Aug 14

How a savvy trader could have missed this Turkey mess

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday the S&P 500 rebounded from Monday’s fizzle and is recovering from a brief bout of Turkish worries. The names have changed, but the story is the same. A small European country is struggling and threatening to take the rest of Europe down with it. These headlines were the catalysts for last week’s tumble from the highs.

While we are still under last week’s highs, fear of Turkey’s economic collapse has been contained. A one day bounce is far from conclusive, but three days into this selloff and we are down less than 1%. That means most traders are definitely not overreacting to these headlines. This remains a “half-full market” and most owners are willing to give it the benefit of doubt.

While these Turkish headlines are new and impossible to predict, it was still possible for a savvy trader to sidestep this dip. I wrote the following last Thursday when stocks were at record highs and before Turkey hijacked the front page of the financial section:

Even though the market left most of its concerns behind as we climbed to these highs, that actually makes this a more dangerous place buy. Smart traders buy discounts, they don’t chase premium prices. Risk is a function of height and this week’s gains made this one of the riskiest places to buy all year. Now don’t get me wrong, I’m most definitely not calling a top or predicting and imminent collapse. But what I am saying is we rallied up to resistance and it is normal and healthy for the market to pause and even dip a little.

I don’t have a crystal ball so I don’t know if we stall at current levels, or if we break through 2,880 resistance and stall above it. Either way it doesn’t really matter because the risk/reward has shifted against us and this is a better place to be taking profits than adding new money. It is a fool’s errand to try and decide if the peak will be 2,862, 2,875, or 2,892. The point is ‘good enough is good enough’ and that is all that matters. And the thing to remember is we cannot buy the next dip if we don’t have any cash. Buy weakness, sell strength, and repeat until a good year becomes a great year.

But just because we slipped from the highs doesn’t mean we need to run for the hills. As expected, the selling has been limited and we didn’t even fall to 2,800 support. As with every other headline over the last six months, owners are reluctant to sell. After years of selling prematurely and regretting it, most traders have learned to hold no matter what. That has been the smartest way for long-term investors to navigate these dips and it doesn’t look like anything changed yet.

Turkey is a small nation and by itself it cannot take down the global economy. No doubt it could cause a lot of pain for some European banks, but there is no reason to think the ECB won’t come to the rescue this time too. That is why the market’s reaction to these headlines has been so muted.

That said, the danger with the above assumption is it means very little risk has been priced in. If everything works out, the upside is limited because we didn’t dip very far. But this complacency leaves us vulnerable if things do not go as planned. I don’t expect this situation to make much of a dent in the global economy, but we have to monitor it closely because if the situation deteriorates, it will weigh on stocks. Unlike Trump’s trade war, larger Turkish risks have definitely not been priced in.

The trader in me misses the days when headlines like these would lead to widespread predictions of another economic collapse. Unfortunately the days of 10% swings in the indexes are long gone. Now the best we get is a 1% dip. The stability is great for care-free holding of long-term positions, but for trading opportunities, there is a lot to be desired.

The dip to 2,820 and subsequent bounce presented us with a fairly weak risk/reward. Day traders could have profited from this few hour move, but for me I’m waiting for something more worthwhile.

While it already looks like the Turkish selloff is dead, we need to hold this bounce for a few more days to be certain. There is a chance this bounce could fizzle and we continue slipping back to 2,800 support. If that happens, that will be a far more attractive entry point. Until then I will keep watching, waiting, and hoping for that next profitable opportunity.

As for our longer-term positions. There is nothing to see here. Stick with what has been working and ignore the noise. The market is still setting up for a strong rally into year-end.

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Jani

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Aug 09

What to expect now that we reached the highs

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Thursday the S&P 500 slipped for a second consecutive day, but “slipped” is a bit of an exaggeration since combined both days didn’t even register a 0.2% loss. That leaves us still within 1% of all-time highs as we simply slow down following last week’s impressive bounce off 2,800 support.

Long gone are last month’s trade war and rate-hike fears. Funny how calming rising prices can be. But this isn’t a surprise to anyone who has been reading this blog for a while. Long ago we recognized this market’s strength. While others were waiting for the impending collapse, we saw a market that refused to go down no matter how bad the headlines got. One of the things I learned a long time ago is what the market is not doing is often more insightful than what it is doing.

There are few things more bullish than a market that refuses to go down on bad news. All it took was a break from the negative headlines and this market would surge on “no news is good news”. And that is exactly what happened. Remember, we trade the market, not the headlines. If the market doesn’t care about trade wars and rate-hikes, then neither should we.

That explains this markets assent to all-time highs, but the trader in all of us want to know what comes next so we can profit from it. While I’ve been calling for this move to all-time highs, I’ve also been warning that prices would run into resistance at these levels. We are still stuck in the slower summer months and that means we lack big money’s firepower to drive large directional moves. That won’t come until after Labor day when institutional money managers return from their summer cottages. Until then we should expect the market’s moves to be more measured and breakouts and breakdowns to stall quickly.

Even though the market left most of its concerns behind as we climbed to these highs, that actually makes this a more dangerous place to be buying. Smart traders buy discounts, they don’t chase premium prices. Risk is a function of height and last week’s gains made this one of the riskiest places to buy all year. Now don’t get me wrong, I’m most definitely not calling a top or predicting and imminent collapse. But what I am saying is we rallied up to resistance and it is normal and healthy for the market to pause and even dip a little.

I don’t have a crystal ball so I don’t know if we stall at current levels, or if we break through 2,880 resistance and stall above it. Either way it doesn’t really matter because the risk/reward has shifted against us and this is now a better place to be taking profits than adding new money. It is a fool’s errand to try and decide if the peak will be 2,862, 2,875, or 2,892. This point is good enough for me and that is all that matters. And the thing to remember is we cannot buy the next dip if we don’t have any cash. Buy weakness, sell strength, and repeat until a good year becomes a great year.

From a short-term trading perspective, this is a better place to be taking profits than adding new money. But for our longer-term investments, stick with what is working and that is buying-and-holding our favorite stocks. We might see a little near-term weakness, but this market is strong and the rally into year-end is still on.

Stock crashes are breathtakingly quick, which means NFLX and FB hanging onto current levels for two weeks tells us the post-earnings selloff is largely done. At this point it would take a new round of bad news to launch the next move lower. While it will take a while to recover recent losses, it seems most owners are willing to give their favorite stocks the benefit of doubt and are sticking with them. That means we should expect FB and NFLX to retake their leadership position later this fall. Meanwhile GOOGL, AMZN, and AAPL are either making new all-time highs or are just about to. The best trade of the first half of 2018 is getting ready to be the best trade of the second half.

It didn’t take long for Bitcoin to tumble all the way to $6k support. Long gone are the hopes of retaking $8k and now only a few hundred dollars separates us from another lower-low. This chart is very sick and we still have a way to go before this over.

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Jani

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Aug 07

Why this rally to all-time highs was obvious

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 finished Tuesday higher for the fourth time in a row and is at the highest levels in six months, just a few points shy of all-time highs. While traders lived in fear of Trump’s trade war and the Fed’s rate-hikes, the market’s done nothing but climb higher.

Regular readers of this blog know we trade the market, not headlines. This market’s strength has been obvious to us for a while. I could quote any of my blog posts from the last six months, but I’ll save regular readers the repetition and invite new readers to browse my archive.

That said, at times even I was caught off guard by just how resilient this market has been. Last week it looked like we were on the verge of tumbling under 2,800 support, but that was yet again another false alarm. But rather than argue with this strength, we should embrace it. It has been a very profitable ride for anyone that understood why the market was acting the way it was.

Often it is more insightful to look at what the market isn’t doing than what it is doing. For months this market refused to breakdown no matter how ugly the headlines got. There are few things more bullish than a market that refuses to go down on bad news and that is exactly what happened here. While the cynics are dumbfounded we are within a few points of all-time highs, those of us that knew what was going on saw this coming from a mile away.

Of course that was then and this is now. Let’s not forget we are still in the slower summer months and institutional managers won’t return from their summer cottages until after Labor Day. Without big money’s deep pockets, we should expect these directional moves to run out of steam fairly quickly. Prices rebounded from 2,600 and paused at 2,700. When we finally broke away from 2,700, we stopped at 2,800. And now that we are approaching all-time highs near 2,880, we should expect yet another pause. The only question is if we trade sideways for a bit before breaking out. Or if we dip back into the mid-2,700s before launching the next leg of this bull market.

Either way, this is a better place to be taking profits than adding new money. The most profitable trade since February’s bottom has been buying weakness and selling strength. Nothing has changed and that means this week’s strength is a better selling opportunity than buying one. Even though everyone feels a lot better because we are no longer on the “verge of collapse”, the lack of fear and recent price gains actually make this a far more risky place to buy than last week’s fearful dip under 2,800 support.

Everything looks good and we should keep doing what has been working all summer long. For our longer-term investments, that means sticking with our favorite buy-and-hold investments. For our short-term trading positions, we need to shift our mindset from offense to defense and start thinking about locking-in profits as we run into overhead resistance near 2,880. If prices dip and retreat back into the mid to lower 2,800s, that is simply giving us another profitable dip to buy. If we trade sideways for a few weeks, then we jump back in ahead of this fall’s next bull leg higher. Either way this market isn’t going anywhere fast and we don’t need to worry about being left behind.

Despite brief scares in FB and NFLX, the tech trade is still very much alive. While I cannot say it is well given the beatings FB and NFLX took last week, it looks like both stocks have bottomed and are starting their recovery. People who miss a big trade always pray for a pullback so they can jump aboard, unfortunately most of those people lose their nerve when the market finally answers their prayers. If someone wanted to buy FB and NFLX at discounted prices, they better move because those discounts are disappearing pretty quick. At this point the biggest risk to FAANG stocks is broad market weakness. As long as the indexes continue trading well, expect FAANG to keep leading the way higher.

It is hard to find anything positive to say about Bitcoin. Last week’s bounce above $8k support failed and rather than break the destructive trend of lower-highs, it looks like we made another one. Failing to hold $8k, it didn’t take long for us to crash under $7k as any hope brought about by the latest rebound vanished faster than it appeared. If we cannot retake $8k support over the next few days, expect us to tumble through $6k support and start making new lows. This is still a very broken chart and Bitcoin is guilty until it proves itself innocent. So far it hasn’t managed to that.

If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!

Jani

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