Feb 07

The way smart money is trading this market

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Tuesday was a whipsaw session for the S&P 500, but by the time dust settled, the index powered 1.3% higher, ending a two-day losing streak.

The day’s big headline was public comments from Jerome Powell covering the economy, recent job gains, and future rate hikes. But for all the hype and anticipation, he didn’t say anything new or unexpected. That didn’t stop impulsive day traders from lurching from one side of the boat to the other.  But at the end of the day, what Powell said changed very few minds and that’s why these lurches didn’t accelerate in either direction.

More important is 4,100 support held for the second day, giving us the buying opportunity we were looking for. As I wrote Monday evening:

Big picture wise, there isn’t any meat to Friday’s headlines or this latest wave of selling. This is nothing more than a routine step back and consolidation near overhead resistance. Those dips are shallow and bounce quickly. Wait a few hours too long and you will miss the next buying opportunity.

Well, here we are a few hours later and the index now finds itself closer to 4,200 than 4,100. If you didn’t come to Tuesday’s session with a plan to buy, you missed some really easy money.

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As for what comes next, the most important thing to realize is this market doesn’t have big move potential. We get these tradable daily swings and there is more up than down, but every step forward is followed by a step back. That means we want to take profits early and often. Hold a few hours too long and the market will steal those profits back.

I really like Tuesday’s gains and I’m sitting on a pile of profits, but this is the wrong time to be getting greedy. I already lifted my stops and am planning my exit.

As easy as it is to buy back in, it makes sense to start taking partial profits as we approach 4,200 resistance. This market doesn’t have big move potential, so we don’t need to worry about getting left behind by a big breakout. Instead, we should be more worried about our profits escaping during the next step back.

Buy the bounce, sell the breakdown, and repeat as many times as the market lets us. That’s the way smart money is playing this.

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Feb 06

Why I’m already looking for the next buying opportunity

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Monday down 0.6%, extending Friday’s employment-fueled swoon. But this continued cooling isn’t a surprise, as I wrote Friday evening:

While I don’t fear “too good”, I am aware that it’s been a good run and stepbacks are part of every move higher. I still like this market over the medium and long term, but the risk/reward has gotten away from us over the near term.

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We only make money when we sell our winners and that’s exactly what I did last week. But just because I locked in some really nice profits doesn’t mean I’m giving up on the October rebound. I actually like the economy and don’t buy into this “good news is bad news” argument. Inflation is coming down AND employment is holding up. Isn’t that the soft landing we’ve been hoping for??? I don’t understand why so many people are afraid of good economic news, but I’m not one of them.

As regular readers know, I love taking worthwhile profits when I have them. But as soon as I get out, I start looking for that next buying opportunity because it often arrives a lot quicker than most people expect.

The index bounced nicely off of 4,100 support Monday morning and I was ready to start buying again. Unfortunately, the lackadaisical afternoon session and closing in the middle of the day’s range convinced me to hold off for the moment.

I’m itching to buy the next bounce, but I would rather be a little late than a lot early. That means I’m waiting to see what happens Tuesday. If the selling continues, I will keep waiting and watching for an even better buying opportunity. But if prices bounce Tuesday morning, I will jump aboard with a small position and a stop near Monday’s lows. If that initial position works well, I will add more money. If the trade doesn’t work and prices retreat under my stops, no big deal, I pull the plug at my stops for a small loss and try again Wednesday or Thursday.

Big picture wise, there isn’t any meat to Friday’s headlines or this latest wave of selling. This is nothing more than a routine step back and consolidation near overhead resistance. Those dips are shallow and bounce quickly. Wait a few hours too long and you will miss the next buying opportunity.

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Feb 03

Why Friday’s retreat shouldn’t have surprised anyone

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 spent Friday’s session bouncing between breakeven and moderate losses as it digested January’s blowout employment report before ultimately closing down 1%.

Economists were shocked by January’s robust hiring that drove unemployment to 50-year lows. Few saw this coming following several months of slowing employment gains.

As with everything in the market, there are two ways to interpret this result. The market’s knee-jerk reaction was fear the Fed will be forced to raise rates higher and keep them there longer than previously thought. Of course, the optimist will point out that slowing inflation AND robust employment is the perfect landing we’ve been hoping for.

Which is it, is good good, or is good bad? It all comes down to if a person believes strong employment will be an obstacle to containing inflation.

But even more basic than reacting to the headlines, the market consumed a huge pile of upside getting to these six-month highs, flipping the risk/reward on its head.

Risk is a function of height and common sense tells us it is safer to buy when prices are low and risker to buy when they are high. At the highest prices in half a year, no matter what the headlines are, we are vulnerable to a very normal and healthy step back. 4,200 resistance is just ahead and it isn’t a surprise to see buying cool off here, no matter what the headlines are.

While I don’t fear “too good”, I am aware that it’s been a good run and stepbacks are part of every move higher. I still like this market over the medium and long term, but the risk/reward has gotten away from us over the near term.

That’s why I told readers Thursday night I started harvesting profits:

As much as I like this market right now, it is making me nervous and that is enough for me to shift to a defensive mindset. Stocks move in waves and every two steps forward are followed by a step back. Without a doubt, stocks can continue climbing for another few days, but we take profits when everyone feels good. And right now things feel pretty darn good. We don’t need to sell everything, but it makes sense to lift our trailing stops and consider taking some partial profits. Remember, we only make money when we sell our winners.

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I had no idea what was going to happen with the employment report, but when the rubber band gets stretched a little too far in one direction, the odds of a normal and routine snapback increase.

As for how to trade this, we take profits when we have them because if we hold too long, they tend to escape. As good as it felt watching profits pile up on Wednesday and Thursday, every good thing comes to an end eventually.

The older the 2022 bear market gets, the lower the volatility becomes. Six months ago, a breakout like Wednesday would have continued for five or more sessions. Today it runs out of gas in 48 hours. This is perfectly normal as traders get used to our new reality and stop overreacting to every bump in the road.

The economy remains strong, but the market tends to get ahead of itself and Thursday was a nice place to start locking in some very worthwhile profits. But as always, as soon as I’m out, I start looking for the next place to get back in. The next opportunity could arrive as early as next week.

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Feb 02

Are bulls becoming too cocky for their own good

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Thursday was another great session for the S&P 500, with the index adding 1.4% and extending this week’s bounce off of 4k support. But this was expected, as I wrote Wednesday evening:

[T]his continues to be a half-full market and it keeps focusing on the positives. If it wanted to go down, there are more than enough excuses for prices to fall…Something that refuses to go down will eventually go up. Expect Wednesday’s highs to get even higher over the next few days and weeks.

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Bears are quickly becoming an endangered species, but as nimble and agnostic traders, we have to get concerned when one side accumulates too much power because it often ends in a reversal in the other direction.

Now, to be clear, I’m not picking tops, but 700 points above the October lows and we have to be aware that a huge portion of the near-term upside has already been realized.

Momentum is far more likely to continue than it is to reverse, but it always comes to an end at some point. A lot of recent buying looks like bears getting squeezed out of their short positions. While that is great for some quick gains, big and sustainable moves need to be built on more than just bears scrambling for cover.

As much as I like this market right now, it is making me nervous and that is enough for me to shift to a defensive mindset. Stocks move in waves and every two steps forward are followed by a step back.

Without a doubt, stocks can continue climbing for another few days, but we take profits when everyone feels good. And right now things feel pretty darn good. We don’t need to sell everything, but it makes sense to lift our trailing stops and consider taking some partial profits.

Remember, we only make money when we sell our winners.

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Feb 01

Why bears keep getting it wrong

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Wednesday was Fed day, and as expected, it took the S&P 500 on a wild ride.

The initial knee-jerk reaction was lower, but as I warned readers, this first move is often misleading and we don’t want to jump aboard anything too quickly. Here’s what I wrote Tuesday evening:

Don’t jump on the first knee-jerk reaction Wednesday afternoon because it often goes in the wrong direction, but it won’t be long before the market can no longer hide its true intentions and it starts the next multi-day move. If it’s up, buy it. If it’s down, get out of the way…

Once Powell got a few minutes into his press conference, a wave of relief spilled over the market and prices went from -1% to +1% as fear of the worst went flying out the window. Which, also wasn’t a surprise, again quoting what I wrote Tuesday evening:

As for what comes next, recent gains leave the market vulnerable to a slip if the Fed doesn’t say all of the right things. But once we work our way through that volatility over the next few sessions, I expect the “less bad than feared” rebound from the October lows to continue. The only question is if it continues from 4,100, 4k, 3,900, or 3,800. And while I consider myself bullish, the trader in me would love to see this fall to the lower end of that range before bouncing.

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Well, unfortunately for us, Powell said all the right things Wednesday afternoon and I didn’t get lucky enough to buy big discounts from impulsive and panicked sellers at much lower levels, but such is the market. Sometimes it gives us great trading opportunities, other times we have to settle for good. This happens to be one of those good times.

While it is easy to parse the Fed’s statement to justify why the market rallied on the news, there are just as many reasons stocks could have fallen on the very same statement. As has been the case for a while, this continues to be a half-full market and it keeps focusing on the positives. If it wanted to go down, there are more than enough excuses for prices to fall. But by this point, all of the naysayers have sold and once they are out, their opinion no longer matters.

If this market was fragile and vulnerable, Wednesday’s knee-jerk selling would have accelerated lower. Instead, supply dried up and prices bounced on less-bad-than-feared. Something that refuses to go down will eventually go up. Expect Wednesday’s highs to get even higher over the next few days and weeks.

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Jan 31

Why Tuesday’s nice rebound doesn’t matter

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Tuesday nicely higher, bouncing back from Monday’s retreat from 4,100 resistance.

As I wrote previously, I started locking in worthwhile profits last Friday:

Now, to be clear, I am in no way calling this a top. But the risk/reward has shifted against us after 300 points of upside has been realized and the air underneath our feet gets higher by the day. Markets move in waves, that’s what they do. And we shouldn’t be surprised when the next routine and healthy wave lower arrives.

But as soon as I get out, I always start looking for the next opportunity to get back and I put on a partial position Tuesday morning, exactly as I said I would in Monday evening’s free post:

[M]aybe prices don’t fall any further than Monday’s lows and it is all uphill from here. But as easy as it is to buy back in, I would rather lock in January’s worthwhile profits when I have them rather than risk letting them get away by getting greedy and holding too long. Maybe I end up buying the next bounce Tuesday morning, but that’s the case, no harm no foul.

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Under normal circumstances, I would have added even more Tuesday afternoon given how well the market rallied. And believe me, I was definitely tempted to leverage up, but given the Fed’s looming policy statement headed our way Wednesday afternoon, I knew Tuesday’s price action didn’t really matter to the big picture.

I’m happy to hold a position ahead of the Fed’s policy statement, especially one sitting on a nice profit cushion, but I’m not interested in gambling on the outcome with a full position. As easy as it is for nimble independent traders like us to get into the market, I don’t mind waiting for the market to make up its mind before I put my hard-earned money at risk.

While other people are gambling on the market’s reaction to the Fed’s latest policy statement, I will be over here waiting to hitch my wagon onto whichever direction this wants to go. No doubt I will be a little late jumping on the next big move, but during times like this, I would much rather be a little late than risk getting run over if I’m wrong.

As for what comes next, recent gains leave the market vulnerable to a slip if the Fed doesn’t say all of the right things. But once we work our way through that volatility over the next few sessions, I expect the “less bad than feared” rebound from the October lows to continue. The only question is if it continues from 4,100, 4k, 3,900, or 3,800. And while I count consider myself bullish, the trader in me would love to see this fall to the lower end of that range before bouncing.

Don’t jump on the first knee-jerk reaction Wednesday afternoon because it often goes in the wrong direction, but it won’t be long before the market can no longer hide its true intentions and it starts the next multi-day move. If it’s up, buy it. If it’s down, get out of the way and wait for the next bounce, which could come along as soon as a few days later.

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Jan 30

Why Monday’s selling shouldn’t have surprised anyone

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

On Monday the S&P 500 retreated 1.3% and gave back a big chunk of last week’s gains.

Easy come easy go. But this shouldn’t surprise readers because we knew something like this was coming. As I wrote last Friday:

Markets move in waves and after a nice bit of up, it is time to get ready for the next bit of down. It’s been a nice run since the December lows and that means we are sitting on a pile of profits. But rather than get greedy, this is when we need to shift to a defensive mindset. There are few things more humbling than watching a leak in our bucket rob us of all of these hard-earned profits.

Remember, we only make money when we sell our winners. As easy as it is to buy back in, there is no reason to stubbornly hold on to a winning position as it moves away from us.

Now, to be clear, I am in no way calling this a top. But the risk/reward has shifted against us after 300 points of upside has been realized and the air underneath our feet gets higher by the day. Markets move in waves, that’s what they do. And we shouldn’t be surprised when the next routine and healthy wave lower arrives.

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There is no reason to overreact to one day of selling, but it was fairly obvious the index was going to run into some resistance near the November and December highs. This is as basic as technical analysis gets and it shouldn’t surprise anyone when swing traders start locking in profits at these obvious technical levels.

As I wrote on Friday, I am in no way bearish and actually think this rebound still has room to go over the medium and longer term. But I also recognize markets move in waves. As I wrote on Friday, we only make money when we sell our winners, so challenging 4,100 resistance looked like a really good place to start locking in some very worthwhile profits.

Now, maybe prices don’t fall any further than Monday’s lows and it is all uphill from here. But as easy as it is to buy back in, I would rather lock in January’s worthwhile profits when I have them rather than risk letting them get away by getting greedy and holding too long.

Maybe I end up buying the next bounce Tuesday morning. But if that’s the case, no harm no foul. But maybe it takes a few more days for this down wave to bottom, in which case I will be getting in at even better prices. But no matter what happens next, the profits from my last trade are guaranteed and I will be in a great position to jump aboard the next trade no matter where and when it starts.

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