Aug 052014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks gave back all of Monday’s gains on above average volume and ever so slightly undercut Friday’s lows in intraday trade.

MARKET SENTIMENT
Confidence was shattered when someone in the Polish government claimed Russia was preparing to invade Ukraine.  While most doubted the accuracy of this claim, it was enough to send an already weak market into a 15-point tailspin midday.

Poland is a member of both NATO and the EU and the US has a couple dozen F-16s stationed in the country.  It is ridiculous to think Putin would share his war plans with anyone in Poland, so we can discount these particular comments as overblown hyperbole and they don’t warrant further attention.  (Poland has been lobbying for months for the US to increase its military presence in the country and these alarmist comments are self-serving.)

While we can ignore these alarmist comments, it is noteworthy how strongly the market reacted to even a hint, no matter how dubious, of an escalation in Ukraine.  Market participants are skittish following the dramatic selloff last week and any whiff of problems sends them running for cover.

The market is a modest 3.5% from record highs, but you wouldn’t know it given all the pundits claiming the sky is falling.  Sentiment is plummeting, put/call ratios are spiking, and anyone watching the financial media is scared to death.  Given how dramatic the reversal in sentiment, it seems likely this is an overreaction to recycled headlines that have been in the news for months.

Simple fact is markets move up and down.  If everyone knew a dip wasn’t the start of something bigger, no one would sell it, everyone would buy it, and we’d all be rich.  But we know the market doesn’t work that way.  Dips are dips because they scare the hell out of owners and everyone assumes prices will continue dramatically lower.  If they didn’t, no one would impulsively sell their stocks at a discount and we wouldn’t get a dip in the first place.

Most everyone agrees the economy is still improving and the fundamental data backs it up.  The criticism bears have is this market’s gone too far and is overvalued.  They have long claimed we are on the verge of a correction and they are confident this time is the real deal.  And so far they’ve been persuasive enough to convince a lot of other people to dump their stocks too.

TRADING OPPORTUNITIES
Expected Outcome:
Every dip in the history of the market was a buying opportunity and this one will be no different.  The only question is how far this will go before it is buyable.  Given how quickly sentiment shifted and how little meat there is to the fundamental justifications for this weakness, the bottom is likely quite near.  While we might have one last leg lower, that would be the last flush before we bottom.

Alternate Outcome:
If Putin actually invades Ukraine, the threat of WWIII will crush the markets.

Trading Plan:
The best trading opportunities arise from having the courage to buy when everyone else is scared.  While the market is poised for another dramatic down day if we fail to hold 1,920, we should be looking for bargains to be bought rather than dumping stocks at a discount.  Everyone knows markets go up and down, but they always forget it in the moment.

Plan your trade; trade your plan

 Posted by at 10:07 pm on August 5, 2014
Jul 312014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
We go from boring, sideways trade to one of the most exciting days of the year.  Today’s 2% decline was the fourth largest of the last 13-months and volume was off the charts as we smashed through prior support and the 50dma.

MARKET SENTIMENT
They say a picture is worth a thousand words, so check out the adjacent chart.  Today we plunged through support and finished at the lows of the day.  Looking back over the last year, we can see multiple examples of similar dramatic crashes through support.  The most noteworthy thing is each of these prior down-moves was the final gasps of a selloff.  If we use history as a guide, today’s huge volume selloff could very well mean the worst is already behind us.

Today’s move lower was a pain trade, plain and simple.  We didn’t get blindsided by a shocking headline and most traders had a hard time pointing to the one thing that triggered this selloff.  The best journalists and talking heads could come up with was recycling old headlines about taper, interest rates, Ukraine, sanctions, Israel, and Argentinian debt.  There was nothing new today that hasn’t been talked about ad nauseam over the last few weeks and months, meaning today’s selloff wasn’t really being driven by these recycled headlines.

What if the true root cause was simpler?  What if today’s huge move was nothing more than normal market gyrations that got carried away?  Breaking support sent technical traders running for cover and once they started selling, others followed their lead even though they didn’t know why they were selling.  This is the herd mentality that was ingrained in our species by evolution.  When everyone else in the clan started running, our ancestors started running too because anyone left standing around was about to become lunch.  And so while no one could explain why the market sold off today, they sold alongside everyone else anyway.

TRADING OPPORTUNITIES
Expected Outcome:
We all know the best trading opportunities come from going against the herd but it takes a lot of courage to buy when everyone else is selling.  The market never found its footing today and finished at the lows of the day, but if we look back at previous pullbacks in this bull market, big down moves that broke support and finished at the bottom of the day’s range is fairly bullish.  While we might dip under today’s low by a few points over the next few days, if the aggressive selling doesn’t continue on Friday, the worst is likely behind us.

Alternate Outcome:
If it was too easy to buy the dip, then we haven’t found the bottom.  Everyone knows this is a buy-the-dip market, but we also know this cannot go on forever.  If we don’t find a bottom near Thursday’s lows, then we have to endure more pain before this is over.

Trading Plan:
If we find support Friday, the selloff is dead and everyone should buy the dip.  If we crash another 20-points in early trade, get out of the way because this thing will keep on going.  While we have the monthly employment report Friday, the market will largely trade the direction it wants to go regardless of report shows.

Plan your trade; trade your plan

 Posted by at 10:52 pm on July 31, 2014
Jul 302014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
A fairly dramatic day.  We gapped higher at the open on stronger than expected GDP numbers, but sold off minutes later and tested 1,960 support.  The Fed rescued us midday with a rosy outlook, but those gains also failed to stick.  For as much as we moved around, we ended almost exactly where we started.  Volume was the highest in a month as many traders reacted to every headline and gyrations.

MARKET SENTIMENT
It was an interesting session with two energetic upside moves that failed to stick.  It’s hard to hang a bullish hat on that kind of performance, but can we infer we are on the verge of collapse?  Not yet.  All today’s price-action tells us is those with cash didn’t want to chase these bullish headlines.  While that limits our upside potential in the near-term, it is the other side of the house that determines if we keep declining.  Right now the market’s fate rests in owners’ hands.  Do they sell at a discount or do they assume we’ll bounce like every other time over the last year-and-a-half and keep holding?  A lot of people are throwing the complacency term around like it is a negative thing, but complacent owners don’t sell and it is really hard to get a correction started without supply.

TRADING OPPORTUNITIES
Expected Outcome:
So far this price-action looks like a vanilla Buy-The-F’n-Dip.  Of course with every BTFD, the challenge is figuring out when we’ve bottomed.  Given today’s weak follow-on buying, it doesn’t feel like we’ve reached the bottom yet.  1,960 is technical support and often the market likes to fool us by violating support before turning around and going the other direction.  If we breakthrough 1,960 but the selling stalls shortly after, that gives us an interesting entry point.

Alternate Outcome:
Every dip, correction, or crash is buyable, the only question is how long to wait before jumping in.  While most of the recent dips were buyable within days, we will eventually find ourselves faced with a longer and deeper dip.  Nothing shatters confidence and complacency like seeing everyone else rush for the exits.  Wait for the selling to stop before buying any dip.

Trading Plan:
Don’t be surprised if we slip under 1,960 in coming days.  But if the selling stalls shortly after, bears should consider locking in profits and bulls can buy-the-dip.  On the other hand, if selling accelerates and we blow through 1,950, hang on because the next stop is 1,930 and 1,900 if that one fails to hold.

Plan your trade; trade your plan

 Posted by at 10:38 pm on July 30, 2014
Jul 292014
 

Screen Shot 2014-07-29 at 10.11.53 PMEnd of Day Update

MARKET BEHAVIOR
Stocks continued yesterday’s rebound in early trade, but stumbled midday and sold off into the close on elevated volume.  The market held Monday’s lows and remains comfortably above 1,960 support.

MARKET SENTIMENT
Talking heads attribute Tuesday’s reversal to increasing sanctions on Russia, but giving up less than 0.5% hardly qualifies as an emotional rush for the exits.  While the West is incrementally stepping up pressure on Russia, both sides are co-dependent on each other and it is unlikely either side will act rashly.  While it was enough to make buyers think twice today, these developments are largely priced in and unlikely to pressure the market.

But just because the Russia thing is old news doesn’t mean we cannot selloff for other reasons, namely typical supply and demand fluctuations.  The market is building a trading ranged between 1,690 and 1,690 and no matter what the headlines, the market seems content hanging out in this area.  Prospective buyers are not confident enough to chase prices to new highs and owners are uninterested in selling bearish headlines for a discount.  Apathetic buyers and complacent owners leaves us range bound.

TRADING OPPORTUNITIES
Expected Outcome:

The longer we hold support, the more likely the next move will be higher.  Markets tend to breakdown quickly and holding 1,960 for a month in the face of significant geopolitical headlines surely doesn’t qualify as a meltdown.  If the market holds 1,960 yet again on Wednesday, expect us to make new highs again in the short-term.

Alternate Outcome:
While owners are confident here, nothing shatters confidence like seeing everyone around them start selling.  While a modest, intraday dip under 1,960 is nothing to worry about, if the selling accelerates after violating support, we have further to fall.  If bulls cannot defend the 50dma and 1,950, then 1,900 and the 200dma are in play.

Trading Plan:
We are in no man’s land.  Those with long or short positions can stick with them, but use stops to prevent small losses from turning into big ones.  Those outside the market should wait for further confirmation before placing a trade.  Closing above 1,960 on Wednesday is bullish and crashing through it is bearish.

Plan you trade; trade your plan

 Posted by at 10:13 pm on July 29, 2014
Jul 282014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks recovered early losses to finish flat.  Volume was below average, even by summer standards.

MARKET SENTIMENT
Last week we failed to breakout; today we failed to breakdown.  Seems those with cash don’t want to buy new highs and those with stock are uninterested in selling weakness.  Until someone decides to do something we will continue trading sideways in this developing trading range between 1,960 and 1,990.

Wile bears are pointing to a dozen different reasons we should selloff, the market already knows them and doesn’t care.  Free-markets are exceptionally efficient at pricing in new information and events in Ukraine and Palestine are ancient news.  While either of these situations could deteriorate dramatically, it would take something even more shocking than downing a civilian airliner to get the market’s attention.

While there is little doubt this market will pullback at some point, the hard part is figuring out when.  Some are making seemingly bold predictions of a 20% pullback in the next 12-months, but what happens if we go up 30% before the expected correction?  Knowing what the market will do next is easy, getting the timing right is where all the money is made and a “sometime over the next 12-month” prediction isn’t worth the paper it’s written on.

TRADING OPPORTUNITIES
Expected Outcome:
Given the opportunity to both breakout to new highs and test support in recent days, the market instead chose to do nothing.  It seems like it wants to consolidate in this 1,960 to 1,990 trading range over the near-term.

Alternate Outcome:
This morning’s bounce could be little more than an automatic buy-the-dip reflex, but if we are running out of dip buyers, the market will let us know when it fails to hold 1,960 support.

Trading Plan:
The market is not giving us a lot to trade.   Since we are still in an uptrend, we should give bulls the benefit of the doubt, but as far as risk/reward goes, it feels like a coin-toss and we should wait for better odds.

Plan your trade; trade your plan

 Posted by at 10:08 pm on July 28, 2014