Apr 232014
 
S&P500 daily at 1:54 EDT

S&P500 daily at 1:54 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are down fractionally in midday trade.  So far the market is holding 1,875, but struggling with former resistance at 1,880 that stretches back to early March.

MARKET SENTIMENT
The bears identified a mountain of reasons this market should breakdown, but instead it holds within 1% of all-time highs.  There are times the market does what we think it should, and there are times we are wrong.  When the market doesn’t behave as expected, it means our analysis is flawed and there is something big we overlooked.

This morning bears are pounding the table over Ukrainian tensions, earnings, weakness in momentum stocks, head-and-shoulders tops, low-volume up-days, among many other things.  So why isn’t the market cracking wide open?  The short answer is supply and demand.  Most of the problems bears are promoting have been around for a while.  Anyone who fears these issues already sold in the dip to 1,815.  That means everyone left holding isn’t worried about these fears and they are priced in.  While there are scary things abound, we cannot forget markets only move on supply and demand.  When everyone already sold these headlines, there is no one left to sell and the market firms up on the resulting tight supply.

But supply is only half the equation.  For this strength to continue, we need fresh demand.  The last time we were at these levels, buyers refused to step up and is why we slipped to the low 1,800s.  Will this time be any different?  The most obvious near-term buyers are shorts, momentum chasers, and breakout buyers.  All three of these groups react to prices moves, not underlying fundamentals.  The higher we go, the more these guys buy the market.  Until we clear old highs, expect these traders to keep buying this strength.

TRADING OPPORTUNITIES
Expected Outcome: Pushing toward the upper end of a trading range.
All the Chicken Littles running around because of a 5-point selloff need to tone it down a notch.  Two-steps forward, ones-step back.  Everyone knows that, so why do they overreact to the smallest gyrations?  While buying here is late in the game, we most likely still have upside and a shot at cracking 1,900 in coming day.  But at the same time I expect we are still in an extended trading range and this strength will not trigger the next rally leg.  Instead we will drift back into the 1,800/1,900 trading range and stay there through the summer

Alternate Outcome:
Bears might be right.  This could simply be a false bottom and we have a date with the 200-dma in May.  While I’m not a big believer in “Sell in May”, it only matters what other people think.  If they start selling head of summer vacation, that will push us lower.  Once we break recent lows, people start selling for no other reason than everyone else is selling and we continue lower in a downward spiral.

Trading Plan:
It is too late to buy the dip after six-consecutive up days that recovered 60-plus points.  While we still have some upside left in this move, the risk/reward does not favor new positions.  At the same time, it is early to short the market and bears should wait for that last surge higher before trading against this strength.  For those with long positions, start looking for an exit and either sell proactively or use a trailing stop to protect recent profits.

Plan your trade; trade your plan

 Posted by at 11:56 am on April 23, 2014
Apr 212014
 
S&P500 daily at 2:31 EDT

S&P500 daily at 2:31 EDT

Intraday Update

MARKET BEHAVIOR
Not a lot happening following the three-day weekend.  The market is up 0.3% in late-day trade and continues holding the recent rebound.  We remain above the 1,850 support and are 1.5% from all-time highs set a few weeks ago.

MARKET SENTIMENT
While the market appears quiet, that speaks volumes since few are fading this bounce.  Anyone who doesn’t believe in this market sold or shorted recent weakness, meaning there are few left to sell.  Those sellers were replaced by more confident buyers willing to own the volatility and downside risk.  The more confident owners are, the less likely they are to sell headlines and dips.  This churn in ownership is what set the stage for the bounce from 1,815.  Now that dip buyers are sitting on profits and owners who held the weakness are breathing a sigh of relief, the current group of owners is less likely to sell because their decisions to hold this market was reaffirmed.  Under most circumstances, confident owners means few sellers and tight supply.

TRADING PLAN
Expected Outcome: Pushing toward upper end of trading range.
If we close in the green today, that will be the 5th consecutive up-day and we all know even the strongest markets have down-days sprinkled in.  Currently we are running into resistance near 1,870, but no doubt many shorts placed their stops just above this level and we will likely see another short-squeeze when we move above this level.  From there the next big resistance level is 1,900.  But we are slipping into the summer trading session and are more likely to see sideways trade than the next rally leg.

Alternate Outcome:
If this market stalls at 1,870 and falls under recent 1,815 lows over the next few weeks, then we are on our way to the 200dma.

Trading Plan:
The best profit opportunities come from the seemingly riskiest trades.  This is buying when everyone else is selling at a discount and selling when everyone is buying at a premium.  While there is a little more upside as we approach the upper end of the trading range, it is far riskier buying the dip on the 5th consecutive up-day.  Swing traders are better served looking for opportunities to harvest profits than adding to their positions.  Bears should wait for a little more upside before fighting this market.  Stalling near 1,900 could be the next good shorting opportunity.

Plan your trade; trade your plan

 Posted by at 12:33 pm on April 21, 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 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 082014
 
S&P500 Daily at 1:13 EDT

S&P500 Daily at 1:13 EDT

Intraday Update

MARKET BEHAVIOR
Stocks bounced off the 50dma in early trade and are holding near 1,850 as they search for direction.  So far today’s move is more like a pause than decisive rebound since we are only up a few points from Monday’s close.

MARKET SENTIMENT
For as much drama as two-days of selling caused, we are only 2.5% from all-time highs.  This can be taken one of two ways.  Either this dip is no big deal and we shouldn’t be obsessing about it, or this is the start of something that still has a long way to go.  Of course the truth most likely lies between these two extremes.

Today’s pause marks the end of two-days of emotion fueled selling.  Those with a weak hand were flushed out in the rush for the exits, but confident owners continued holding and that limited new supply.  As soon as the emotional finished selling, the market found a floor and this is taking pressure off any remaining anxious holders.  But the fate of this move is no longer in the hands of holders.  Instead buyers will be the ones to save us.  Traditionally this is a mix of value investors and dip buyers.  Today’s pause is tempting dip buyers, but it is hard to claim a 2.5% discount from all-time highs represents a great buy for the stingy value investor.  Sometimes dip buyers can do this on their own, but if we need the value investor’s help, we probably need to slip a little further before they come to the rescue.

TRADING OPPORTUNITIES
Expected Outcome:
If the marked doesn’t end this dip in a decisive v-bottom today, we will likely hold near for 1,850 over coming days.  This leaves us vulnerable to one last emotion filled selloff as those barely hanging on get flushed out.  That last dip will likely be the end of the selloff and clears the way for a continuation higher.  We saw a similar move in late January.

Alternate Outcome:
While big selloffs usually need a reason, sometimes we only come up with one after the fact.  While this is behaving like a vanilla pullback, it could devolve into bigger waves of emotional selling if dip buyers and value investors don’t have sufficient numbers to prop up the market.  Every dip is buyable until the one that isn’t.

Trading Plan:
There is not a lot to do here as we wait for the next trade.  We will likely see one last dip lower before bottoming.  This means shorts can continue holding and dip buyers can wait for a better entry.

Plan your trade; trade your plan

 Posted by at 11:15 am on April 8, 2014