Jani

Apr 172014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks traded quietly ahead of the three-day weekend.  We continue holding recent gains and remain above prior support at 1,850 and the 50dma.  This bounce recovered more than half of the recent 80-point sell off and puts the market on more solid footing.

MARKET SENTIMENT
The selloff for no reason was met by the rebound for no reason.  Big moves are driven by traders changing their outlook on the future due to unexpected headlines.  Smaller moves are the result of the natural ebb and flow of supply and demand.  The recent selloff was nothing more than a modest pullback when demand dried up near 1,900.  While the selloff felt dramatic and spooked many traders, nothing happened over the last couple weeks that changed traders’ economic expectations.  Those that expected the economy to continue improving two-weeks ago still feel the same today.  We didn’t get fundamental data that made big money managers adjust their economic outlook lower and is why we bounced sooner than many predicted.

Last week’s reactionary selling wasn’t due to people thinking the economy was taking a nose dive, but because they thought the market was going to take a nosedive.  That a key piece of information technicians miss when they lump all trading activity together in a chart. Supply and demand moves are smaller and more common than fundamentally driven ones.  While many were calling for a 10 or 20% correction likes we’ve seen in years past, what these prognosticators forget is those corrections were driven by dramatic headlines that forced traders to adjust their economic outlook.  Euro Contagion and the downgrade of US debt threatened the viability of our financial system and is why those headlines lead to big selloffs.  Traders were no longer confident about what the future held.  This time around we didn’t have gut-wrenching headlines backing up this selling and is why I felt fairly confident this move would bottom while others were predicting we were falling off a cliff.  While the chart looked scary, we lacked a fundamental reason to drive confident owners out of the market.  While this weakness spooked out impulsive and reactive traders, there was little substance to rattle the nerves of more confident owners.

TRADING OPPORTUNITIES
Expected Outcome: There is still more upside left in this rebound, but it is unlikely to lead to a new rally leg.
Traders are breathing a sigh of relief as the emotion driven selling abates.  We will likely see more buying next week as people feel more comfortable owning this market and they chase the bounce.  While this move largely puts fears of a 20% correction behind us, the coast is not clear.  The market will likely remain in a trading range through the summer.

Alternate Outcome:
Big declines often have multiple false bottoms along the way and this weeks strength could just be a sucker’s rally.

Trading Plan:
It is a little late to buy the dip.  The best trading opportunities come from the most uncomfortable situations.  Buying after four up-days is hardly uncomfortable.  We will likely see a few down days next week that flush out the late dip-buyers and tempt the bears to go short.  While I still think there is more upside in this rebound, most of the easy money is behind us and the next couple dozen points of upside will be more bumpy.

Plan your trade; trade your plan

 Posted by at 10:05 pm on April 17, 2014
Apr 162014
 
S&P500 daily at 2:11 EDT

S&P500 daily at 2:11 EDT

Intraday Update

MARKET BEHAVIOR
We broke through the 50dma and 1,850 barrier as this rebound continues.  This puts us back above key technical levels and gives this move credibility.

MARKET SENTIMENT
Last week many were convinced we were on the verge of a larger correction, but this week we’ve done nothing but go up.  And that is how the market works.  Everyone who expected a prolong selloff dumped shares reactively, but as soon as they finished selling, supply dried up and we bounced.  No matter what the headlines or traders’ expectations, market prices only respond to supply and demand.  Even when the crowd is pessimistic, we rally when we run out of sellers.

Volatility like we’ve seen over recent weeks churns ownership in the market.  The dip forced many weak hands to sell reactively and tempted aggressive bears to go short.  While all this aggressive selling continued the move lower, what is going on under the surface is these sellers are transferring ownership to more confident buyers willing to hold the risk and volatility.  They confidently buy the discount and patiently wait for the market to bounce.  Since they willing stepped into this uncertainty, they are more comfortable holding a declining market.    But the paradox is the more willing these new owners are to hold weakness, the less likely it is we will see that weakness.  When they confidently hold, then we run out of sellers and the market finds a bottom.

TRADING OPPORTUNITIES
Expected Outcome:
 Look for the bounce to continue into next week.
This rebound should continue at least until we recover April 10th’s selloff.  From there we will have to see what traders think and how the market responds before we decide if this move continues to all-time highs or stalls out.

Alternate Outcome:
Last week we saw a painful false bottom that caught many dip-buyers off guard and the same could happen here.  Short covering pushed us back above technical support, but we need wider buying for this strength to continue.  If demand dries up, we could easily stumble back to the lows.  Undercutting 1,810 in coming days means this selloff is going to get a lot worse and the 200dma is in play.

Trading Plan:
It is getting a little late to buy the dip since we are near the middle of a move back to 1,900.  The best opportunities arise from the most difficult trades.  Buying the third consecutive up-day is late to the party and exposes a trader to greater risks of an intermediate dip.  As for bears, it is still early to short the bounce and the next shorting opportunity would be if the market stalls near 1,870.

Plan your trade; trade your plan

 Posted by at 12:13 pm on April 16, 2014
Apr 152014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Fascinating day as we traveled well over 60-points intraday.  We surged higher at the open, collapsed near recent lows by midday, only to see us race back up to the early highs by the close.  Volume was elevated and one of the busiest days we’ve seen this month.  We finished a hair under the 50dma and just a few points from prior support near 1,850.

MARKET SENTIMENT
Did today’s trade signal a capitulation bottom?  It sure felt like it.  Early strength pushed us to the 50dma, a technical level that often acts as overhead resistance.  Bearish traders used this mark to open the floodgates and their selling sent us down 30-points.  But as just quickly as the selling started, it exhausted itself and we rallied 30-points on tight supply.  No doubt this whiplash carried most reactive traders out on a stretcher.

This volatility is cathartic as it flushed out weak traders and seduced bears to short with both hands.  All that selling clearly pressured the market, but the frenzy stalled midday when there was no one left to sell.  When we run out of sellers, supply dries up and there is nowhere to go but higher.  And this strength is likely to continue given our proximity to the 50dma and 1,850.  Modest gains Wednesday could send shorts scrambling for cover and set off a dip-buying frenzy.

TRADING OPPORTUNITIES
Expected Outcome: We most likely put in a bottom to this modest selloff.
The most profitable trade of 2014 has been buying weakness and selling strength.  It appears this is no different.  The best time to buy is when everyone fears we will continue lower.  Anyone expecting lower prices already sold and they were replaced by confident dip-buyers willing to own the risk.  Purging weak-hands and infusing strong-hands is the best way to turn this market around.

Alternate Outcome:
Every dip is buyable until the one that isn’t.  While I still believe we need a headline event to dramatically lower investor’s expectations of future profits and earnings, sometimes fear is all it takes to turn confident owners into panicked sellers.  Even as this volatility flushed many weak holders, without a doubt we could easily see another leg lower before this is all done.

Trading Plan:
The best trades are often the hardest to make.  Buying recent weakness was not easy and will likely turn out to be the right trade.  Shorts should consider locking in profits, or at the very least protect themselves with a trailing stop.  Dip-buyers should get ready to ride the short-squeeze higher.  Since we are in the middle of a holiday shortened week, we should expect continued volatility due to lighter than normal volume.

Plan your trade; trade your plan

 Posted by at 11:07 pm on April 15, 2014
Apr 142014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks closed higher and recovered most of Friday’s losses, but it was a wild ride getting there.  After an opening gap higher, the market slipped to break even before staging a late-day rally back to the early highs.  Volume was well under average on the first day of this holiday-shortened week and the S&P500 remains under the widely followed 50dma.

MARKET SENTIMENT
Sometimes markets are overwhelmed by surges in supply and demand, other times they move because no one is buying or selling.  Today’s low-volume rally had selling take a break as we floated higher on tight supply.  This strength took pressure off nervous owners, but it didn’t do much to tempt reluctant dip-buyers that were burned by last week’s false bottom.  While there were few buyers, there were even fewer sellers and is why we ended the day higher.

With the S&P500 down over 4% and the NASDAQ 8%, many are claiming this is the 10% correction that is long overdue.  These people point to similar corrections in years past, but to me there isn’t much similarity because the examples they hold up were driven by some fundamental change that altered investor’s outlook on the future.  Euro Contagion and the downgrade of US debt were the two biggest selloffs of this 5-year old bull.  While the technical setup might be similar, we still lack the fundamental catalyst that changes confident investors outlook on the future.  Without those fear mongering headlines, this dip will likely be little more than the normal back-and-forth.

TRADING OPPORTUNITIES
Expected Outcome: Without a fundamental reason to sell off, we will remain range bound.
While I don’t see any reason for the market to implode here, there also isn’t much reason for it to race off to the moon either.  We trade sideways more often than directionally, so why are so many people taking sides, predicting a launch higher or collapse lower?  Why can’t we simply hang out in a 100-point trading range through summer?

Alternate Outcome:
Sometimes we don’t know why markets selloff until after the damage is done.  Maybe there are people far smarter and connected than we are and they are liquidating positions ahead of the imminent market collapse.

Trading Plan:
While it is fun to predict market collapses, smart money bets on a continuation of the previous trend.  That’s because a trend will continue countless times, but only reverses once.  It’s a numbers game.  While it is hard to get excited about the upside, the market is in a better position to bounce than continue lower.

Plan your trade; trade your plan

 Posted by at 10:42 pm on April 14, 2014
Apr 112014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks sliced through any semblance of support as the selloff continues.  We fell over 80-points from the all-time highs set last Friday.  This includes breaking the 50dma Thursday and continuing lower on Friday.

MARKET SENTIMENT
It is hard for the financial press to come up with a justification for this selloff other than “profit taking”.  There are no fundamental headlines dominating trading rooms and it largely seems like people are selling for no other reason than everyone else is selling.  The high-flyers are taking it the hardest, down 20 and 30%.  Some claim the death of these mo-mo stocks signals the end of this bull run, but here is the thing, markets typically top when the hottest stocks continue higher while everything else drops back.  During the dot-com boom, brick-and-mortar companies were shunned while everyone was piling into speculative internet stocks.  Today we have the opposite.  The momentum darlings are down double digits while the broad market only slipped a few percent.  Is this the end of the bull market?  Not if we use history as a guide.

Stocks fall for only two reasons, waves of selling or lack of demand.  A rush of sell orders is the stereotypical selloff and fairly intuitive.  This is when everyone hits the sell button at the same time and that surge of supply overwhelms demand, crushing prices.  The less intuitive reason prices fall is lack of demand.  This is when most traders still believe in the market, but prices come under pressure because prospective buyers wait patiently for more attractive prices.  

Surges of buying and selling often see volume leap 30 and 40% above average, but over this 80-point slide, the most elevated volume we’ve seen was 8% above average.  That hardly qualifies as a mass exodus.  The lack of huge selling volumes suggests most owners are confidently sitting through this weakness and these price declines are largely driven by lack of demand.  This is important because it gives us insight into where we are headed next.  

TRADING OPPORTUNITIES
Expected Outcome:
There are two kinds of selloffs, those driven by fearful headlines and those that seem to fall for no reason at all.  This week’s selloff  lacks a fundamental catalyst and these mysterious selloffs are primarily caused by supply and demand imbalances.  All of the big selloffs people remember and fear are triggered by a fundamental catalyst that sent shivers of fear through the market.  Contagion, Default, Taper, Sequester, etc.  Confident owners need a boogeyman to shatter their confidence and turn them into sacred sellers.  So far we don’t have a boogeyman and that likely means this selloff will be more shallow since fewer owners will impulsively sell the fear mongering.

Alternate Outcome:
Sometimes we don’t figure out why a market is selling off until after it already happened.  If this market continues collapsing, the financial press will invent a reason.  While today’s selloff stalled just above 1,810, we could see a fresh round of emotional and reactive selling if we breach 1,800 next week.

Trading Plan:
The best profit opportunities are born from the most uncomfortable situations.  Buying the dip Wednesday after holding support was the easy, and wrong, trade.  Buying now that we’ve crashed through support is far more difficult.  And that is what likely makes it the right trade.  Without a fundamental driver, expect this selloff to stall soon.  Shorts should look to take profits and bold dip-buyers can take a chance.

Plan your trade; trade your plan

 Posted by at 10:38 pm on April 11, 2014