool of interested buyers, demand dries up and we stumble into another leg lower.  Failing to escape from this consolidation in coming days leaves us at greater risk of one last leg lower.

If I am wrong:
It’s been a fearful couple weeks and we’ve seen quite a bit of turnover as ominous headlines scared out the weak and replaced them with confident traders willing to buy the dip.  Retaking and holding 1,950 support will show the worst is behind us, at least in the near-term.

Trading Plan:
At this point the market could go either way and we don’t have an edge in coin-flip style trades.  Bulls can stay long, bears can stay short, and those out can stay out.  But soon I expect we will get more clarity from the market as it reveals what it is thinking.  From there we can find a trade with better odds.

Jani

 Posted by at 9:19 pm on August 12, 2014
Aug 112014
 
S&P500 daily

S&P500 daily

End of Day Update:

There was a little something for everyone today.  For bulls, this was another relief rally, adding 0.3% to Friday’s bounce.  For bears, we finished near the lows of the day as a lack of follow-on buying failed to fuel further gains.  While we finished near the upper end of the recent 1,910/1,940 consolidation, an early attempt to break 1,950 was rebuffed.  Ultimately few were motivated to trade today’s rebound and volume came in at the lowest level in several weeks.

The question on everyone’s mind, is the worst behind us, or is this just a bull trap before continuing lower?  If we use history as a guide, the last couple of times the market broke down, it temporarily found support before plunging one last time.  See the accompanying chart.  January 30th we traded to the upper end of a consolidation, but stumbled into a 60-point sell off two-days later.  Same thing happened to April 9th’s rebound, two-days later we were down 55-points.  The bullish takeaway from both plunges is they formed powerful capitulation bottoms that were excellent buying opportunities.

While some fear is dissipating as Western forces gain the upper hand in Iraq and Ukraine, markets remain on edge.  Another bad headline could send traders running for cover yet again.  But rather than fear the volatility, we should embrace it because one man’s panic is another man’s gain.

If I am right:
If buyers cannot push the market above 1,950, then we need to be wary of one last selloff.

If I am wrong:
If buyers shrug off further fearful headlines and continue bidding up prices, holding above 1,950 and the 50dma will signal the worst is already behind us.

Trading Plan:
As long as we remain inside the 1,910/1,940 consolidation, we are in no-man’s land and the market could break either way.  I would be reluctant to buy until the market proves the worst is behind us by reclaiming the 50dma.  If the market stumbles in coming days, that creates an interesting, but very brief shorting opportunity.

Jani

 Posted by at 10:27 pm on August 11, 2014
Aug 072014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

Market Analysis:
Even with the wind at their back, bulls could not get it done and early strength faded into yet another down-day. It doesn’t matter what the financial press attributes this weakness to because we know the truth, no one wants to buy this market.

Every day the market is flooded with hundreds of pieces of news and data. Some of it is bearish, some of it is bullish, and most of it is irrelevant. But in the short-term, none of it matters because most traders simply look for an excuse to justify their preconceived bias. If they are bullish, they will find plenty of reasons to buy. A bear will find countless number of reasons to dump his stock. Allegedly the market sold off on a slight variation of Russian and European news that’s been making the rounds for months. Who cares why the market sold off, the only thing that matters is what people are thinking and how they are positioned.

We are still in a long-term secular bull market and this is just another buyable dip on our way to record highs, but we need to exercise restraint in the near-term. The inability to escape the lower reaches of this trading range proves we are not yet oversold. We all know the market always overdose it, so we need to wait until it reaches those extreme oversold levels before calling a bottom. While some use complicated mathematical formulas to calculate overbought and oversold levels, the only thing that matters is what the market thinks. We’ll know when we’ve gone too far because, it will snap back with decisive speed and ferocity. Groping for a bottom for five days is anything but ferocious.

If I am right:
Watch out for another leg down. This slow motion crash isn’t enough to shake free those hanging on by their fingertips.  We need something more spectacular to send the last of the holdouts scurrying for cover. Breaking under 1,900 support will trigger an avalanche of technical stop-loss orders and the swiftness of that automatic selling will convince others to join in the dash for the exits.  But rather than cascade into the collapse everyone fears, this will be the dying gasp of this correction before we capitulate and bounce higher.

If I am wrong:
The longer we hold near the lows, the more likely it is we will crash through support, but there is a chance this slow motion selloff is convincing enough fearful owners to sell to more confident dip-buyers.  If we churn over an extended period of time, we might not have enough fearful owners left to trigger another emotional selloff.  This is a much more ambiguous bottom and it is impossible to pick a nearby point where it would be clear I was wrong.  I wouldn’t trust this sideways consolidation unless it stretches on for a few more weeks or finally holds above 1,950.

Trading Plan:
The longer we hold near the lows, the more likely it is we’ll see another leg lower.  Shorts can hold on for another leg lower and dip-buyers need to keep their powder dry until we have that capitulation bottom.  Longer-term investors can ride this out, but they should wait a few days before adding to their favorite positions.

Jani

 Posted by at 9:13 pm on August 7, 2014
Aug 062014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
A long way to nowhere as the market opened lower, then broke into the green, before ultimately finishing flat.

MARKET SENTIMENT
While we held 1,920 support, the market had a hard time finding dip-buyers willing to chase prices higher.  Most often capitulation bottoms are violent whipsaws with decisive rebounds.  Treading water at this level is anything but decisive and shows we haven’t reached such extreme oversold levels that the market couldn’t help but snap back.

While we could be forming a rounded base, there is far too much emotion in the market for such a boring move.  Every day we fail to escape this gravity is one more day where late-to-the-party dip-buyers work up the nerve to buy support.  But the more of these guys that get in, the greater the risk of crashing through support as we undercut all the automatic stop-losses forming under our feet.

TRADING OPPORTUNITIES
Expected Outcome:
This is nothing more than another buyable dip in a secular bull market, but given the market’s inability to bounce shows we have not reached extreme oversold levels yet.  This means we likely have another whoosh lower when the market undercuts all the stop-losses accumulating under support.

Alternate Outcome:
The huge spike in volume over the last several days shows many of the willing sellers have already sold, meaning there is a far smaller pool of prospective sellers remaining.  Markets bottom when everyone is convinced the selloff will continue and this selloff has everyone nervous.  We will reach a point where there is no one left to sell and the market rebounds on tight supply.  Every day of sideways churn brings us one day closer to that day where we run out of sellers.

Trading Plan:
The longer the market holds in this trading range, the more likely it is we will break through support.  While we are close to a bottom, the market is not acting like it is oversold yet.  Bears can hold their shorts and dip-buyers should step back and wait for another whoosh.

Plan your trade; trade your plan

 Posted by at 9:19 pm on August 6, 2014