PM: Hope, fear, and opportunity

By Jani Ziedins | Intraday Analysis

Jun 20
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks crashed spectacularly in the largest selloff of the year.  Volume was off the charts as we undercut all the stop-losses clustered under the 50dma, 1600, and 1598.

As sick as the market feels, we are still within 6% of all-time highs.  For bears that means plenty of downside remains.  For bulls this is just another routine dip on the way higher.  And who knows, both could be right if we selloff a bit more before rebounding to new highs this fall.

Markets often reverse on a capitulation bottom.  This is the largest decline and highest volume of the entire selloff; the classic pain trade.   Many previously confident traders are persuaded into selling because the market hit their stop-loss, or alternately they just can’t take the pain of seeing their account fall any further.  But the thing to remember is markets only go down on new selling.  If the recent plunge triggered a majority of the stop-losses and shook out a large chunk of holders sitting on the fence, the supply of available sellers might be drying up.

I very well could be the biggest idiot in the room for seeing opportunity in this slide, but that comes with the territory of being a contrarian.  I will be the first to admit I can be wrong, but that’s what stops are for.

Expected Outcome:
Any disciplined bull should be out of the market, either because they sold recent strength, or they were stopped out on the way down.  The advantage of being in cash at times like this is it gives us the clarity to see the next trade.  Anyone still holding is jumping between hope and fear and that is clearly a poor way to trade the market.

I still think we are closer to the end of this selloff, but we can wait to buy the rebound above 1600 and there is no reason to force a trade in this volatile, sideways market.  Sitting on cash is a legitimate position.  Remember, it is easy to make money in the markets, the hard part is keeping it.  Don’t do anything stupid.

Alternate Outcome:
We sliced through support on our way to 1588.  This is finally a legitimate place to put on a short trade with a stop above recent support.

Trading Plan:
A bear can put on a short with a stop above 1600.  Anyone already sitting on short profits should consider locking in some of those gains or at least move their stop down to 1600.  We are in this to make money and the only way we can do that is by selling our winners.

Bulls should wait to buy the bounce above 1600.  Our plan this summer is selling strength and buying weakness.  This certainly qualifies as weakness, we just need to wait for the right opportunity.

AAPL daily at end of day

AAPL daily at end of day

AAPL continued its slide under the 50dma, but its loss was less than the broad market as it actually out performed on a relative basis.  While encouraging, that is not a valid reason to buy or hold this weakness.  Any disciplined bull should be out of this stock and waiting for the rebound back above the 50dma.  On the other side, a bear can short with a stop above the 50dma.

Gold’s 7% selloff would normally be one for the history books, but unfortunately for gold-bugs it is simply par for the course this spring.  The last few years gold was bought to protect against a weak economy, a strong economy, inflation, and deflation.  Now it is a sell for all the same reasons.  Obviously gold was nothing more than a momentum trade and that momentum has turned.  I’m not sure if there is enough downside to justify shorting GLD here, but those hoping for a rebound to previous levels will be waiting a long time.

Plan your trade; trade your plan


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.