Another rest day

By Jani Ziedins | End of Day Analysis

Nov 01

Regular readers of this blog will notice a new tab above this post.  I am excited to announce the launch of a Real-Time Trade Alert service that allows subscribers to follow my trades in real-time.  If you are interested in learning more, click the Real-Time Trade Alerts tab above or follow this link.  For everyone else, have no fear, I intend on keeping the CrackedMarket blog exactly as it is and will continue publishing it free of charge.  

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks finished lower for a second day, but the losses were fairly modest in comparison to recent gains.  The market started weak, but recovered early losses by midday as traders bought the dip.  Unfortunately for them, things unraveled in the final hour of trade and we closed near the day’s lows.  Of course “unravel” is bit strong to describe today’s 0.38% decline.  The market is still well above support and a little cooling off is expected and healthy.  This is nothing to sound the alarm over yet.

MARKET SENTIMENT
Many traders bought the midday rebound, but it was short-lived as we slid into the close.  Given yesterday’s “engulfing candle”, prospective buyers remain cautions and today’s weak close justified that sentiment.  While the long-term trend remains solidly intact, 130-points over three-weeks is a hell of a run and a little pullback here is long overdue.

Bears love to talk about how “overly-bullish” this market is.  When we keep setting record high after record high, how can this be anything but over-bought?  Here is another Yahoo Finance poll that shows an “overwhelming” plurality of traders have “no fear”.  The 42% bulls far outweighs all the other categories, but is this the right way to look at the data?  What if we combined everyone fearing a bubble and compared them against those that think the world isn’t in such bad shape?  Then we find 42% think things are okay, while 68% fear we are on the verge of some kind of bubble.  Framing it that way, it is hard to claim this market is overly bullish and traders are complacent when nearly two-thirds of all traders think we are standing on a trapdoor.

Source: Yahoo Finance 10-31-2013

Source: Yahoo Finance 10-31-2013

TRADING OPPORTUNITIES
Expected Outcome:
Given today’s weak close, we probably have a little more selling in the near-future, but this is nothing more than two-steps forward, one-step back.  Look for a retest of 1730/1740 support before a larger legion of dip buyers jump in and buy the discount.

Alternate Outcome:
While most markets go up and down, occasionally we run into a market that goes up and up and up.  It’s been a strong year and this outcome is less likely given where we are, but it is possible big money will buy any and every dip no matter how small.

Trading Plan:
While the trend remains intact, expect some near-term weakness as prospective buyers wait for the market to dip to support.  Maybe they will rush to buy before we get there, or maybe they wait to see how far we will go.  I don’t have a crystal ball and we will evaluate the situation as it develops.  Prospective buyers should wait a little longer to see if we get better prices. Shorts can hold for a little more downside.  But both sides should realize this will be a modest dip, so don’t wait too long to initiate new positions or cover shorts.

Real-Time Trade Alerts
A free look into my portfolio:  As of this writing, I am 300% short the SPX through the SPXU leveraged ETF and have been since Wednesday morning.  My target is the 1740 region and depending on how the market responds to this level, I will look to cover and go long if we find support.  To get more trade ideas like this, subscribe to the Real-Time Trade Alerts using the tab above this post or follow this link.

Plan your trade; trade your plan

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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.

LT November 1, 2013

Im signing up. I sent a private email to you. Thanks goodness you’re not charging for the free blog. Let’s make some money.

Tori13 November 5, 2013

I notice in your post that you are trading a leveraged inverse ETF. I am very curious about inverse ETFs but have read so many negative articles about the high level of risk, especially in holding for more than a day and during sideways action rather than trending. I would love to hear your comments on this and how you deal with these inherent risks.

Really enjoying your posts.
Thanks so much.

    Jani Ziedins November 5, 2013

    You are right, they drift from the expected behavior over long periods of time or in volatile markets. It is mostly a warning for buy-and-hold investors who think they can use a leveraged ETF to make 2x or 3x the index’s returns over the long haul. The biggest reason for the deviation is the daily rebalancing and the compounding of gains and losses that results. The index can go from $100 to $90 and back to $100 over a period of weeks, while the leveraged ETF could go from $100 to $70 and only make it back to $95. Over time this erodes an account, causing the leveraged ETF to underperform.

    Since I’m actively trading the markets and using these tools to catch directional moves, I should largely avoid the negative consequence of compounding because I try to avoid holding sideways markets or through round trips. And honestly, if I only net 2.5x from a 3x fund, I’m okay with that.

    The one risk I do have is the underlying structure could implode during a 1987 style market meltdown. Since there is no such thing as safety in the markets, it is just one of many risks I am taking for the opportunity to make money.

    If you have any other questions, let me know.
    Jani

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