Is it finally time to short this market? (and how to do it safely)

By Jani Ziedins | End of Day Analysis

Apr 21

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The S&P 500 shed 3% Tuesday, adding to Monday’s nearly 2% decline. As well as the market has been trading lately, these two sessions closed nearly the daily lows and their price action stands out like a sore thumb.

Stocks have been defying gravity every since they launched off of the March lows. This has been one of the biggest and fastest rebounds in history and most seasoned observers were skeptical this strength could last given the frighteningly dreadful economic headlines surrounding us. But the same thing could have been said last week and the week before that. And unfortunately, a lot of anxious bears got themselves run over shorting this meat-grinder rebound a little too early.

As I often say, knowing what the market will do is easy, the hard part is getting the timing right and that’s where all the money is made. Without a doubt, this market was going to pull back, the hard part is knowing when. Are we finally at that point? Great question but if we are approaching this the right way, it shouldn’t matter.

Far and away the greatest strength we have as independent traders is the nimbleness of our size. We can go from full long to full short with just a few mouse clicks. We don’t have big money’s army of analysts, supercomputers, or inside connections, but those things are not necessary if we know how to exploit our size. We don’t need to know what the market will do ahead of time because we are fast enough to react to events as they happen. Rather than short the pullback before it rolls over, we can (and should) wait for it to happen before we jump aboard that move lower.

The keys are knowing what signals to look for and then being able to recognize quickly when we get it wrong. Get in, get out, and try again. That’s the formula for our success as independent traders. With that approach, we don’t need to predict the future. We simply react to it as it happens in realtime.

Yesterday’s weak close, this morning’s early dip and finishing again near the daily lows gave us the first interesting overnight shorting opportunity in a while. For several weeks I’ve been day-trading this market because opening gaps have been large and unpredictable. But this is the first time in a while I felt like there was something worth holding.

That said, this trade needs to be done carefully. Shorting today’s weak open gave us a profit cushion going into the close. And more than that, locking-in a portion of profits this afternoon both guaranteed some profits and reduced our exposure by leaving us with a smaller position.

If the short trade doesn’t work tomorrow, it won’t hurt much between the reduced position size, existing profit cushion, and the portion of profits already locked-in. If that’s the case, we get out and try again next time. But if it works, add more at the open and see where it goes. Close weak for the third day and we follow the same formula tomorrow afternoon.

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


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.