Jul 292014
 

Screen Shot 2014-07-29 at 10.11.53 PMEnd of Day Update

MARKET BEHAVIOR
Stocks continued yesterday’s rebound in early trade, but stumbled midday and sold off into the close on elevated volume.  The market held Monday’s lows and remains comfortably above 1,960 support.

MARKET SENTIMENT
Talking heads attribute Tuesday’s reversal to increasing sanctions on Russia, but giving up less than 0.5% hardly qualifies as an emotional rush for the exits.  While the West is incrementally stepping up pressure on Russia, both sides are co-dependent on each other and it is unlikely either side will act rashly.  While it was enough to make buyers think twice today, these developments are largely priced in and unlikely to pressure the market.

But just because the Russia thing is old news doesn’t mean we cannot selloff for other reasons, namely typical supply and demand fluctuations.  The market is building a trading ranged between 1,690 and 1,690 and no matter what the headlines, the market seems content hanging out in this area.  Prospective buyers are not confident enough to chase prices to new highs and owners are uninterested in selling bearish headlines for a discount.  Apathetic buyers and complacent owners leaves us range bound.

TRADING OPPORTUNITIES
Expected Outcome:

The longer we hold support, the more likely the next move will be higher.  Markets tend to breakdown quickly and holding 1,960 for a month in the face of significant geopolitical headlines surely doesn’t qualify as a meltdown.  If the market holds 1,960 yet again on Wednesday, expect us to make new highs again in the short-term.

Alternate Outcome:
While owners are confident here, nothing shatters confidence like seeing everyone around them start selling.  While a modest, intraday dip under 1,960 is nothing to worry about, if the selling accelerates after violating support, we have further to fall.  If bulls cannot defend the 50dma and 1,950, then 1,900 and the 200dma are in play.

Trading Plan:
We are in no man’s land.  Those with long or short positions can stick with them, but use stops to prevent small losses from turning into big ones.  Those outside the market should wait for further confirmation before placing a trade.  Closing above 1,960 on Wednesday is bullish and crashing through it is bearish.

Plan you trade; trade your plan

 Posted by at 10:13 pm on July 29, 2014
Jul 282014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks recovered early losses to finish flat.  Volume was below average, even by summer standards.

MARKET SENTIMENT
Last week we failed to breakout; today we failed to breakdown.  Seems those with cash don’t want to buy new highs and those with stock are uninterested in selling weakness.  Until someone decides to do something we will continue trading sideways in this developing trading range between 1,960 and 1,990.

Wile bears are pointing to a dozen different reasons we should selloff, the market already knows them and doesn’t care.  Free-markets are exceptionally efficient at pricing in new information and events in Ukraine and Palestine are ancient news.  While either of these situations could deteriorate dramatically, it would take something even more shocking than downing a civilian airliner to get the market’s attention.

While there is little doubt this market will pullback at some point, the hard part is figuring out when.  Some are making seemingly bold predictions of a 20% pullback in the next 12-months, but what happens if we go up 30% before the expected correction?  Knowing what the market will do next is easy, getting the timing right is where all the money is made and a “sometime over the next 12-month” prediction isn’t worth the paper it’s written on.

TRADING OPPORTUNITIES
Expected Outcome:
Given the opportunity to both breakout to new highs and test support in recent days, the market instead chose to do nothing.  It seems like it wants to consolidate in this 1,960 to 1,990 trading range over the near-term.

Alternate Outcome:
This morning’s bounce could be little more than an automatic buy-the-dip reflex, but if we are running out of dip buyers, the market will let us know when it fails to hold 1,960 support.

Trading Plan:
The market is not giving us a lot to trade.   Since we are still in an uptrend, we should give bulls the benefit of the doubt, but as far as risk/reward goes, it feels like a coin-toss and we should wait for better odds.

Plan your trade; trade your plan

 Posted by at 10:08 pm on July 28, 2014
Jul 222014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks tested recent highs near 1,985, but failed to set a new closing high.  The last few weeks of sideways trade allowed the rapidly rising 50dma to catch up and we are now less overbought than the last time we found ourselves up here.

MARKET SENTIMENT
While we are back near the highs, market participants are far less giddy this time.  Conflict in Israel and Ukraine are keeping traders on edge, but the truth is these headlines are already old news as far as the market is concerned.  Anyone who fears these situations already sold.  Those who bought during this uncertainty showed an appetite for risk and willingness to hold the volatility.  And of course as we’ve seen in previous dips, the vast majority of owners have no interest in selling no matter what the headlines shout.  While all the talking heads try to scare us with this or that, without sellers this market will continue to defy gravity.

But that is the near-term assessment.  Over longer time frames it is hard to think of the catalyst that will drive the next bull leg higher.  Typically markets climb the proverbial wall of worry.  This is when prices are oversold as traders fear the worst.  Then there is a gradual thaw and markets rally as traders change their mind and slowly buy back in.  But we find ourselves with the opposite condition, everyone is fat, dumb, and happy.  With everyone so content, there are fewer and fewer people left to change their mind and buy in at ever higher prices.  While the momentum is clearly higher, we are on thin ice.

TRADING OPPORTUNITIES
Expected Outcome:
We are a few points from record highs and the resulting short-covering and breakout buying that will push us toward 2,000.  After that, it is anyone’s guess what comes next.  Maybe it is one last surge in a double top.  Maybe we’ll pullback modestly and continue consolidating.  Or will we surge higher and never look back?  Only time will tell as we watch to see how traders respond to the breakout.

Alternate Outcome:
Many traders expect us to hit 2,000, but often the market gives us the opposite of what the crowd expects.  Today’s failed breakout could be all we get before retesting support at 1,950.

Trading Plan:
It is too early to be short this market since it is completely ignoring bearish headlines.  No matter what people think it should do, it keeps going higher and we must respect that.  1,950 is turning into a major technical support level and breaking through that will force us to reevaluate our outlook, but until then assume the uptrend is intact and plan your trades accordingly.

Plan your trade; trade your plan.

 Posted by at 10:23 pm on July 22, 2014
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