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
Jul 072014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks pulled back from record highs, giving up a fraction of a percent, but are still holding above recent resistance near 1,960.  The market continues to levitate 50+ points above the 50dma, something it last tested back in mid-May.

MARKET SENTIMENT
Noting boosts investor optimism like a long string of new highs.  Fear of heights and calls for a correction have been drowned out by frenzied dip-buying.  In the first six-months of the year the S&P500 has only experienced three occurrences with three down-days, two of those barely qualify with losses of 0.1% or less.  And we  still have yet to string together more than three down-days.

While that is a worrying sign, the good times continue until they don’t.  So far owners remain reluctant to sell shares no matter what headline pops up.  Their conviction that every dip is buyable prevents us from having a dip.  While we all know this cannot last forever, it almost always goes on longer than anyone dreams possible.

The biggest prop behind this market is the sheer size of all the money on the outside the market looking in.  These regretful investors made a hasty decision to bail out during the financial crisis and now that everyone around them is making money, the pressure is on to overcome their fears and pick up some of this easy money.

TRADING OPPORTUNITIES
Expected Outcome:

Finding support above 1,960 for a couple more days suggests this market is headed to 2,000.  Breakdowns happen quickly and holding these levels shows buyers are willing to continue buying these levels and few are selling and locking in gains.

Alternate Outcome:
It’s been a good run since they May breakout and swing-traders will likely lock-in profits if we dip under technical support.  That selling could trigger wider selling and push us back down to the 50dma.

Trading Plan:
It is waaaay too late to buy this strength.  Anyone out of this market should wait for a pullback.  Bears should also avoid jumping too aggressively on any weakness since every other dip this years has been enthusiastically bought.  At this point we just wait for the complacency to pass and allow the next wave of emotion to create a trading opportunity.

Plan your trade; trade your plan

 Posted by at 10:56 pm on July 7, 2014
Jun 262014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks plummeted out of the gate, but recovered most of those losses by the close.  Early weakness pushed us under prior support at 1,950, but the selling stalled minutes later as we bounced off 1,945.  Volume was surprisingly light for such a wild ride.

MARKET SENTIMENT
Bears who claim this market is complacent are 100% correct, unfortunately for them that complacency is working to the bull’s advantage.  After a horrific open, bears had the perfect setup for an extended and bloody two or three percent selloff.  What happened instead?  Owners shrugged and continued holding, abruptly stymying the wave of selling.  What was supposed to result in a mad rush for the exits was met with a yawn as complacent owners stayed put.  Without supply flooding the market, it was inevitable we would bounce and that is exactly what happened.  The notion of complacent owners is further evidenced by the low volume that showed how few people reacted to Thursday’s dramatic open.

Conventional wisdom says complacency is bearish, but as we saw first hand today, in the near-term complacency is quite bullish.  Only over time does complacency become a problem after most prospective buyers are already fully invested and there is no one left to buy.  As we keep making new highs, clearly that is not the case yet.

TRADING OPPORTUNITIES
Expected Outcome:
Holding 1,950 through Friday will show bulls are still in control of this market.  Failing to maintain this level means we are quickly running out of dip-buyers.  While no one knows for sure which way this will go, the market will tell us real quick what its intentions are.  Breakdowns happen shockingly fast, so if this pause stretches across multiple days, that tells us Wednesday’s selloff was little more than a head fake.

Trading Plan:
1,950 is quickly shaping up as the line in the sand for both bulls and bears.  Hold above this level, then bears should cover their shorts.  Break under it and bulls should take some profits off the table.

Plan your trade; trade your plan

 Posted by at 10:54 pm on June 26, 2014