Jan 27

Is the worst still ahead of us?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 tumbled for a second day on growing Coronavirus fears. While the odds of a massive epidemic remain very small, the risk is not zero and that is making investors nervous. As high as stocks climbed over the last few months, there was a lot of air underneath us and it doesn’t take much uncertainty to knock down a highflying market.

As I wrote last week, today’s tumble shouldn’t have surprised anyone. While history tells us these things don’t have a lasting impact on stocks, they do make a lot of waves in the moment and we were definitely seeing that today.

The bigger questions is if today was the worst of it. And unfortunately, the answer looks like “no”. These things usually end in a capitulation bottom when the selling climaxes and we exhaust the supply of fearful sellers. Today’s market traded mostly sideways and there wasn’t a lot of aggressive selling. The majority of owners held steady through the rocky open and the lack of new supply prevented prices from falling under the early lows. While this stability felt reassuring in the moment, it leaves many owners at risk of getting spooked out. That overhang means the worst could still be ahead of us.

This morning’s resilient open gave us a great buying opportunity. The early bounce gave us a clear stop-loss level to limit our risk. But if this was going to be a good trade, we would have seen prices climb decisively throughout the day. Instead, the market stumbled into the close. That is never a good sign.

This lethargic close means we probably have lower prices ahead of us. Luckily, most readers of this blog either took profits proactively last week or at the very least used 3,300 as a trailing stop to lock in their profits Friday. Rather than fear this dip, these proactive profit-takers are looking at this dip as a fantastic buying opportunity. Instead of lying awake at night debating whether they should stay in or get out like most investors, these proactive traders are looking at this dip as a fantastic buying opportunity.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jan 24

Does the Coronavirus really matter?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Does the Coronavirus really matter? Well, yes…..and no. The virus definitely matters to the people directly affected. It also matters to health organizations and governments. Their quick and decisive action will definitely help slow the spread of this deadly virus. And hopefully, their proactive response will keep this from spreading any further than it needs to.

Aside from the obvious human element, we are traders and we want to know how this will affect the stock market. By this point, everyone is drawing parallels to previous outbreaks and how the ultimate result was inconsequential for stocks. But the important thing to keep in mind is that assessment was only after it was all said and done. The only reason we remember these previous episodes is because they were big deals when we were in the middle of them. And chances are good the same thing will happen this time too.

While there are a lot of bulls arguing with the market dipping a handful of points over the last few sessions, the thing to remember is no one wins an argument with the stock market. Either we go along with it or we get out the way. If this market wants to dip on these headlines, great. Pull the plug on your longs and wait to get back in at lower levels. If you know this won’t last, rather than argue with it, be proactive and profit from it!

As I wrote previously, the greatest advantage we have as independent traders is our nimbleness. If we don’t take advantage of this strength, we are giving up the most important weapon we have in our arsenal. But if we are going to sell, we need to be proactive and do it early. I took a big chunk of profits last week because the market had a good run since December’s 3,200 breakout. These things always move in steps and I like taking at least some of my profits off the table after the market runs to the next obvious resistance level. That said, I did leave some money in with a stop near 3,300 just in case this kept racing higher. One foot in and the other foot out gave me the best of both worlds.

But as expected, the market dipped under 3,300 and I got stopped out of my final position today. I didn’t know what would happen when I planned this trade, I just new odds were good that something was going to come along and knock us down. And that is exactly what happened today.

Now that I’m out of the market, I have a pile of cash itching to get back in. Maybe that happens on Monday when all of this Contravirus stuff blows over and prices rebound back above 3,300. Or maybe the situation grows more grave and stocks dip even further. Either way, I have a plan to get back in. Do you?

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jan 23

CMU: Did you sell? Always be ready to get back in

By Jani Ziedins | Free CMU

Cracked.Market University:

There is plenty of advice on how to get out of the market. Whether that is taking profits when the market hits your price target or bailing out defensively when the market retreats to your stop-loss. But what you don’t hear very often is how important it is to get back in when you realize you sold too early.

The single greatest strength we have as independent traders is the nimbleness of our size. While institutional investors have impressive degrees, decades of experience, an army of researchers, and industry contacts we could never duplicate, what they don’t have is speed. It takes them weeks, even months to establish full positions, something we do in the amount of time it takes to make a few mouse clicks.

But with that nimbleness comes responsibility. Taking profits early and often is always a good idea. But so is continuing to watch the market for the opportunity to get back in. All too often people flip their outlook on a trade as soon as they sell. All of a sudden what was a great and profitable trade transforms into an outdated and used up idea. But a lot of times there is life still left in a good ideal and we should not let ourselves miss out on it just because we sold last week, yesterday, or even an hour ago.

Every time you sell, have a plan on what it would take to get back in. Maybe you jump back in if the market pulls back to a certain level. But what if the pullback never happens? Do you have a plan to get back in if it keeps going higher? While we never recklessly chase a move higher, maybe the stock is more resilient than we expected. But rather than missing the next leg higher because we are stubborn, have a plan to buy when prices exceed the prior highs.

There is nothing wrong with taking profits when your trading plan tells you to take profits. In fact, it would be wrong to not follow our trading plan. But once we are out, always be looking for that next entry point. It could happen a lot sooner than you expect.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jan 22

The dangers of thin ice

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 bounced back from Tuesday’s small dip and so far most owners show zero interest in extending any selloff. That said, we need to remember step-backs are a very normal and healthy part of every sustainable move higher. The fact we’ve gone several months without a meaningful test of support makes me cautious.

Yesterday I saw people criticizing the market for “overreacting” to these Chinese virus headlines. While I agree this sickness is highly unlikely to impact the U.S. economy in a meaningful way, calling a 0.4% intraday slip a “reaction”, let alone an “overreaction”, is definitely a stretch. In most markets, 0.4% barely rises to the level of random noise. These “overreaction” comments definitely give us a sense of just how complacent this market has become when people become incredulous over a 0.4% dip.

The bigger question is if bulls struggle to comprehend a 0.4% slip, how are they going to react to a very normal 1% stumble? Or god forbid, a routine 5% or 10% pullback? Making money has become so easy people have forgotten what “normal” really looks like. At this point, traders are so complacent something totally benign could send shockwaves tearing through the market. While at this point talk of a 5% or 10% correction sounds extreme, these things happen all the time and nearly every year on record experienced at least one 5% pullback. When the inevitable eventually happens, I expect to hear all kinds of apocalypse predictions because compared to what we’ve seen over the last few months, it will feel like the end of the world.

All of that said, the market is still acting really well and there is no reason to alter our plans just because something could happen. We are definitely skating on thin ice, but the thing to remember about thin ice is it only dangerous if we fall through. Until that happens, expect the good times to keep rolling.

I’m definitely not calling this a top and am still long in my personal trading account, but I do know that when we hit the rocks, there is the potential for a big reaction. There is nothing to do right now other than remain alert. While it is tempting to become cynical, remember, this is still the less likely outcome. The only reason to even concern ourselves with it is if it does happen, it will be big. Remember, the greatest strength we have as little guys is our nimbleness. We don’t need to predict the future when we can simply ride this wave all the way to the edge and then hop off just before the fall.

That said, we don’t need to be fully invested at these levels. It has been a good ride, but this is definitely a better place to be taking profits than adding new money. Keep moving your stops up and consider taking some profits proactively. Once the market consolidates some of these gains, we can start looking at adding more. And if the market falls through the ice, that will present us with the best shorting opportunity in a long time.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jan 21

CMU: Lesson 1: Trading is hard

By Jani Ziedins | Free CMU

Cracked.Market University:

I learned many things through my three decades of trading experience, but none have been more all-encompassing than the simple idea, “Trading is hard.” If I’m only allowed to share a single idea with a new trader, this would be the one.

We arrive with different backgrounds and with varying ambitions, but the one thing that unifies all of us is the belief we can beat the market. The concept seems easy enough. Come up with an idea. Move a little money around with a few mouse clicks. And blamo, profit! Or at least that was the notion that brought us here.

But as most of us have already figured out, reality is far different. In fact, I’ve come to believe trading successfully is one of the most challenging ways to earn a living. In most fields it is pretty straight forward, the harder you work, the more successful you are. Unfortunately, there is no such correlation in the stock market. A well researched and thought out idea has nearly the same chance of being correct as a coin flip. In fact, there have been documents cases of dart-throwing monkies outperforming some of the smartest and most experienced professionals in this business. Talk about humbling!

The challenge with trading is the only thing that matters is when we open a position and when we close it. It doesn’t matter how we came up with the idea. It doesn’t even matter if we were right. The only thing that matters is if the market moved in our direction between while we held it. Sometimes we get it right and make money. (Yeah!) Other times we are wrong. (Boo!) But far and away the most frustrating cases is when our idea was spot-on but somehow we still managed to screw it up. (WTF?!?)

The truth is, trading is as much about managing ourselves as it is about having a good idea. Can we control both our positive and negative emotions? Do we have a sound risk management strategy? Do we know how to get in and get out at the most favorable times? Are we capable of admitting our mistakes?

I wish I had a simple or easy answer to help new traders getting started out, but the simple truth is trading is nowhere as easy as it seems. But don’t get discouraged. As long as you educate yourself, have a sensible plan, and stick with it, eventually this gets less hard. (It is never easy)

Over the next few months I plan on writing brief posts covering all of my Trading Rules. If you want to receive the list of my list of Trading Rules and be notified when new posts are published, signup for FREE Email Alerts.

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