Monthly Archives: May 2020

May 29

How much life is left in this rebound?

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis and Lookahead:

The S&P 500 extended its weekly win streak to three out of the last four and finally reclaimed the 200dma for the first time since early March. As much as it feels like the wheels are coming off the global economy, the S&P 500 is completely oblivious and 10% shy of all-time highs. (The Nasdaq is only 4% away.)

As much fun as it was watching the market rally 40% in two months, we need to keep our expectations in check. There is no way we will do another 40%. Even collecting another 10% to get back to all-time highs will be challenging. While this feels like an invincible market, someone always gets left holding the bag. Now don’t get me wrong, I’m not a bear or anything close to that. But I have been doing this long enough to know that we need to be really careful when this feels too easy. By the time this resilience is obvious to everyone, it is getting really late in the game.

Without a doubt, momentum can keep carrying us a little higher, but this is definitely a better place to be locking-in swing-trading profits than chasing prices higher. If we are in this to make money, the only way to do that is by selling our favorite positions. Being proactive usually means selling too early, but if we assume it is impossible to consistently pick tops, that means we either sell too early or we sell too late. I like selling too early because that leaves me in the best position possible to take advantage of the next opportunity. When everyone else is debating whether they should bailout, I’m looking at a buyble the dip.

But that’s just me. You do what’s right for you. As nice as this ride has been, it is probably time to start planning our exit. Whether that means selling proactively on the way up or following the market with a trailing stop and getting out on the way down, it doesn’t matter as long as you pick something. And even better, do a little of both! Take some profits proactively and hold the rest with a trailing stop. But whatever you do, don’t be that guy left holding the bag.

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May 28

Is it finally time to start locking-in profits?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 continued climbing this morning and notched yet another higher-high for this unprecedented rebound. But just as the market was looking invincible, concerns about the long-forgotten Chinese trade war started seeping back to the forefront.

The last two weeks have been a great run as the market ricocheted off the May lows. The index bounced 300-points over a handful of days and as good as that felt, everyone knows this cannot continue indefinitely. Savvy traders buy weakness and sell strength. Now that this resilience is obvious to every Tom, Dick, and Harry, maybe it is time to start taking some profits off the table.

As I wrote yesterday, this is definitely late in the game to be adding new money. And given today’s weak close, it might also be time to start thinking about locking-in some profits too. Maybe that means taking profits proactively. Maybe that means tightening up our training stop. Or even better, a bit of both.

Wednesday’s lows look like a good spot for a trading stop. Fall under that level in early trade tomorrow and we should definitely be moving to a defensive posture. On the other hand, if traders forget about this afternoon’s fizzle and start piling back into the market as they have done countless other times during this rebound, stick around and let those extra profits come to you.

Everyone knows markets move in waves and it’s been a good run. Rather than get greedy or become complacent, start eying the exits. If we get squeezed out by a false alarm, no big deal. Just buy back in when prices resume their uptrend. But if prices fall further, even better, that gives us another opportunity to buy the dip.

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May 27

Is it still safe to buy this rebound?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

As unpopular as this rebound has been with the cynics, it could care less and keeps chugging higher. We saw the market rebuff another selloff attempt today. A promising pullback had a good start as the indexes skidded into yesterday’s close and then followed that up by converting a nice open this morning into a bearish reversal before lunchtime. As ominous as this price action looked, most owners shrugged and continued holding. When confident owners don’t care, headlines and worrying price action stop mattering. As long as confident owners keep holding stubbornly, every dip fizzles and bounce within hours.

Now obviously this cannot last forever, but this is our reality and we need to keep giving this rebound the benefit of doubt until it proves otherwise. What could have started the long-awaited pullback unsurprisingly turned into yet another push higher.

This two-week-old bounce has been a great trade for readers who had the wherewithal to buy two weeks ago at much lower levels. But what about the people who missed this move? That’s a much trickier question to answer.

With a couple hundred points of profit cushion acting as a buffer, proactive dip buyers have time on their side. Keep following this move higher with a trailing stop and let the profits come rolling in. But what about the guy who missed that initial move? Is it too late?

Unfortunately, this is a much riskier level to be buying in because prices have already realized a big portion of their near-term gains and pushed the risk/reward away from us. Buying these higher levels exposes us to a fair amount of risk and with each passing day, the profit opportunity gets smaller and smaller.

Sometimes the best trade is to wait for a better trade. I really like the way the market is trading here, but for anyone still out of this market, it is better to wait for the next lower-risk entry point. It will come along sooner than you think.

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

May 26

The real reason this market is defying gravity

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 popped 2% at the open on the first day back from the long Memorial Day weekend. Governments around the world continue relaxing their economic restrictive policies. But even more important, they keep pumping out free cash. It’s gotten so excessive that some people are actually earning more on unemployment than they were in their jobs.

If we only learned one thing from the market over the last decade, it loves free money. As long as the Fed, ECB, and other governments continue handing out free money, expect stock prices to defy gravity. Why fight what is working?

Which is exactly what I wrote last week:

“when a market is trading this well, we follow those signals and keep jumping aboard the bounces. I have no idea how much longer this rebound can continue defying gravity, but as long as it keeps telling me it wants to go higher, I have no choice but to grab on and enjoy the ride.”

Unfortunately for the stragglers, now that the market is nearly 8% above the lows from two weeks ago, the easy money is behind us. Anyone waiting to buy the “confirmation” is putting themselves at risk of a very normal and healthy near-term dip. Two-steps forward, one-step back kind of thing. As much as I harp on this, the safest time to buy is when it feels the most risky. Buy the bounce early when you can place a sensible stop a nearby stop. If we’re wrong, we get dumped out for a small loss. If we’re right, we make big bucks and are sitting on a pile of profits when everyone else is debating whether it is too late to get it.

Is it too late to buy? I have no idea, but I will keep riding this as long as it keeps going higher. My stops are at Friday’s close and we’ll see if this afternoon’s late tumble into the close turns into anything more significant than the failed dips last week. Maybe we test Friday’s close and maybe we don’t. But for those of us with a profit cushion, riding these routine gyrations will be far easier than anyone who chased this strength today and bought high.

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

May 23

Should we be shorting this strength?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead: 

This was a good week for the S&P 500 and it logged a 3.2% gain. That said, nearly all of those gains occurred Monday morning at the open when prices snapped back from the previous week’s dip. Following those early gains, the market spent most of the week drifting sideways. But given how dreadful the economic headlines are, sideways is an impressive achievement in of itself.

Two weeks ago the market pulled back as much as 6% in the biggest test of this rebound. But rather than crumble, prices bounced back to set even higher-highs. Instead of caving to the pressure, this resilient market keeps grinding higher.

There is an endless stream of cynics criticizing this market for refusing to go down. But rather than argue with this strength, wouldn’t it be smarter to profit from it? That’s one of the things I don’t understand about many traders. They frequently accuse the market of being “rigged”. Well, if you know the market is rigged, instead of complaining about it, why don’t you turn those insights into a few bucks? If we know this Covid market is “broken”, rather than argue with it, why not use this knowledge to make some money?

I’ll be the first to admit I’ve been suspicious of this rebound and have been wary of the “inevitable” pullback. But as long as this market keeps trading well and is grinding higher, I have no other choice but to respect that and give it the benefit of doubt. There is nothing wrong with shorting the cracks when they form, but we need to be quick to lock-in profits because it gets ugly real quick if we stubbornly hold a losing short too long.

But more than question this strength, when a market is trading this well, we follow those signals and keep jumping aboard the bounces. I have no idea how much longer this rebound can continue defying gravity, but as long as it keeps telling me it wants to go higher, I have no choice but to grab on and enjoy the ride.

Until we get a string of dreadful closes or start a new pattern of lower-highs, we must continue giving this market the benefit of doubt. There will be inevitable down-days along the way, but as long as there is more up than down, this rebound is alive and well.

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May 21

Was today’s down-day a warning signal or no big deal?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Obviously, many up-days are good days and down-days are bad days. But don’t overlook the fact there are also bad up-days and good down-days. Where in this matrix did today’s price action land? Good question.

Stocks rebounded nicely from last week’s modest selloff and set two fresh higher-highs this week. There are few things more bullish than responding to an attempted dip with higher-highs. Not only did the market refuse to breakdown, but prices resumed rallying to even higher levels.

That said, the market stumbled into Tuesday’s close. A waterfall selloff in the last hour of trade is always something to be wary of. If we get a few too many weak closes in a short period of time, that tells us big money is getting out and we shouldn’t be far behind. But rather than extend Tuesday’s weak close, the index bounced even higher Wednesday. All clear right? Well…not so fast. In a bit of groundhog day, today’s price-action produced another weak close. Is this second weak close something we should be worried about?

No, and I’ll tell you why. First, the weakness developed early in the day and rather than trigger another waterfall selloff, supply dried up and prices drifted sideways for the remainder of the day. The all-important final hour of trade was more flat than anything and that told us big money wasn’t abandoning ship today.

The second thing to keep in mind is down-days are a very normal part of every move higher. In fact, I get nervous if we go too long without a normal and routine down day. They are healthy and they keep uptrends healthy sustainable.

The short answer to the original question is today was a good down-day. There was nothing unusual or noteworthy about today’s 0.78% loss. That means the path of least resistance remains higher and there is no reason to worry about today’s very benign down-day. Until further notice, continue giving this rebound the benefit of doubt.

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May 20

Trading wisdom for the cynic in each of us

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 bounced back from yesterday’s late-day tumble. But this was expected. As I wrote yesterday:

I don’t see any reason to expect today’s late selloff will turn into anything more dramatic. Last week’s dip was our best chance to crack this rebound. If bears couldn’t get it done with a far better setup, I doubt they have what it takes this time around.

And not only did the market shrug off yesterday’s dip, it went ahead and set yet another high water mark for this rebound. As bad as the economy is today, investors are encouraged by the modest improvements and are forecasting a far better outlook six months from now.

There are two ways to approach any market. Trading what we think “should” happen, or trading what “is” happening. As obvious as the correct answer is, far too many people get caught arguing with the market. There are a million reasons this market should be lower (30 million reasons if you count the job losses!) Yet this market keeps grinding higher. The worst economic contraction in modern history and stocks are barely down 10%. Surely something is broken.

And you know what, something probably is broken. But when the market is broken, we go with it, we don’t fight it. The only other option is to get out of the way. At this point, a mountain of stubborn bears have been bankrupted by this rebound. The more they resist, the more they lose. Now, maybe at some point they will be proven right. But most of them will be long dead and buried by then and that small victory won’t matter.

No doubt this market will go down at some point. But this is most definitely not that point. Until then, expect every dip to be quick and shallow. If this rebound was going to break, it would have happened by now. It is okay to disbelieve this market. But it is not okay to trade against it.

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

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