Oct 022014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The relentless selling continued in the first half of the day, but in typical fashion, the market overdid it and snapped back to breakeven by the close. It was a fairly dramatic reversal, covering nearly 50-points combined. Volume was brisk for the third-day in a row as traders both bailed out as the pain got too great and chased the ensuing afternoon rebound.

Again there wasn’t an individual headline driving the selling and the weakness felt more herd-like when many traders dumped shares simply because everyone else was. But there always comes a point where we run out of sellers. When no one is left to sell, supply dries up and prices rebound. No matter what the headlines, tight supply props up prices and that was the case this afternoon. If today’s low holds, the bull market remains intact because this is a higher-low than August’s 1,900 dip. While pullbacks always feel like the world is ending, as long as we keep stepping higher, all is well with the market.

But what are the chances this low will hold? Markets move for one of two reasons. New information causes the majority of traders to adjust their forward-looking outlook. Whey they change their mind, they buy or sell stock to reflect their new expectations and this one-sided trade moves markets long distances. The other source of volatility is normal fluctuations in supply and demand. The former is what big market moves are made of because the new information converts bulls into bears or bears into bulls. It takes a fundamental shift in the underlying economics to drive these major changes in sentiment and so far the economic data we keep getting points to a slow, but steady recovery in the US and a struggling recovery in Europe. None of this is new and unlikely to change anyone’s mind. When bulls stay bulls and bears stay bears, what we are left with is the market’s normal gyrations due to minor imbalances in supply and demand. This is when we go a little too high and then turn around and go a little too low. Obviously the push to 2,020 a few weeks ago was a little too high and now it appears like 1,925 is a little too low. During these typical gyrations it is most profitable to buy weakness and sell strength. If this bounce holds, we should not violate today’s low. The best trade is buying the dip with a stop under 1,925.

Jani

 Posted by at 10:36 pm on October 2, 2014
Oct 012014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

It was another brutal day, smashing through prior support at 1,965 and ultimately closing under 1,950. Volume was some of the highest we’ve seen all year as traders reacted to both headlines and technical weakness. But the thing we must remember is routine dips only happen when everyone thinks the market is on the verge of plunging even lower. If everyone was confident this was little more than a buyable dip, they wouldn’t sell. If no one sells, prices don’t dip. Therefore by rule, to get the dip, we always need to scare a large number of people into selling. And clearly we’ve done that here. But what comes next? Is this really just another vanilla dip? Or the start of a larger correction?

Despite all the prognostications of the bull’s demise, we haven’t done any real technical damage yet and the up-trend remains comfortably intact. The real threat won’t come until we undercut August’s dip to 1,900, making a new lower-low. Bouncing anytime in the next 40-points still counts as a higher-low and extends this resilient bull market.

The real test will come in the next few days. Capitulation bottoms typically smash through support on huge volume. This is the point of maximum pain where previously confident owners cannot bear the mounting regret of not selling earlier and reactively pull the plug. Unfortunately for many, this breaking point typically happens near the bottom of the move. Once the last wave of impulsive selling washes through the market, supply dries up and we bounce. Today’s dip had all the hallmarks of a traditional capitulation bottom.

But nothing in the market is ever clear-cut and one-sided. Rather than bounce, there is the real possibility today’s weakness will convince even more owners to sell in coming days, once they are pushed to their breaking point. Nothing rattles confidence like seeing everyone else running for cover and a bad open could lead to another bloodbath.

This appears like another cookie cutter dip and capitulation bottom, but we will know the answer for sure in a couple of days. A decent trade is buying the dip and using recent lows as a stop.

Jani

 Posted by at 9:59 pm on October 1, 2014
Sep 302014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Stocks slipped on the final trading day of the third quarter, but remain inside the recent consolidation. 1,965 has been support over the last four days as the market struggles to reclaim the 50dma. But the problem for the optimist is markets usually snap back decisively from oversold levels, meaning we are not at oversold levels here. But that is only half the story.

Most of the headlines filling the front page have been bearish. There is so much political discord in the world it takes more than one hand to count all the active hotspots. We also have persistent signs of economic sluggishness. And just tonight, the potential of a spreading pandemic. But for all the negativity, the market is only a couple percent from all-time highs. Is the market being naive, or does it know something the rest of us don’t?

It is too easy to assume the market doesn’t have a clue and will eventually wake up to what is so obvious to the rest of us, but unfortunately beating the market isn’t that easy. More often than not, when we disagree with the market, we are the ones who have missed something. By default the market already knows everything we know since it is made up of people who have all the same information we do. Taper, rate hikes, Ukraine, Syria, etc. These stories have been around so long we can no longer call them news. Anyone afraid of these headlines sold long ago to someone who wasn’t afraid to own this risk. When there is no one left to sell a widely expected headline, it becomes fully priced in. When markets hold up the face of bad news and refuses countless legitimate excuses to sell off, it shows us it doesn’t want to go down. No matter what we think should happen, we have to respect the market’s resilience.

Now it’s time to resolve the contradiction between a market that doesn’t want to go down with one that isn’t oversold yet. It all comes down to timing. In the near-term, the inability to bounce decisively and put the 50dma behind us means there is a good chance this selloff is not complete. Be prepared for one more dip under recent lows and testing support at 1,950 is a very real possibility. But rather than signal the start of a larger selloff, this will be the capitulation point before rebounding to fresh highs. Expect more near-term weakness, but this is yet another buyable dip.

Jani

 Posted by at 10:26 pm on September 30, 2014

Higher-Lows

 End of Day Analysis  Comments Off
Sep 232014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update: 

Stocks took it on the chin for a third day following Friday’s early surge to record highs. This dip leaves us less than 10-points from the 50dma and just above recent support at 1,980. The primary catalyst for this weakness appears to be a selloff in small-cap stocks. While the S&P500 is less than 2% from all-time highs, the Russell 2000 is off 8% and continues the shift from high-flying, speculation stocks to blue chips.

Wednesday will be an important day for the markets with a looming challenge of 1,980 support. This technical level stretches back to early July when it acted as resistance. But as we often see, resistance became support and we bounced decisively off this level a couple of weeks ago. Will selling stall and buyers step in at this level again? We will know the answer in a few short hours.

If stocks stop sliding, look for a rebound to record highs. On the other hand, failing to find support means we should expect the selling to continue to 1,950. While this sounds easy, the real challenge is not falling for the head-fake where the market dips under support, flushing out the reactive traders, before reversing and finishing the day higher. If this were easy, everyone would be rich.

Market sentiment is cooling off slightly, but it remains at bullish levels. While overconfidence could ultimately cause the demise of this bull market, contrary to popular opinion, confidence and complacency is bullish in the short-term. Confident owners don’t flinch in the face of a 2% dip to support. The lack of nervous owners keeps supply tight and props up prices. This has been the story for the last 12+ months and there is no reason to assume the tide is changing here. We continue making higher-highs and higher-lows and the best trade is sticking with what works.

Jani

 Posted by at 10:10 pm on September 23, 2014
Sep 222014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

Stocks fell further on Monday following Friday’s reversal from all-time highs. Volume was well above average as we broke under prior support/resistance at 2k. While the daily chart gives the impression the market sold-off through the day and finished weak, the intraday chart shows we found a floor in late-morning trade and moved sideways the rest of the day. While this seems like a minor nuance, it is actually fairly significant.

The market gapped lower at the open and continued sliding fairly aggressively until just after 11am Eastern. This pushed us under the psychologically important 2k level and set off a wave of automatic stop-losses littered under support. But rather that accelerate the selloff, these stop-loss orders were the last of the selling before we found a bottom above 1,990. This weak price-action dared owners to join the selling, but most resisted the temptation and stood confidently by their positions. If this selloff chased off the weak, then all we are left with is the strong.

While I’m not super bullish on this market, the stalled selloff shows supply dried up fairly quickly and that bodes well for a bounce to new highs in coming days. If the market finds support Tuesday, then the selling is done and we are headed higher. If we breach 1,990 and continue lower, then Monday afternoon’s support was a false bottom and the 50dma is in play. Trade accordingly.

Jani

 Posted by at 9:59 pm on September 22, 2014