CrackedMarket http://crackedmarket.com Wed, 10 Feb 2016 04:41:28 +0000 en-US hourly 1 Get Ready for the Bounce http://crackedmarket.com/2016/02/get-ready-for-the-bounce/ http://crackedmarket.com/2016/02/get-ready-for-the-bounce/#respond Wed, 10 Feb 2016 04:41:28 +0000 http://crackedmarket.com/?p=4567 [...]]]> Screen Shot 2016-02-09 at 9.39.43 PMEnd of Day Update:

The S&P500 ended a turbulent day exactly where it started. But given the headlines and early losses, a flat close is actually a win. Japanese stocks were gutted 6%, oil plunged 5%, and Europe was down nearly 2%. In the face of these tremendous headwinds, our market held up amazingly well by not succumbing to the global panic. Unfortunately flat might not be good enough.

Typically oversold markets rebound with explosive force. While that bounce might arrive Wednesday, if it doesn’t, that means we have a little more downside remaining. Two-weeks ago I suggested we are on the verge of entering an 1,800ish-1,950ish trading range and so far that is exactly what has happened. We rebounded off the January lows when we ran out of fearful sellers and existing owners were no longer willing to discount their stocks any further. That put a floor under the market and helped stocks rebound to 1,940, but beyond that point those with cash were no longer willing to chase prices higher in the face of this looming uncertainty. The resulting lack of demand pushed us back to the lower end of the trading range. At least to this point, stock owners are once again showing a reluctance to sell at lower prices and is why we found support the last two days. This confidence is keeping a lid on supply and propping up prices. No matter what the global headlines say, when few are willing to sell, prices remain resilient.

While it is easy to say this is little more than a normal and routine trading range, it sure doesn’t that way. But the thing to remember is nothing ever feels routine in the market. By rule every move has to be dramatic. If it didn’t, no one would sell. And when no one sells, we don’t go down. Therefore every time we go down, it must feel real. This is circular logic, but it happens every, single, time. The only time a market looks easy is when we are reviewing a chart months after the fact. And to this point, I have little doubt that two-months from now it will seem painfully obvious what we should do. But without the benefit of hindsight, making a trading decision today is anything but easy.

If we don’t bounce Wednesday, that tells us we haven’t found the capitulation bottom. As I stated earlier, rebounds from oversold levels are decisive and meandering around this level for three-days is anything but decisive. The ideal capitulation bottom is a relentless intraday selloff that slices through January’s lows and breaches 1,800. But just when it looks like we are going over the waterfall, we run out of sellers and bounce. That will be our buy signal to buy and hold a return to the upper end of this trading range. But in this instance it is better to be a little late than a lot early. Wait for the bounce to ensure we are not in fact plunging off a gigantic waterfall.

Jani

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The Trading Range is Here http://crackedmarket.com/2016/02/the-trading-range-is-here/ http://crackedmarket.com/2016/02/the-trading-range-is-here/#comments Wed, 03 Feb 2016 04:57:38 +0000 http://crackedmarket.com/?p=4564 [...]]]> Screen Shot 2016-02-02 at 9.56.26 PMEnd of Day Update:

The S&P500 failed to hold Friday’s gains and we challenged 1,900 support Tuesday. But regular readers of this blog expected last week’s rebound and this week’s retrenchment. A week ago I told them to prepare for a 1,820ish to 1,940ish trading range to develop and to this point the market is acting like it should. January’s 10%+ pullback did a little too much damage to put in a v-bottom, meaning we should expect a sideways consolidation and trading range to develop in the near-term. While most of us come to the market with a bullish or bearish bias, we need to resist the temptation to overreact these swings. Instead of buying the breakout or selling the breakdown, anticipate these reversals and trade against them. Take profits when the crowd is rushing in and buy when they are giving away stocks at steep discounts.

Trading ranges develop when both sides are entrenched and unwilling to yield. If a stock owner didn’t sell last August’s China meltdown and this year’s oil collapse, what are the chances they will bailout due to a recycling of these same headlines? The is also true on the other side. Recent sellers abandoned the market because they are convinced things are only going to get worse. A modest bounce is unlikely to convince them to buy stocks with reckless abandon anytime soon. With such strong and opposing viewpoints, we settle into a trading range until something new shakes up the status quo.

Jani

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Three Ways to Trade this Volatility http://crackedmarket.com/2016/01/three-ways-to-trade-this-volatility/ http://crackedmarket.com/2016/01/three-ways-to-trade-this-volatility/#comments Wed, 27 Jan 2016 04:21:27 +0000 http://crackedmarket.com/?p=4558 [...]]]> Screen Shot 2016-01-26 at 9.11.15 PMEnd of Day Update:

Choppiness in the S&P 500 continued Tuesday when we recovered most of Monday’s selloff, the day that erased most of Friday’s gains. Three-days of nearly equal and opposite moves, but the one constant through all of this has been the driver: oil.

Equity traders cannot make a move until they first see what oil did overnight. Then, and only then, can they decide if they should buy or sell stocks. This trading mentality lead to a nearly perfect 98% correlation between oil and equities since the start of the year. This is the tightest link in more than 25-years, far eclipsing previous periods of elevated correlation that only approached 80%. Clearly this an abnormal link that cannot last, but as long as equity traders think the only thing that matters is the price of oil, that is the card we have to play.

The most impressive thing about today’s 1.4% pop is it came on the heels of a Chinese stock market meltdown. Shanghai fell more than 6% Tuesday and their bear market rout is carving out new lows. Chinese weakness triggered our January meltdown, but it seems traders have moved on to obsessing over oil prices and are increasingly indifferent to Chinese stocks. But this divergence might be short-lived since China, oil, and S&P 500 futures are tanking in overnight trade. If this weakness persists, the fourth whipsaw will unwind the bulk of Tuesday’s gains.

But as I warned in my last few blog posts, we should expect and be prepared for this type of volatility. Corrections larger than 10% rarely result in v-bottoms that rebounds to recent highs. Instead we see choppy trade as dip-buyers, regretful owners, and over-confident bears fight for control. One day we are saved, the next day the world is ending. And so the cycle continues until the market has battered, bruised, and humiliated bears, bulls, and everyone in between.

In normal, trending markets buy-triggers and stop-losses work well, but these are clearly are not normal times. Trading predetermined levels is the quickest way to give away money in choppy basing patterns like this. If you set a stop-loss 20-points under the market, you pretty much guaranteed yourself a 20-point loss. That doesn’t make a lot of sense, so how do you trade this market?

The simple answer is you don’t. The safest approach is to wait for normalcy to return where traditional risk management techniques protect you instead of guarantee losses. The other approach requires an iron stomach as you buy the dip, watch the market move against you, and rather than get scared out, buy even more. Every dip in the history has bounced and this one will be no different. Buy when other people are fearful is easy to say, but far harder to do.

That being said, the market is most likely forming a trading range between 1,940 and 1,820. Baring brief excursions we should expect to trade inside this range through the remainder of the quarter. Earnings were the one thing that could have saved us, but so far it hasn’t worked out that way. On the other side, runaway selloffs happen over days, not weeks. It’s been a week since we bounced off 1,810 and at this point the panicked rush for the exits abated. While we will almost certainly retest those lows, the second time we approach a level is less scary than the first. The initial dip triggered a surge of automatic stop-losses and flushed out the weak, but all of that selling already behind us and second retracement will have a harder time building critical mass.

For the ambitious, trading against this range is a third possibility. But since we are near the middle of this range, the prudent move is to wait until we approach one extreme or the other before trading against it.

Jani

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Is the Bottom In? http://crackedmarket.com/2016/01/is-the-bottom-in/ http://crackedmarket.com/2016/01/is-the-bottom-in/#respond Fri, 22 Jan 2016 03:22:36 +0000 http://crackedmarket.com/?p=4554 [...]]]> Screen Shot 2016-01-21 at 8.18.17 PMEnd of Day Update:

It’s been a dramatic couple of days. Wednesday the S&P500 cratered over 3.5% in midday trade. But just when things looked their worst, we bottomed and recovered a majority of those losses with a powerful, 50-point rebound into the close. Volume was staggering and the second highest level in several years. The only day when more shares traded hands was August’s 5% bloodbath, a day also noteworthy for forming the bottom of the Fall selloff.

Thursday morning we slipped into the red but the situation changed decisively when the ECB hinted more stimulus is on its way in March. Then a less bad than feared U.S. oil inventory report sent crude spiking 5%. Between the apparent capitulation volume on Wednesday, more easy money from Europe, and rebound in oil, have we put in a bottom?

While Wednesday’s massive selloff did a lot of damage, it also purged most of the weak supply between here and 1,810. If anyone had a stop-loss, it was triggered when we plunged well beyond August’s lows. If an owner could have been spooked out, they were spooked out. But for every person who went running for cover, their was a bold buyer willing to take advantage of these emotional discounts. Removing weak owners and replacing them with confident dip-buyers is a very constructive development. Since we cleared most of the stop-losses under 1,850, it will be far harder for another dip under this level to trigger a runaway selloff.

But before we get too excited and start buying with reckless abandon, this correction fell well past the point where a V-rebound to previous highs can save us. This 10% selloff pushed us back into correction territory for the second-time in six-months and nerves are frayed. That means we should expect this erratic trade to continue as we carve out a base. Similar whipsaws occurred during the September bottoming and we should plan for the same choppiness here. In the near-term that means selling strength and buying weakness as we settle into a multi-month trading range. Be prepared for a retest of Wednesday’s lows at some point and expect regretful owners to flood the market with supply everytime we try to rally above 1,900. While it is tempting to trade our bullish or bearish bias every time the market feigns a breakout or breakdown, the best money over the next couple of months will come from trading against these moves.

Jani

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What Does History Tell Us? http://crackedmarket.com/2016/01/what-does-history-tell-us/ http://crackedmarket.com/2016/01/what-does-history-tell-us/#comments Wed, 20 Jan 2016 06:09:58 +0000 http://crackedmarket.com/?p=4550 [...]]]> Screen Shot 2016-01-19 at 11.06.28 PMEnd of Day Update:

The S&P500 opened with strong gains Tuesday morning following overnight stability in China, Europe, and the oil markets. But the comfort of a rebound was short-lived as we slid more than 30-points from the early highs. Only a late surge prevented us from closing deep in the red.

While a lot that could be said about Tuesday’s price-action, it has already been superseded by plunging S&P500 futures in Asia’s Wednesday morning trade. We don’t have to look far to find the usual suspect; oil slipped another 2.5% and is now under $28 for February delivery.

Counting this overnight weakness, we find ourselves down nearly 14% from last year’s highs. While this feels terrifying, where does this rate historically? Over the last 65-years the S&P500 has fallen more than 10% twenty-times, or about once every three-years. Losses of more than 15% occurred eleven-times, meaning nearly half of all 10% selloffs never made it past 15%. But if we pass 15%, things don’t look as rosy because nine-times we shot straight through 20%.

What does this historical data tell us? That selloffs between 10% and 15% tend to bounce while those that exceed 15% tend to keep going. While at first this phenomena seems perplexing, it actually makes sense when we look at the makeup of market participants.

We can segment stock owners into two groups, those that follow the market closely and those that don’t. Sentiment measures that include AAII, Stocktwits, option buyers and sellers, newsletter writers, and all the other popularly quoted sources tell us the opinions of active participants. These people tend to trade more frequently and drive daily market moves. A 10% selloff will push the sentiment of the active owners into the cellar where more often than not capitulation selling results in a rebound. But occasionally the panic and fear mongering achieves such intensity that Wall Street’s dirty laundry reaches Main Street. Losses above 15% is when we start waking up a whole new segment of owners and this larger supply allows the oversold condition to intensify. Currently we find ourselves just above this inflection point. Drop a few more percent and we risk Main Street joining in this circle-jerk selloff.

Does this mean current owners should get out now while they still have a chance? Not necessarily. It all depends on timeframe. Nimble day-traders and swing-traders who are good at spotting capitulation can profit from near-term weakness and the inevitable rebound, but most everyone else should be thinking about buying this dip, not selling it. The other thing that history tells us is only three of the nine 20%+ selloffs were under 20% for more than a few weeks or months. While we sliced through 20%, we bounced back nearly as quickly six out of the nine-times. The odds are clearly more in favor of buying these discounts than selling them.

Screen Shot 2016-01-19 at 11.06.40 PMBut what about those other three-times? I suppose each of us must decide of this oil weakness is a one-in-twenty selloff that completely trashes our financial system. We saw prolonged losses from the 1970’s stagflation and oil embargo. Then there was the grossly overheated tech bubble that came crashing down. And lastly the housing bubble where the most valuable asset people owned plunged in value. If you think a slowing China and falling oil prices ranks up there with the worst financial calamities of the last 65-years, then you should be selling. But if you have a less fatalistic view of the world and our economy, then this is just another buyable dip on our way higher.

While it is never easy to hold through volatility, the time to sell was when the first cracks started forming, not now that we are approaching a capitulation. I told my subscribers on January 4th that the price-action was deteriorating and I moved to cash. Now a couple of weeks later I’m on the verge of buying this weakness. If people want to sell me stock at a steep discount, I’m more than happy to oblige them. Their loss is my gain.

Jani

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