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
Jul 092014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks found support above 1,960 and recovered most of Tuesday’s decline, but today’s up-volume was significantly lower than the selloff.

MARKET SENTIMENT
Confident owners chose not to not join the short-term traders pushing the market down the last couple days.  The lack of follow-on selling by a wider group of owners cut off supply and the market bounced as we ran out of sellers.

While the wave of selling ended rather quickly, we need buyers to push us back up to record highs and it often takes several days of support for prospective buyers to regain their confidence.  This period of no one selling and no one buying is what gives us the sideways chop that shows up as a base on the chart.

TRADING OPPORTUNITIES
Expected Outcome:
Baring a catastrophic open Thursday, the selloff died rather quickly.  But that isn’t a surprise.  In a complacent market, confident owners don’t want to sell, keeping supply tight and preventing downside moves from building momentum.  While it is easy to say the selloff is dead, if buying dips were easy, everyone would be rich.  We should expect the market to bounce around for a couple of days, even undercutting Tuesday’s 1,960 lows, before resuming the push to 2,000.

Alternate Outcome:
Today’s bounce could appear to be be the obvious buy-the-dip trade.  The problem with obvious trades is they rarely work.  If this was a false bottom, expect the selling to resume in short-order.

Trading Plan:
Closing above 1,960 Thursday and Friday tells us this market is headed higher.  If selling accelerates after breaking 1,960, expect the slide to continue.  Trade accordingly.

Plan your trade; Trade your plan

 Posted by at 11:34 pm on July 9, 2014
Jul 082014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, testing prior resistance at 1,960.

MARKET SENTIMENT
As dramatic as a 1% selloff from all-time highs feels, it is an indication of just how complacent we have become.  Times have been a little too easy when two down-days make us feel like the sky is falling.

While conventional wisdom says complacency is bearish, that is the long-term prognosis.  In the near-term it is highly bullish because confident owners refuse to sell their stock no matter what the headlines say.  The resulting tight supply drives prices up to dizzying heights.

Weakness over the last two-days was driven by short-term traders trying to time the market.  They saw last week’s pop to record highs as a little too much and decided to sell it this week.  Some of these are swing traders locking-in profits, others are bears shorting a market that’s gone too high.  While these short-term traders are very active, they have shallow pockets.  They can move markets for a few days, but after that it takes follow-on trading by big money to extend a move.  Here short-term traders are afraid of an imminent market pullback, but the vast majority of shareholders are comfortable with these dips because they learned long ago that they always bounce back.  And so far they have been right.  Without a fundamental catalyst to shatter the market’s confidence, there is little reason to expect this time will be any different.

This market will breakdown like every other one before it, but it will take some unsettling news that sends fear through the hearts of previously confident owners.  While that could happen at any moment, these last few days have been little more than short-term traders selling stock since no one can point to any one thing driving this selling.  Without that, there is nothing to send the larger herd rushing for the exits.

TRADING OPPORTUNITIES
Expected Outcome:
The market has only been down more than two days in a row four times this year and all but one of those one of those streaks included a down day of less than 0.1%.  This is a complacent market and the dips keep getting smaller before the selling stalls and the dip-buyers rush to the rescue.  We found support at 1,960 Tuesday and if we hold this level over the next couple days, the selloff is dead and the market will likely bounce to 2,000 in coming weeks.

Alternate Outcome:
While complacent owners are extremely bullish, running out of buyers is just as bearish.  If buyers are afraid of these record highs, they will let prices slip to more attractive levels before coming to the rescue.

Trading Plan:
Long-term holders should keep holding.  Nimble swing-traders can buy support at 1,960 if we continue holding it.  Shorts should lock-in profits if we don’t crash through 1,960 Wednesday.  If we slice through 1,960 and cannot find a bottom, we will likely fall to 1,640.  Fail that and we are headed to 1,620.  But rather than be the start of a bigger correction, this is just another buyable dip and shorts should lock-in profits instead of get greedy.

Plan your trade; Trade your plan.

 Posted by at 10:56 pm on July 8, 2014