Monthly Archives: March 2020

Mar 09

CMU: Trading plan for markets in turmoil

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P had one of the worst days since the 2008 Financial Crisis, plunging a staggering 7% from Friday’s close and violating recent lows in the process. While the Coronavirus remains front and center, frayed nerves were shattered when Saudi Ariba launched an aggressive oil price war against Russia, going full nuclear and triggering the biggest one-day oil price crash in nearly 30 years. Global markets were already teetering on edge and this news gave us the biggest kick in the pants imaginable.

How do we trade this? That’s a question everyone wants to know, so let’s get to it.

First, we need to bifurcate our approach into two major strategies because our primary objectives have a huge impact on how we approach this volatility. It all comes down to time-frame. Either we are steady long-term investors or we are nimble swing-traders. There is zero room in between these extremes. Pick one or the other and make a ton of money. Find yourself in the middle and other people will be getting rich at your expense.

Now, there is a smart way to straddle these two extremes, but it most definitely doesn’t come from blending timeframes. Instead, we allocate a portion of our market exposure to each approach. Have some dedicated long-term investments and another portion is exclusively for swing-trading. As long as each piece falls firmly within one of these clearly defined strategies, you will be fine. Anyone mixing the two quickly become a wealth doner (If you know anyone like this, please thank them for allowing us to have such a great month!)

Trading Plan

Long-term:
Let’s start with the long-term approach. This is the classic buy-it-and-forget-it. These people shouldn’t be following the market’s daily movements and if they do, it is only so they know when prices dip and they can add more. Anyone selling long-term investments during this crash is making a huge, huge mistake. Don’t be that guy. Buy-high and sell-low never works.

If your trade started as a long-term investment, keep it that way. Stop following the headlines and watching the market’s daily gyrations. If you really want to do something, pick your favorite investments and add more. Scale up your 401k contributions, don’t decrease them. In nine months when pundits are reflecting back on 2020, the Coronavirus will simply be a footnote and life will be back to normal. If you bought the dip, great. If you sold it, well, someone needed to donate their money so the rest of us can have a great year.

Short-term:
While a lot happened over the last few weeks, the short-term trading plan I’ve been sharing with subscribers hasn’t changed in three weeks. When something is working this well, why mess with it?

First, we are small investors and that means we can get in and out of the market with the greatest of ease. This is far-and-away our largest advantage over the big boys and if we don’t exploit this strength, we should convert everything over to long-term investments and forget about trading this chop.

Second, this is often a counter-trend trading technique, meaning we need to be extremely nimble, buy early, and exit losing trades fast. The only way to survive this stuff is by being earlier and faster than everyone else.

Third, start small and only add to winning trades.

Fourth, buy bounces early and short breakdowns just as quickly. Moving decisively allows us to place a nearby stop under the lows on a bounce or just above support on a short. The closer our stops, the less money we have at risk.

Fifth, be prepared for a lot of head fakes and false alarms. There will be inevitable rebounds that fizzle and violations that rebound. No big deal. As long as we start small, get in early, and have a nearby stop, the losses will be minor and inconsequential compared to the towering profits when we catch the next big move.

And Sixth, trade in such a size that when we are wrong, it stings, but it isn’t crippling. Being long into this morning’s open would have sucked, but if we bought near Friday’s lows and only held a small position over the weekend, it actually wasn’t that big of a deal.

Take all of those strategies together and our trading plan is to buy any and all bounces early, start small, keep a nearby stop, and close/short the violation of support. It doesn’t get any simpler than that. I’ve been buying every bounce for two weeks and I keep making money shorting the market. And I will continue buying every bounce until the market stops giving away money. If I make money buying the dip, great. If I make money shorting the violation, great. It makes no difference to me as long as I’m making money.

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

Mar 06

CMU: Why everyone is right about this market but they are still losing money

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 continues whipping around violently. It’s been two weeks filled with 4% intraday price swings and a lot of people are losing a lot of money. But that’s stating the obvious. What readers really want to know is how to turn those losses into profits.

It is impossible to come to the market without some kind of bias. We spend most of our time searching for proof that supports our predisposed outlook. Bulls see the positive in every event and bears see the opposite. While some people claim they “don’t have a bias”, unless they are a robot, they’re lying to themselves and few things are more expensive than fooling yourself.

Rather than deny what we can’t control, successful traders learn to control it. (Exceptional traders even know how to harness that power, but I’ll save that topic for another post.)

What makes this idea so important right now is because it is impossible to come to this selloff without thinking either A) it is totally overblown and unreasonable or B) this is just getting started and we are going so much lower.

The paradox of those opposing statements is both been very true over the last several weeks. And not just once, but multiple times.

Last month the market rallied decisively in the face of Cornovirus fears. But all of that ended last week when prices crashed hard and the bears were finally able to beat their chest triumphantly. But two day later bulls were strutting around again because the market rebounded in spectacular fashion. Then came Tuesday’s second-guessing and not long after, the Biden Bounce. And finally today, the market closed near the weekly lows.

In perfectly alternating fashion, the bulls went from holding all the cards to falling on their face. Then it was the bears’ turn. As soon as one side was feeling pretty good, the next smackdown came. And honestly, I don’t see these alternating reversals of fortune changing anytime soon.

If we tally the score, bulls have been right three times and the bears matched that tally with their own three wins. But if the score is even, how can so many people be losing money? Easy, rather than collect profits confidently, most people wait until they are wrong and they cannot bear the pain of loss before liquidating their positions. Bulls sell the crash and bears buy the bounce (ie cover their shorts). One day’s profits become the next day’s losses. Rather than strut around and taunt the opposing side, smart money is taking profits.

My personal bias is this tumble is a gross overreaction and prices will bounce back soon enough. But rather than argue with the market crash, I’ve been too busy making money following its lead. When it wants to go down, I short it. When it wants to go up, I buy the bounce. And rather than pat myself on the back for a good trade, I’m locking-in worthwhile profits as soon as I have them. As long as I’m making money, I don’t care if anyone knows what I think.

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

Mar 05

CMU: Lesson 6: Sometimes the best trade is to not trade

By Jani Ziedins | Free CMU

Cracked.Market University

Now that we are nearly two full weeks into the Coronavirus crash, collecting profits is going to become a lot more challenging. The first few swings of any crash are the easiest to profit from because the market moves sharply lower, obliterating all rational support levels along the way. But just when all hope is lost, supply dries up and we get a nearly instantaneous rebound that recovers a huge portion of the crash. Unfortunately, this relief rally is short-lived because the market likes symmetry and a crash that goes too far is immediately followed by a rebound that goes just as overboard. That first overbought rebound is followed by an echo crash, followed by another echo rebound.

After a few days of clearly defined crashes and rebounds, the market starts to settle into a wide trading range. While the intensity of these swings starts to moderate, so does the predictability of the moves. Swings that went too far before reversing are now prone to switching directions in the middle of the range. Gone are the clear indications of too far and prices now jump and crash dramatically at seemingly random levels on less than obvious headlines.

While these moves are still profitable for the most nimble of traders, the speed with which these gyrations come and go makes it challenging to consistently stay on the right side of the market. Rather than try to force trades, sometimes the best trade is to simply sit back and not trade. If a person did well and collected nice profits over the last week and a half, it might be time to protect that windfall.

Spend any time in trading circles and you will quickly learn making money in the market isn’t hard. Even the most clueless of traders stumble into great trades. Winning isn’t the problem, it’s losing all of those great profits in the next bad trade. Sometimes we get a little too full of ourselves after a big win. Maybe we are dreaming of cashing in for something big and we need just a little bit more money. Whatever it is that convinces us to push things too far, that next ill-advised trade is what wipes out most of what we just earned.

Trade when you have an edge. But if you don’t have an edge, there is nothing wrong with taking a step back and waiting for a better opportunity. This market is on the verge of getting really choppy and a lot of people who traded the initial crash well are on the verge of giving all of those profits back. Don’t be that guy.

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

Mar 04

How the market’s behavior is going to change over the next few days

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 rebounded from yesterday’s Coronavirus tumble following Biden’s decisive comeback performance in Super Tuesday’s primaries. That said, the Biden bounce was actually short-lived and didn’t last much beyond the open. This market continues to live and die based on Coronavirus headlines. And while those headlines didn’t improve overnight, they didn’t get materially worse either, which at this point, is a good thing. Last week’s tumble from the highs priced in a tremendous amount of bad news and most likely took things way too far. So while the Coronavirus headlines continue to be overwhelmingly negative, the market actually rallied from the lows because things haven’t gotten a whole lot worse.

As I’ve been telling readers since last Monday, this is a volatile market and we should expect sharp moves in both directions. Emotional markets always take things too far. That means crashes that go too low are quickly followed by bounces that go too high. Now that we are a few gyrations into this, expect the size and speed of these swings to moderate. Volatility will definitely remain elevated for a while, but we won’t see violent whipsaws like we lived through last week and the first half of this week.

Unfortunately, those oversized moves were a lot easier to trade than the choppy phase we are moving into. That’s because previously, the market would move from one extreme to the other extreme before changing direction. Now that some of the emotion has moderated, these swings don’t drive as far and that means bounces and breakdowns can also occur in the middle of the range. Just like today’s rebound that took hold well above the prior lows. And the same could happen for the next peak. Rather than stretch all the way to the upper limit, we could stub our toe tomorrow morning and tumble back to 3k.

These erratic and choppy moves are harder to trade and require us to be even more nimble. That means we will make more mistakes and our profits will be smaller. And more than ever, we need to take profits early and often. Wait a couple of hours too long and nice profits will turn into disappointing losses. Just ask yesterday’s gleeful shorts.

If a person collected some really nice profits over the last few days getting ahead of these oversized moves, there is no reason to stick around and trade this chop. In fact, quite a few savvy traders could take the next 10 months off and still finish with an outstanding year. But if a person insists on trading this chop, always be on the lookout for the next reversal. We closed strong today and there is a good chance we will open strong tomorrow. But rather than buy that strength, I would be ready to short it at the first signs of weakness. Short early, start small, only add after the trade starts working, and take profits early. Then repeat in the other direction the next day. While these moves won’t be nearly as profitable as the ones already behind us, there are still profits to be had for proactive traders that know how to manage their risk.

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

Mar 03

The right way to predict the market

By Jani Ziedins | Free CMU

Cracked.Market University

Q: Is it possible to predict the market?

A: Yes……..and No.

Spend any time in trading circles and invariably someone will scold you for trying to predict the market. “It is impossible!”, they claim.  There are even popular books written about how trading is a fool’s errand and beating an efficient market is only possible through random luck. But my retort to these accusations is, “Why is it so hard to predict something when it keeps doing the same thing over and over again?”

The Dow Jones Industrial average stretches back to the end of the 19th century and gives us well over 100 years of price data. Can anyone point to a time in history when a dip/correction/crash wasn’t buyable? Heck, show me a time when buying the top of the market didn’t turn out profitable? (Excluding last week’s selloff since it hasn’t had time to recover yet!)

To me, it is pretty clear, as long as the Dow index and stock market survives, every dip is buyable. (At least until civilization ends and if that happens, people will have bigger things to worry about than the value of their 401k!)

Okay, so if we assume every dip is buyable, when the market dips and we claim the market will eventually bounce back, isn’t that a prediction?

What about when the market opens with a brutal 3% plunge like we saw last Monday? From what I know about markets, extreme moves almost always end in even more extreme moves. There are very few one-day panics and that meant further panic selling was almost guaranteed. That sounds like another prediction to me.

And how about the idea that the market always overshoots. That tells us any selloff almost always goes too far and inevitably snaps back not long after it starts. Isn’t that also a prediction?

Now for the “No” part of my initial answer. While we know with near certainty what the market will do, the challenge is we don’t know exactly when it will do it. It is easy to say, and almost certainly correct, to claim last week’s dip is buyable. The problem is our stock purchases and sales occur at an exact moment in time and the only thing that matters to our bank account is where prices are when we bought and when we sold. (or sold and bought for a short trade)

But just because we don’t know the exact where and when doesn’t mean we cannot make intelligent trades with what we do know. If we know the next move will be huge, but don’t know when it will start or which direction it will go. All we need to do is jump aboard anything that looks like a move in one direction or the other. Keep a nearby stop. And see what happens. While we might get shaken out a time or two by some head fakes, as long as we start small, buy smart, and keep a nearby stop, any initial losses are trivial. Especially compared to the towering profits by being in the market at the right time and pointed in the right direction.

While I cannot tell you exactly what level the market will close at tomorrow. I cannot even tell you if the day will finish red or green. But I can tell you tomorrow’s move will be big and volatile. That information is tradable and most likely very profitable for anyone with a sensible trading plan. I didn’t know last week’s selloff would fall all the way to 2,855.84, but I didn’t need to know that in order to profit from the four consecutive violations of the previous day’s close.

And the same goes for buying Friday’s bounce. I was wrong buying the four prior bounces, but as long as I started small, bought right, and kept a nearby stop, eventually I was in the right place at the right time and rode Monday’s tremendous move higher.

While it has been a great week for many of us, rather than be lulled into complacency, I know any bounce wouldn’t last and is why I was happily taking profits yesterday afternoon when everyone else was breathing a sigh of relief.

Predicting the market isn’t hard. We just need to know our history and follow a sensible trading plan.

What comes next? Easy, a lot more volatility. Figure out how to trade sensibly that and you will be golden. (Easy, buy the dips, sell the rips, take profits early and often, and repeat as many times as the market allows us.)

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

Mar 02

Lesson 2b: What it really means to trade proactively

By Jani Ziedins | Free CMU

Cracked.Market University

I often say, “Trade proactively, not reactively.” This is even the second rule on my list of 23 Trading Rules. But in extremely volatile markets, it warrants expanding on what this simple phrase actually means.

The longer version is, “Trade proactively based on a sensible trading plan, not reactively by listening to your tardy emotions of fear and greed.”

While this expanded rule isn’t as catchy as the original, it makes a lot more sense in crazy volatile markets. That’s because in unpredictable times, we need to be reacting to the market’s moves, just not in the traditional sense.

Traditional “reactive trading” is making tardy decisions when the pain of regret overwhelms us. This is selling after markets already collapsed and we are “afraid things are going to get worse”. Or buying long after the breakout is obvious and we are “afraid of missing out”.

Reacting emotionally to the market’s moves long after they happen is trading a day late and a dollar short. To be clear, we should never allow ourselves to fall for these tardy trading decisions because they are extremely expensive and our regret is often compounded when the market turns against us a second time (i.e. bailing out just before the rebound or chasing a huge breakout right before the pullback).

If that’s the bad kind of reactive, what is the good kind? Proactive. Moving early. Before it is obvious to everyone. The key is not moving based on gut or intuition, but a thoughtful trading plan. One that we came up with when we were relaxed and deliberate in sketching out our trading decisions.

This is important because in crazy emotional markets, we cannot use conventional trading rules. Support/resistance/etc, none of that matters when the crowd is losing its mind. These huge disruptions move markets further and faster than anyone imagines possible. We need a trading plan that accounts for these extreme moves. The only way to do that is to throw out the conventional rules and react to the market proactively.

Last week’s selloff obviously went too far, too fast and everyone knew a sharp bounce was coming. The problem is no one knew when. Buy the dip a little too early and you watch devastating losses pile up. Get in a little too late and most of the discounts are long gone. And worse, if you are really late, you could be jumping in moments before the next collapse.

If we know the market is going to make a huge move but we don’t know when, the easiest way to trade it is to jump on every move early and see what happens. The market easily could have bounced last Monday morning and that dip was definitely worth buying. But as it turned out, that wasn’t the bottom. But if we started our trade small, got in early, and had a sensible stop, we would have gotten knocked out with a minor loss. And not only that, if we were aggressive, we shorted the violation of the prior lows while waiting for the next bounce. Then we get to do this all over again Tuesday. Cover the overnight short for a healthy profit, buy the first bounce, start small, and keep a tight stop. If that was the bottom, great. If not, short the next violation of prior lows. As it happened this time, we got to repeat this process Wednesday, Thursday, and even Friday.

As it turned out, I spent all week trying to buy the inevitable bounce and while I was wrong 4 out of 5 times, my thoughtful trading plan kept racking up a pile of money on my shorts. But that dip-buying persistence finally paid off Friday when the market bounced from those early lows and didn’t fizzle. One day later and we are 250-points above Friday’s opening lows. Not bad.

Not very often can we be wrong all week but still make a pile of money. But I had a sensible, thoughtful, and proactive trading plan. That was the difference between making money last week and getting killed.

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

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