Monthly Archives: January 2020

Jan 31

How to trade days like this

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The following is a brief excerpt from today’s premium analysis that I emailed to subscribers at lunchtime today. This does a good job of explaining how we should respond during sessions like this.

Market Mentor

We always knew this retreat could happen and it shouldn’t surprise us. I liked the mid-week resilience, but that was no guarantee this situation was resolved. But as long as we included this possibility in our trading plan, it won’t catch us off guard and we will respond to it intelligently.

This intelligent and thoughtful response is miles away from the way most people have been trading this situation. Rather than buy early in the rebound when they could keep a sensible stop close to their entry point, they waited until it looked like things were safe and jumped in at much higher levels. Now the market tumbled under their entry points and their positions are in the red. What felt safe at the time turned out to be anything but.  Now many of those same late-buyers are having second thoughts and dumping their stocks for a loss today.

While today’s retreat proves my initial purchase wrong, having a sensible purchase point [near Monday’s lows], appropriate position size [1/3 position], and nearby stop-loss [under Monday’s lows] means any resulting losses will be trivial.

Today’s lows undercut my stops, meaning I’m not out of the market. But rather than give up, I’m already looking for the next opportunity to get in. If today’s weakness proves to be fleeting and is a false alarm, I’ll buy back in and try again. While these whipsaws can be frustrating, the protection against bigger losses while still maintaining the opportunity to profit from the rebound is more than worth it. As long as we are smart about our entries and stops, we won’t lose much from these swings and will be ready to profit from the inevitable rebound.

(All of that said, if the market has an absolutely horrid close this afternoon, I might be tempted to buy a small position just before the close. The lower we go now, the less room we have to fall on Monday, so any selling today actually reduces the risk of holding over the weekend. This definitely counts as trying to catch a falling knife, but if we do it with a reasonable position size, it can be more entertaining than dangerous.)

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

Jan 30

The self-fulfilling prophecy TSLA cannot escape

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Traders are GooGoo-GaaGaa for TSLA’s latest earnings report, sending the stock surging 10% today. The company blew away expectations by actually making money last quarter! Adding those profits to the previous three quarters and the company only lost $862,000,000 last year. What a relief!

All sarcasm aside, we need to be realistic about both the company and the stock. Traders love this stock and the share price doubled since the third quarter’s earnings report last October. That’s one hell of a performance and no matter what a person believes about TSLA’s future prospects, there is only one way to trade a move like that. Unfortunately, bears cannot help themselves and countless cynics have been absolutely demolished by this strong move higher.

But now I feel the tide is about to turn. These late buyers are going to be the next ones in trouble. The first thing to remember is institutional money managers control the bulk of all money in the stock market. What they say goes no matter what anyone else believes. The challenge going forward for TSLA is institutional managers are a cautious bunch. They’ve been around long enough to know these explosive surges higher never last. Even if they love the company, they won’t chase a move like this. Instead, they wait for the inevitable pullback from these frenetic levels.

What happens next is a bit of a self-fulfilling prophecy. The majority of big money managers avoid what they think is an unsustainable move. And when enough of them do that, eventually the retail investors run out of money and bears finish covering their shorts. Once that happens, supply dries up and prices tumble.

The above most definitely isn’t a judgment on the company’s financials or growth prospects, but more a look at the supply and demand cycle that is behind every hot stock. Big money fears heights and they won’t embrace this move until prices cool off. Without their deep pockets, this sharp rally will not stick.

Smart money is taking profits at these levels, not chasing prices recklessly higher. Only fools are buying TSLA above $600 and the thing to remember about fools is they don’t have a lot of money. Expect this stock to cool off very soon. Now don’t get me wrong, I’m not calling today a top and I most definitely wouldn’t short something just because it is “too high”. But I do know for certain at some point soon this stock is going to come crashing back to earth and anyone who is patient will be able to buy all the TSLA they want at lower prices. At the very least, we should expect prices to return to the $500s and even a dip into the $400s is highly likely. I would feel much better buying the company at those levels after this frenzy cooled off.

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

Jan 29

CMU: How to make money when your gut is wrong

By Jani Ziedins | Free CMU

Cracked.Market Univerity:

I will be the first to admit my gut isn’t always right about the stock market. Sometimes I overthink a situation or assume a move has more potential than it really does. Regardless, if I traded exclusively on gut feel, I would have a lot less money than I do. My secret weapon? Planning my trades and sticking to my plan. It doesn’t get any more straightforward than that.

Every time an opportunity arises in the market, look at it and ask, “what would take to get me to buy this?” Moments after answering that question, ask yourself the follow-up, “okay, if I’m in, what would it look like if I’m wrong?”. Answer those two simple questions, follow through on those commitments, and you will be miles ahead of almost everyone else who trades stocks.

Let’s look at a few recent examples where my gut was wrong but my trading plan got it right. Back in December, TSLA moved to the upper end of its trading range. While my gut is reluctant to believe TSLA is the second most valuable car company in the world, the stock was at an important inflection point. Either it hits its head on resistance like it has done so many times over the last several years. Or it smashes through resistance and keeps on going. While my gut was cynical, my trading plan said to buy $TSLA above $390 and stick with it as long as it stayed above this level. Here we are nearly two months later and the stock is up almost 50%.

Gut 0 – Plan 1

Bitcoin is another one I don’t trust. I even wrote a post last year questioning its viability after the $10k rebound tumbled back under $7k. But you know what? I was wrong. Instead of tumbling back to the lows, Bitcoin rebounded and retook $7k. My trading plan said that level was the line in the sand and no matter what my gut felt, as long as Bitcoin was above $7k, I had to give it the benefit of doubt. Here we are a few months later, up 35% and pushing up toward $10k again. While I still question the viability of Bitcoin over the long-term, it has been trading well over the short-term and there was only one way to trade it after it retook $7k.

Gut 0 – Plan 2

And lastly, this week’s Coronavirus tumble. I like taking some profits proactively and keeping a trailing stop on the remainder of my winning positions. That discipline meant I locked in profits when the S&P 500 was above 3,300 and had a lot of cash ready to buy this week’s dip. That said, I was a little nervous along with everyone else when the market gapped 1.5% lower Monday morning. Most of the time these emotional selloffs get carried away and go far further than anyone expects. My gut was hesitant to buy Monday’s early bounce because I feared another waterfall selloff, but my trading plan told me to buy the bounce and protect myself with a stop under the opening lows. While it didn’t feel good, this was my plan’s entry point and keeping a stop nearby limited my risk. It was a very good entry even if it didn’t feel good. And here we are a few days later, well above that entry point.

Gut 0 – Plan 3

No one can correctly predict the market’s every move, but if we plan our trades intelligently and stick to that plan, we will do a lot better than most.

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

Jan 28

The best way to buy this dip

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 recovered a big chunk of Monday’s losses as fears of a runaway Coronavirus epidemic receed. That said, there were not any concrete headlines supporting this change in outlook, just a wave of dip buyers jumping in and hoping for the best.

The bigger question is if this rebound is the real deal or just another sucker’s rally on our way lower. I wish I could tell you the answer, but predicting the whims of an emotional market is one of the most challenging things to do in the market. But just because we don’t know what the market will do doesn’t mean we cannot trade these swings intelligently.

If a person took profits proactively when the market broke above 3,300 or alternately, used a trailing stops to lock-in profits at this level, they should have cash available to take advantage of this dip. If we don’t know when and where this market is going to bottom, our plan needs to tell us when to act.  Obviously we don’t want to catch a falling knife, so that means waiting for a bounce. But how do when know when the market is really bouncing? Unfortunately, we don’t. That means our plan also needs to include contingencies for being wrong.

While Monday’s gap lower open was dreadful, prices bounced off those early lows minutes after the open. That is considered a bounce and is a great entry point. The biggest advantage is the early lows give us a definitive and close stop-loss level. Buy the bounce and hold on as long as prices remain above the opening lows. Easy enough.

This morning’s bounce also gave us a good entry point. Not quite as nice as yesterday, but we buy the early bounce and keep a stop at yesterday’s close. This entry is less attractive because we are buying at higher levels and the stop is a little further away, but it is still a decent entry with well-defined risk.

Typically we control our risk by starting with a smaller position and only adding money after it starts working. And while we start this trade the same way, this situation is a little more tricky because most of these Chinse headlines come in the middle of the night. That leaves us vulnerable to a dramatic gap opening like we saw Monday morning. For this reason, we might want to hold less risk overnight than we normally do. Or at the very least, acknowledge the increased risk and be willing to hold something that could jump past our stop-loss levels.

While buying the dip in the face of all of these spooky and uncertain headlines feels risky, if we follow a sound plan, the risks are actually quite modest. By the time it “feels safe”, the discounts will long gone, and in fact, the higher prices actually make the “safe feeling” time riskier. Jumping in at the lows with a sensible plan and well-defined stop-loss gives us both protection and profit opportunity. Hard to argue with that.

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

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