Buy, sell, or hold?

By Jani Ziedins | Intraday Analysis

Nov 27

S&P500 daily at end of day

Markets finding support after last week’s sharp rally, but how long can this keep up?  Maybe the more important question, is wise to holdout for those last few dollars?

MARKET BEHAVIOR

It was an interesting day in the markets.  Initially the market sold off, but it found support and finished near the day’s high, although still in negative territory.  AAPL made a huge comeback and no doubt contributed to some of the tech market’s strength.

Today’s volume was below average, but not surprising being the first trading day back from the holiday weekend.  Today markets the 5th consecutive day above the 200dma and it seems the worst fears of careening off the fiscal cliff have dissipated.  Of course this rally creates room for another bout of pessimism to take hold.

MARKET SENTIMENT

It is pretty obvious we’ve come a long way in a short amount of time.  The speed of the bounce has not allowed many people to change sides and we still have a fair number of bears gunning for the markets even if they were chased out in last week’s short squeeze.

Where we head from here largely depends on how other people are positioned.  There are still a lot of bears out there, but many of them were chased out of their shorts last week, meaning they have renewed ammunition to use against the market.  We also had some momentum buyers jump on board the break above the 200dma and 1400 resistance/support.  Momentum buyers are a fickle group and will bail at the first hint of trouble.

Both of these factors point to selling pressure in the near future, but the counter argument is these things often go further and longer than most expect.  Combining those two ideas, we might expect a little more upside before this bounce runs out of steam.

TRADING OPPORTUNITIES

As I shared last week, we are close to the end of this move, but I would like to see one last push higher before rolling over.  I thought we might get that at the open and that would have made for a great exit/short.  But opening lower makes it more likely we might see one last push higher before rolling over.

Of course debating a little higher or simply lower is nothing more than trying to pick a top and gambling at best.  We need to accept that we can never sell the top and it is foolish to try.  Either we intentionally choose to sell early, or the market forces us to sell late.  A case can be made for each, but personally I prefer selling early because it is far less stressful to be in cash.  Holding temps brings out the emotions greed and regret.  When I’m in cash, it keeps my head clear, allowing me to identify and pounce on the next opportunity.  I’ll always miss some upside, but I’m okay with that because it means I will be in a better position for the next move.  The goal isn’t to make all the money, only the easy stuff.  Leave the rest to the gamblers.

More often I find people who think it is better to sell late because the logic is you capture the entire move and leave the door open to an extended run higher.  And don’t get me wrong, I understand the logic behind the idea.  But in reality it works less well in practice because human emotions of greed and regret get in the way when trying to sell something on the way down.  We start obsessing about what we could have sold it at just a couple of days ago.  Then we are tempted to wait for it to come back.  If it comes back, greed kicks in and instead of selling we decide to hold a bit longer.  If it falls again, we convince ourselves this is just a minor dip and it will continue higher if we just wait a little longer.  I know because I’ve been there.

The beauty of selling early is you don’t have any of those doubts.  And the proof is in the pudding. I’ve read countless interviews with successful traders and virtually all of them claim a major key to their success is selling too early.  In fact, I can’t recall a single one that said he prefers to sell on the way down.

Like many aspects of trading, this is an individual decision and you should stick what gives you the most success.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

StockKevin November 27, 2012

Without a doubt, the marketed turned quickly in the past week. The hanging man candlestick it formed today doesn’t look promising for bulls. Stochastic indicators show overbought in the short-term. But, wishful thinking has be hoping this Black Friday rally will continue.

    Jani Ziedins November 27, 2012

    I agree

Matt November 27, 2012

Everything in this blog is pure gold. My biggest concern here is a resolution to the “fiscal cliff.” Even if we go down between now and then, I want to be 100% long at the moment congress agrees on something. Because when they do the market will go vertical like a rocket ship to outer space and I don’t want to get caught with my pants down.

    Jani Ziedins November 27, 2012

    You are absolutely right, over the medium term I am bullish and expect the market to continue the rally after some near-term volatility. I also expect the market will rally in anticipation of a deal, so anyone who waits to trade the news will be too late.

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