Jul 172014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks plunged on a double dose of international headlines.  The S&P500 gave up more than 1%, making this the biggest selloff in multiple months.  In spite of anxious selling, we are still above 1,950 support and curiously, the volume was the lowest we’ve seen in three days.

MARKET SENTIMENT
Clearly this was a sell first, ask questions later kind of day, but the relatively light volume is noteworthy for such an outsized move.  There are two ways to interpret this.  Either there are still a lot of hopeful owners left to drive out of the market, or alternately, most owners are not interested in selling these headlines and today’s move was driven by a small minority impulsively reacting to headlines.

As for the individual headlines, anyone paying attention over the last few years knows there are periodic flare-ups between Israel and the Palestinians and tensions have been coming to a head in recent days.  This shouldn’t be a big surprise and it is unlikely to lead to a material disruption in the US economy or earnings for US listed equities.  While these stories are never pleasant, we’ve been here before and few people will change their economic forecast based on these events.  That means this headline is largely a non-issue for US markets.

What happened in Ukraine is quite a bit different.  Shooting down a civilian airliner is anything but routine and it clearly escalates the tension between the East and West.  While many feel this will deteriorate the already fragile situation, I’ll take the other side.  This tragedy could actually defuse things.  If it turns out Russia or Pro-Russian separatists were involved, that creates an indefensible position for Putin and he will have little choice but to dial back his rhetoric.  This was an appalling act and there is no way he can defend the people who pulled the trigger, killing nearly 300 innocent people.  Putin could very well distance himself from the separatists following this cowardly act and without their major ally, their resistance will likely fizzle.

But even if tensions remain elevated in Ukraine, the market came to terms with these risks months ago when the situation first developed.  Honestly I think we should be more fearful of what is going on in Iraq than who fired the missile today.  If the market doesn’t care about what is happening in Iraq, then this Ukraine story won’t matter in a couple of days either.

TRADING OPPORTUNITIES
Expected Outcome:
While these clouds will likely pass once most traders realize they will have limited impact on corporate earnings, we could see near-term weakness as traders continue selling before thinking.  But given how quickly the market blew off more serious headlines out of Iraq and Portugal, I doubt today’s weakness will last more than a couple of days and this creates yet another buying opportunity.

Alternate Outcome:
The market has largely been ignoring escalating geopolitical risks.  At some point hoping for the best will no longer work and we could be in the middle of that if the situation Israel and Ukraine continues to deteriorate.

Trading Plan:
Support lies back at 1,950.  While we might dip under this key level if selling continues early Friday, closing above it is supportive of this market.  It tells us the wave of reactive selling has stalled and we likely have another buyable dip on our hands.  But if we slice through 1,950 and keep going, all bets are off and a test of 1,920 support seems likely.

Plan your trade; trade your plan

 Posted by at 11:47 pm on July 17, 2014
Jul 162014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks closed above 1,980 for the first time in a couple of weeks, leaving us within a few points of all-time highs.  While the market trades sideways, the upward sloping 50dma and 200dma are quickly gaining ground.

MARKET SENTIMENT
The market no one wants to trust keeps holding strong.  Many traders admit they think stocks have come too far, but they are reluctant to sell because every time they sold over the last year and a half, they watched the market rebound higher without them.

This is the foundation of the “next greater fool” theory in investing.  The logic goes, “I know this is overvalued, but I will buy it anyway because I know someone else will come along later and pay even more for it.”  Traders have a natural fear of heights, but this resilient bull market is making many are more afraid of being left behind than losing money.  This is why so many continue chasing all-time highs and not selling bearish headlines, even though they don’t trust this market.  But like every game of musical chairs, if you stick around too long, you’ll be the one that gets left out.

TRADING PLAN
Expected Outcome:
We are four points from triggering another short-squeeze.  While there is no reason to trust this market, it is giving us every indication it wants to go higher.  Even if we are setting up a bearish double-top, we still need to set new highs first.

Alternate Outcome:
At some point we will run out of dip-buyers.  Maybe that day is tomorrow.  Maybe it won’t happen until next year.  But every dip that gets bought brings us one step closer to the one that doesn’t.  Failure to set new highs this week will be an ominous sign.

Trading Plan:
Both bulls and bears should expect new highs in coming days.  The only disagreement will be what to do next.  Bulls should use a trailing stop to protect recent profits.  Bears should wait a couple of days before jumping in front of this bounce.

Plan your trade; trade your plan

 Posted by at 10:48 pm on July 16, 2014
Jul 152014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks bounced between 1,980 and 1,965, but spent most of the day in the red and finished in the middle of this range.  Volume was above average and the highest we’ve seen in a couple of weeks.

MARKET SENTIMENT
We were having a good morning until Janet Yellen started speaking to Congress.  From there we plunged more than 15-points as she shared her views of a fragile recovery and asset bubbles in the market.  That was enough for some traders to hit the sell button and send the market lower midday.

To figure out where we go from here we need to understand who was selling, buying, and holding this move.  It really doesn’t seem like Yellen shared anything new in her testimony, so fundamental traders are unlikely to change their outlook based on what she said.  That means most of the activity came from reactive traders responding to the negative commentary and technical/momentum traders selling the weakness and dip under Monday’s close.  But following the initial wave of reactive selling, supply dried up as a wider group of owners chose not to join the liquidations.  This group held through multiple conflicts in the Middle East and Easter Europe, brushed off Portuguese bank defaults, as well as every other bearish headline to hit the wires recently.  From that frame of reference, it seem unlikely Yellen stating the obvious would convince them to sell today either.

TRADING OPPORTUNITIES
Expected Outcome:
Holders keep holding and until something changes, expect the resulting tight supply to prop up prices.  Today’s volume was elevated as reactive traders dumped shares, but those buying the discount showed a willingness to jump in front of these headlines and weak price action.  If these dip-bueyers are more confident than the reactive sellers they replaced, expect supply to get even tighter in coming days.  Swift selloffs are swift and holding 1,950 for four days is anything but swift.

Alternate Outcome:
If we violate support near 1,950, that means we ran out of dip-buyers and there are few things that rattle nerves like a screen filled with red.  Breaking technical support could trigger a larger wave of stop-loss selling and send us to 1,925.

Trading Plan:
We are stuck in no-man’s land between recent highs at 1,985 and lows at 1,950.  Holding last week’s bounce for another day show buyers and owners are comfortable with these levels and we exhausted the supply of sellers.  But fail to hold 1,950 on Wednesday makes a test of the 50-dma likely.  Plan your trades accordingly.

Plan your trade; trade your plan

 Posted by at 11:23 pm on July 15, 2014
Jul 142014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks extended Thursday’s bounce off of 1,950 with modest gains on light volume.

MARKET SENTIMENT
While not many traders participated this low-volume move higher, what is more important is confident owners chose not to sell the rebound.  As long as owners are willing to hold no matter what the headlines proclaim, it is really hard for a correction to take hold without supply.  And that is why, much to the chagrin of bears, this market continues to climb on weak volume in spite of all the ominous headlines.  No supply means no selloff.

While we all know this cannot go on forever and at some point this bull market will stall, the challenge is figuring out when.  Predicting what the market will do is easy, all the money is made getting the timing right.  While there are countless indicators pointing to how high investor sentiment is, in the near-term these indicators are bullish because it means people continue throwing money at the market.  Only after we get too close to the sun will we finally come crashing back down to earth.  Until then, let the good times roll.

The best way we know this is not the top is twofold.  First last week gave the market the perfect excuse and setup to trigger an extended selloff.  But instead of gathering momentum and sending spooked owners scrambling for the exits, everyone shrugged off the headlines and viewed the weakness as yet another buyable dip.  The second indicator is how wound up short-term traders, bears, and the financial press became over a 1% dip.  Bullish sentiment on Stocktwits SPY stream plummeted from 66% to 41% in a week!  That shows there is still a healthy amount of fear and skepticism in the market.  And now these aggressive bears will need to buy the market to cover their premature shorts, adding more fuel to the fire

Source: Stocktwits SPY stream 7/14/2014

Source: Stocktwits SPY stream 7/14/2014

TRADING OPPORTUNITIES
Expected Outcome:
Selloffs are breathtakingly quick and this is the third day we’ve held 1,950 support, suggesting last week’s dip was little more than a test of support.  While I’m no raging bull, this market is giving every indication it wants to test 2,000.

Alternate Outcome:
One of these days we will come across a dip that shouldn’t be bought.  While the final score might be 99-1, bears will ultimately have the last laugh.

Trading Plan:
Last week’s selloff appears dead and bears should cover shorts before they turn into losses.  Nimble short-term traders can position themselves for a short-squeeze to 2,000.  Long-term investors already in the market should stay in the market but hold off on making new purchases for a couple of months because we will likely see better prices.

Plan your trade; trade your plan

 Posted by at 10:41 pm on July 14, 2014
Jul 102014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed European banking worries, but recovered a big chunk of those losses by the close.  Volume was elevated as fundamental traders responded to the headlines and technical traders bailed on the break under 1,960 support.

MARKET SENTIMENT
While the S&P500 closed down 0.4%, this was about as bullish of a day as we could ask for.  Between the scary headlines and a violating support, owners had every excuse to stampede for the exits.  Instead they did the opposite, absolutely nothing.  The lack of selling tightened supply and there was nowhere for this market to go but higher from the opening lows.

When the market doesn’t do what it is supposed to do, that is a clear indication our analysis is flawed.  Bears had the perfect setup for a cascading selloff between spooky headlines and technical weakness, but when most owners didn’t flinch, it shows bears under estimated the resolve and confidence of bulls.

Even more bullish is the fact that over the last several days many weak-kneed traders sold these down-days, leaving far fewer potential sellers in the market.  Those that bought the dip demonstrated a willingness to own in the face of this weakness and are unlikely to flinch if we see another modest dip.  But a peculiar thing happens when everyone is willing to hold another dip, we don’t get one because when no one sells, there is nothing to push the market down.

TRADING OPPORTUNITIES
Expected Outcome:
Having chased most of the worry-worts out over the last few days sets up a solid foundation of confident owners from which to continue the prior up-trend.  While this rally will eventually end like every rally before it, when the market resists the perfect setup to selloff, it means the rally is not over.

Alternate Outcome:
Buy the dip is the most worn out trade of the last few years.  By the time everyone know something, it is already on its way out.  If we bounced on one last gasp of dip-buying, expect the selling to resume once the dip-buyers run out of money.

Trading Plan:
The market is giving every indication it wants to go higher in the short-term.  Dip-buyers can buy the dip and bears should lock-in any profits they have before they disappear.  If we undercut today’s 1,952 low, all bets are off and the selloff will likely continue.

Plan your trade; trade your plan

 Posted by at 11:07 pm on July 10, 2014