Apr 07

What to expect from the market’s next move lower

By Jani Ziedins | End of Day Analysis

Free After-Hours Update

The S&P 500 3% popped at the open as global Coronavirus infection rates showed their first hints of moderating. This was welcome news for fatigued markets and the relief extended the market’s rebound more than 500-points above our lowest point.

As I often write, the market loves symmetry. It was almost inevitable that a historic crash would be followed by an equally historic rebound. As incredulous as people were two weeks ago when the market rebounded 20% and headlines proclaimed the bear market was over, here we are, still standing. As bad as things seem in their darkest hours, we always manage to push through them and this episode will be no different.

That said, there is a huge difference between starting to heal and being recovered. This market is still incredibly volatile and that means big moves in both directions. While the free-fall might be behind us, that doesn’t mean we should expect clear sailing back to the highs. There are definitely promising signs in the battle against the Coronavirus, but the economic cost of this progress is staggering and cannot be ignored. Following this brief relief rally, expect our economic reality to start weighing on stock prices again. We saw the first signs of this second-guessing show up this afternoon as stocks retreated from their early highs.

Markets move in waves and this latest rebound will invariably end in the next move lower. I don’t expect a major crash, but any retest of support feels scary. It has to. If it didn’t feel real, people wouldn’t sell and we wouldn’t dip. But rather than tumble out of control, realize this next move lower is simply an exhale, not a crash.

As for how to trade this, anyone with short-term trading profits should have locked them in. As volatile as this market is, waiting a day too long is the difference between harvesting profits and accumulating tax write-offs. While no one likes taxes, I definitely prefer paying taxes on profits than using losses as a tax deduction.

More important than how the market opens tomorrow is what its initial move is. Gap lower or higher doesn’t matter as much as that move in the first 30 minutes. Buy an early bounce with a stop just under the opening levels or short a dip with a stop just above the open. If we get stopped out, consider switching direction and going the other way. Collect profits before the close and limit overnight exposure. Repeat this process again on Thursday.

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

Apr 06

CMU: Always have a plan to be wrong

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 exploded 7% higher after Coronavirus infection rates showed a modest moderation over the weekend. While these are only just the first hints of a beginning, anything remotely positive is being embraced by the markets. These small rays of light reassure traders there will be an end to this crisis and we are not falling down a bottomless pit. That said, today’s relief could easily turn into tomorrow’s disappointment when our economic realities come crashing back down on the market.

These 4%, 5%, and even 7% moves in both directions are a constant reminder we cannot survive these markets without a plan that allows us to be wrong. Despite the constant boasts on the internet claiming otherwise, no one is right all the time. In fact, any honest trader freely admits to being wrong…a lot. While braggarts are trying to convince us they already know where the next breakout/breakdown will be, I’m over here looking at all these boasts with a highly skeptical eye.

There is a popular saying in the market, there are bold traders and there are old traders, but there are no old, bold traders. And it’s true, only the novices boast about their trading prowess. (Many people still act like first-year traders even though they’ve been doing this for a decade!) Savvy veterans have been humbled far too many times to even consider tempting the market’s vindictiveness by bragging about their successes.

My most recent humbling experience occurred today.  Last week I was looking for a market swoon back to 2,300 support following the previous week’s 20% rebound. While I felt like a near-term dip was the most likely outcome, I knew better than to tempt fate by holding a short position over the weekend. With 3%, 4% and even 5% opening gaps as common as they are, a simple mistake could easily turn into a very costly mistake by leap-frogging any sensible stop. (IMO, stock options are far too costly to be usable right now.)

Since my trading plan couldn’t effectively manage my risk over the weekend, I chose not to hold a position and would wait until this morning to trade the next move. That decision meant I couldn’t profit from a nice move in my direction over the weekend, but it also meant I wouldn’t end up on the wrong side of a 5% gap against me. And it’s a good thing because that’s exactly what happened today.

Sometimes the best trade is to not trade and I’m glad my trading plan kept my gut out of the market this weekend. And more than just saving me from a big opening loss, my cash position and trading plan actually got me in on the right side of the market and I finished the day with a decent profit. Not bad for being wrong.

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

Apr 03

What to expect next week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead

It definitely felt like another rough week for the S&P 500 as the market retreated from last week’s rebound, especially Wednesday when the market shed 4.4% in a single session. That said, if you stand back and look at the weekly chart, it doesn’t seem so bad. For the week, we only gave back 2% of last week’s 10% rebound. I’d actually go so far as to call that resilience a win.

Stocks tumble from unsustainable levels quickly and the market had plenty of invitations to unleash bigger waves of defensive selling. Yet, most of the weak daily opens were met with buying, not follow-on selling. At least to this point, investors seem more interested in buying these discounts than selling them.

How much longer this can last is anyone’s guess, but the longer this goes, the more solid the ground is under our feet becomes. Calm and rational trade is almost always bullish and the longer we hold off another waterfall selloff, the better our prognosis becomes.

That said, the best case is falling into a trading range near the lows. Just because we don’t tumble doesn’t mean we are ready to race back to the highs. Expect prices to settle into a range between 2,300 and 2,600 for a while. As long as we remain inside that spread, everything is under control. Just make sure you remember this includes dipping back to 2,300. While everyone else is scared out of their minds, we will know better. (If the crowd didn’t think a dip was real, no one would sell and prices wouldn’t dip!) As long as we recognize what is going on, then we will be in a far better position to profit from it.

Chances are good the market tests 2,300 support next week and until further notice, we treat that as a dip-buying opportunity. That said, our greatest asset is our nimbleness. If prices tumble under the lows, we close our longs and go short. If prices bounce back, we close the short and go long. Moving proactively and keeping a nearby stop minimizes the cost of these whipsaws. More important is we ensure we are in the best possible position to profit from the next move no matter which direction it goes.

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

Apr 02

The only way to figure out where this market is headed next

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

In a bit of a mixed day, the S&P 500 recovered a big chunk of yesterday’s selloff. Initial unemployment claims surged past 6 million, easily shattering last week’s record and the economy continues screeching to a halt at an unprecedented rate. That said, the stock market is already coming to terms with this staggering uncertainty. As dramatic as the crash seems, we are only down about 25% from February’s highs. While it felt like we fell off a cliff, stocks are actually holding up fairly well all things considered.

As usual, there are two ways to interpret this. Bulls are impressed by the market’s reluctance to continue falling. If we already chased off most of the fearful sellers, supply will dry up and prices stabilize. Remember, headlines don’t move markets, only people actually buying and selling stocks do that. Quite simply, when owners stop selling the headlines, the headlines stop mattering. The bear’s counterpoint to this resilience is it is little more than a pause on our way lower and we are in the middle of a dead-cat bounce.

Who’s right? That’s a hard question and people are desperately searching for answers in many different places. Some are consulting charts, moving averages, and ratios. Others are looking to fundamental data. Some are even consulting the stars or reading tea leaves. At this point, one approach isn’t any better than the other. This scenario has never happened before and nothing based on historical data is of any use in figuring out what comes next.

The effectiveness of these social-distancing campaigns and lock-downs can’t be found in stock charts, ratios and moving averages that are based on past price data. The only thing that matters is if this epidemic continues spiraling out of control, or if the fever finally breaks and we start getting a handle on it. No moving average or ratio that can predict what happens next so quit looking for one. Trade this market by looking ahead, not behind. Watch what the market does next and then react to it. If prices keep falling, get out and go short. If they find support and bounce, buy it and hang on. Quit looking for the easy answer. There isn’t one. This is a very tradable market, we just need to cut out the noise and focus on what matters. Follow the market’s lead and the rest will take care of itself.

Over the next couple of weeks, expect prices to retest 2,300. While dipping back to those levels will feel scary, as long as they hold, this situation is getting better, not worse and we should be buying this dip, not selling it. But if prices slice through 2,300 and the selling accelerates, short the weakness and see where it goes. One of the greatest strengths we have as independent traders is our nimbleness. We don’t need to predict the future if we are nimble enough to follow the market’s lead.

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

Apr 01

What to make of today’s 4.4% selloff

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 tumbled nearly 5% in what would normally be classified as one of the worst days in stock market history. Today, it seemed like just another routine midweek dip. As callous as it sounds, 5% crashes don’t feel all that dramatic after experiencing -7%, -10%, and -12% plunges over the last few weeks. It’s almost gotten to the point where we could find ourselves saying, stocks “only” fell 5% today.

The financial press claims today’s selloff was in response to Trump’s new estimates of 100,000 to 240,000 American deaths from Covid-19. While that excuse sounds plausible enough to satisfy newspaper editors, the simple truth is today was little more than a natural snap-back from last week’s towering 20% rebound. These 100k and 200k estimates have been floating around for days and are actually far less draconian than the 2 million fatalities that were initially projected. Trump’s update didn’t surprise anyone who is paying attention and it sure didn’t catch the market off guard. The truth is today’s move was nothing more than the natural ebb and flow of supply and demand. But rather than take place over 1%, 2%, or 3% increments, we are seeing 5%, 10%, and even 20% swings. This is routine stuff, just super-sized.

As for what comes next, expect more of the same. Last week’s towering rebound consumed a truckload of demand and now it is time for the sellers to take control. Unless we see these social-distancing efforts have a dramatic impact on infection rates over the next few days, expect the market to slip back to the lows. Whether we bounce above, at, or under the prior lows has yet to be seen, but we should expect more down than up over the next handful of trading sessions.

That said, this is still an incredibly volatile market and that means big moves in BOTH directions. Just because we will retest the prior lows at some point doesn’t mean it will be a straight line getting there. Expect volatility to remain off the charts and the best trading plan includes taking profits early and often. Hold a few hours too long and today’s profits turn into tomorrow’s losses.

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

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