Jun 23

The simplest and best trade staring us in the face

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Thursday was another back and forth session as the market digested Powell’s second day of testimony before Congress.

At this point, the Fed is no longer counting on a soft landing for the economy and they plan on keeping interest rates elevated until inflation starts coming down in a clear and convincing fashion. That means they could continue applying the brakes even if the economy slips into a recession. Hence, the increased likelihood of a “hard landing”.

Wednesday the market rallied during Powell’s testimony and slipped into the close after he finished. Thursday gave us the mirror image as the market slumped during his testimony and then rallied after he concluded.

One day down, the next day up. And so continues the battle between bulls and bears. The index remains nicely above last week’s lows, but it also seems stalled just under 3,800.

As obvious as this sounds, either the market clears this sideways consolidation under 3,800 or it doesn’t. The nice thing about binary setups is they are very tradable. Either we buy the breakout or we sell the breakdown. And the longer we stay within this range, the more coiled the spring becomes, meaning the resulting breakout/breakdown will be even larger.

At this point, expect the resolution to either run up to 4k resistance or drop under recent lows near 3,600. Maybe there will be a head fake or two along the way, but as long as we start small, get in early, and keep a nearby stop, the costs of being early are small. More important is we make sure we stick with it and are standing in the right spot at the right time when this thing finally makes its next move. (Today’s nice close gives the bulls the edge.)

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Jun 22

What Wednesday’s price action means for the latest bounce attempt

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Wednesday’s seesaw session threw us for a loop, with a -1.2% opening loss bounced into the green an hour later. The intraday reversal even rallied as high as +1% before settling back near breakeven by the close.

I really, really liked the morning reversal. Selling evaporated moments after the open as buyers rushed in to prop up the market. And everything looked amazing when the intraday rally crested +1%. That was a 2% gain from the open and everything was going swimmingly, that is until a late slump erased all of those midday gains.

In the news, Powell testified to Congress that the Fed is still planning on aggressively raising rates and that risks pushing the economy into a recession. But as bad as those soundbites seem, the market was actually received well and investors were relieved those comments were not even worse.

Sometimes bad news can be good news when it isn’t as bad as feared and that’s the scenario we found ourselves in around lunchtime. Our economic environment is far from great, but at least it is not getting worse. Or at least that’s how the midday logic went.

And with stocks at 52-week lows, the path of least resistance seemed to be higher. At least until a wave of second-guessing overcame the market in the final hour of the day.

As I often remind readers, it’s not how we start but how we finished that matters most. And by that measure, it was both a good day that we bounced off of the early lows and an inconclusive day in that we skidded into the close. I loved how stocks ricocheted off of the opening lows. But the lethargic close showed a real lack of conviction by institutional investors in the final hours of the day.

I started buying the bounce Friday afternoon, added more Tuesday, and was loading up on additional positions Wednesday morning. But that late slump gave me second thoughts. As easy as buying back in is, it made sense to take some risk off the table. If stocks continue higher Thursday, I can always buy back in. But if the market retests last week’s lows, the best place to be is cash.

Since I was sitting on a modest profit, I decided the bigger crime would be allowing that to turn into a loss if the second-guessing continued Thursday. It seemed prudent to take some risk off the table and close some positions proactively.

In trading, defense always comes first, especially when doing something as risky as trying to catch a bounce. When these things work, they tend to really work. And Wednesday afternoon didn’t feel like the bounce was working. That’s all I needed to pull the plug while my trade was still above breakeven.  As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.

But as soon as I’m out, I’m already looking to get back in and will happily buy a bounce Thursday morning. And if that bounce doesn’t happen Thursday, then I’ll be waiting for it on Friday or Monday. Just because Wednesday’s close was indecisive doesn’t mean I’m giving up on this trade. I just didn’t like the risk/reward at that particular moment in time. A lot can change in a few hours so I’m already looking forward to what Thursday’s price action will bring us.

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Jun 21

Why smart money is buying this bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 came back from the three-day weekend well-rested and promptly popped 2.5% Tuesday.

Headlines haven’t improved in a meaningful way, but more importantly, they haven’t gotten worse either. Last week’s tumble to fresh lows seems to have reached a near-term capitulation as it ran out of fearful sellers, giving us this nice little bounce.

I’m under no delusion and think lower prices are still ahead over the medium and longer-term. But at the same time, I recognize markets move in waves and I also know bear markets have some of the biggest bounces on their way lower.

As bad as things felt last week, the selling got a bit ahead of itself and a near-term bounce seems appropriate. How long this lasts and how far it goes is anyone’s guess, but 4k resistance is very much on the table if we string together a few more nice up days. (A bounce back to 4k from Friday’s close represents a 9% gain in the index. Catch part of that wave in a 3x ETF and now we’re talking about real money!)

Buy the bounces and sell the breakdowns. Seems easy enough but we must have the courage to actually do it.

Now that the market is bouncing, it is time to close our shorts and start buying the bounce. Start small, get in early, keep a nearby stop, and only add to a trade that’s working. Follow those simple rules and there is money to be made. Or at least, it opens the door to a very attractive, low-risk trade.

Maybe we need to bounce a few times before making our way back up to 4k, but unless someone is psychic, we won’t know which bounce is the real bounce until after it happens. And since I’m not psychic, the best I can do is treat all of the bounces as if they are the real deal until they prove me wrong. But as long as I start small, get in early, and keep nearby stops, any mistakes will be fairly inconsequential, especially when compared to the profits that come from riding the next wave higher.

Trading is a game of risk versus reward and right now the risk/reward is stacked in our favor. Buy the bounce, move our stops up to our entry points as this rebound progresses, and if we get stopped out, no big deal, we step aside and wait for the next bounce.

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Jun 16

Are savvy traders running from this market or are they getting ready to buy the next bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

So much for the Fed bounce, the S&P 500 gave back all of Wednesday’s gains and then a chunk more, finishing at the lowest levels in a year and a half. Ouch!

Gas is pushing $5/gal, mortgage rates are creeping up to 6%, consumer confidence is tumbling, and inflation remains stubbornly stuck at 40-year highs. Oh yeah, and there’s the biggest war in Europe since WWII. But other than that, things are going pretty well.

As poorly as everything feels, stocks are not oblivious and their nearly 25% decline reflects a lot of this pain.

Most bear markets bottom out between 25% and 30%, meaning we are most of the way there for a vanilla bear market. There are exceptions, like the Great Depression and the Great Recession, but the banking system nearly imploded in those episodes and for a repeat, we’d need to see something equally terrifying.

While $5/gal oil is painful, the biggest problem we have right now is most people have too much money and are bidding against each other for housing, cars, and everything else that is in short supply. Our biggest problem is the economy is too hot and the Fed is trying to cool things off.

Does that sound like our current situation has anything in common with the worst bear markets in history? No, not really.

And so while people are afraid of how much worse this will get, it is a little late to be worrying about that kind of stuff seeing as how most of the damage has already been done to stocks.

Maybe this grinds sideways for a year or two, which wouldn’t be a big surprise. But fearing a 40% or 50% selloff from the highs doesn’t match our current economic situation.

As for how to trade this, while Thursday’s 3.3% decline sounds bad, stocks ground more sideways than anything following the gap lower at the open. That means few people were rushing to sell stocks through the day, which is the first thing that needs to happen before we find a bottom.

Maybe we get a little more selling on Friday, but everyone knows markets moves in waves and after falling more than 500 points over a handful of days, the next near-term bounce is just around the corner.

I covered my short Wednesday, which proved to be a little early, but that’s the way this goes sometimes. Once we realize only fools try to pick tops and bottoms, that means accepting we will always cash in a little too early or a little too late. That’s just the nature of the game.

But now that I’m out, I’m already looking to get back in. The next trading opportunity that excites me most is a nice bounce back to 4k resistance. It could start as soon as Friday, so be ready.

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Jun 15

What made Wednesday’s bounce so predictable

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 bounced nicely after the Fed got aggressive and hiked interest rates by 0.75%.

The market’s reaction seems counter-intuitive, but lucky for readers of this blog, it was the most likely outcome I flagged in Tuesday evening’s free post:

While this latest tumble was largely spurred by expectations shifting to a 0.75% Fed rate hike this week, this could very easily turn into a “sell the rumor, buy the news” event. This latest wave of selling priced in most, if not all of the widely expected rate hike, so when the news becomes official Wednesday afternoon, there might not be much selling left to do. And when a large wave of follow-on selling fails to materialize, we often see prices rally in relief that things weren’t worse.

The most likely scenario is the index reflexively crashes immediately following the Fed’s announcement of a 0.75% rate hike, but not long after, the selling capitulates and prices bounce, giving us that oh-so-beautiful “V” bottom.

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While bears were expecting another large selloff, stocks bounced because all of the people who were afraid of a 0.75% rate hike sold over the previous four sessions, meaning there was no one left to actually sell the news. And more than that, some investors were actually reassured by the Fed’s aggressive stance on inflation. Attacking inflation harder in the short term will keep this from dragging on, or at least that’s the hope.

As for how to trade this, when the rate hike failed to trigger a larger wave of selling, that was my signal to lock in some really nice short profits and get ready to buy the bounce. I still think we have lower prices ahead of us over the medium and longer-term, but over the near-term, if Wednesday’s bounce holds Thursday, 4k resistance is the most likely next target.

Any bears with nice short profits should be getting real protective because those profits will disappear if they hold much longer. As easy as it is to reshort the market when the selling resumes, lock in some nice profits here and get ready for the next breakdown.

As for dip buyers, here is our chance for a quick 200-point rally. While that doesn’t seem like a lot, catch that 5% wave in a 3x ETF and now we’re talking real money for a few days of “work”.

Cover shorts, buy the bounce, and leave stops/reshort under Tuesday’s lows. That seems easy enough.

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Jun 14

What Tuesday’s small decline tells us about what’s coming next

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped 0.4% Tuesday.

While a small loss usually isn’t something worth worrying about, these are not usual times. The lack of a meaningful bounce following Monday’s nearly 4% crash suggests the selling hasn’t capitulated yet and lower prices are still ahead of us.

I typically have a bullish bias when it comes to the market because stocks spend far more time going up than down. That means I’m always on the lookout for a bounce to buy, but Tuesday’s price action didn’t check my boxes.

As I often write, the market loves symmetry and this crash will almost certainly capitulate in a “V” bottom. Unfortunately, Tuesday’s modest slip lower doesn’t look anything like the start of a “V” bottom.

While this latest tumble was largely spurred by expectations shifting to a 0.75% Fed rate hike this week, this could very easily turn into a “sell the rumor, buy the news” event. This latest wave of selling priced in most, if not all of the widely expected rate hike, so when the news becomes official Wednesday afternoon, there might not be much selling left to do. And when a large wave of follow-on selling fails to materialize, we often see prices rally in relief that things weren’t worse.

The most likely scenario is the index reflexively crashes immediately following the Fed’s announcement of a 0.75% rate hike, but not long after, the selling capitulates and prices bounce, giving us that oh-so-beautiful “V” bottom.

And of course, another real possibility is the Fed is the one that capitulates and sticks to its previously telegraphed 0.5% move. That would also trigger a nice pop in the market. (Or counterintuitively, the market freaks out and stocks crash because investors start fearing the Fed lacks the courage to combat inflation.)

Will any of these things happen Wednesday afternoon? Only time will tell, but they are definitely scenarios we need to incorporate into our trading plan. If we can’t map out our responses ahead of time, how in the world are we going to do it in the heat of battle?

While we will likely see further selling before reaching the capitulation bottom, once that bounce takes hold, shorts need to get out of the way and everyone else needs to grab ahold because the move will be fast and hard. Maybe the rebound stalls at 4k resistance, but a 300-point rally in 3x ETF is enough to put a pile of cash in your trading account. You like cash, right?

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