Monthly Archives: September 2020

Sep 30

How to trade this chop

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It was an incredibly choppy 24-hours for the S&P 500.

It started with last night’s train-wreck of a debate. Stock futures swung wildly between 1% gains and 1% losses depending on who was saying what, but by the time the market opened this morning, prices returned to mostly unchanged.

So much for all the headline hype, but that’s not a surprise. Last night I told readers to ignore the noise coming from the debate because no matter what happened, it wouldn’t change anyone’s mind. And this morning, the market agreed with me.

That said, things got spicy after the open. Moments after it looked like it could be another ho-hum day, bulls took control and started squeezing the bears for the third time in a week. That one-way panic buying sent the index 50-points higher in just a few hours.

While bulls were congratulating busy themselves over their latest conquest, the thing we cannot forget is there is a huge difference between buying because people have to (shorts getting squeezed) and buying because people want to (compelling value).

Short-squeezes exhaust the supply of desperate bears very quickly. Combine that midday exhaustion with the Fed extending restrictions on big banks because of potential liquidy concerns and the stage was set for an afternoon retreat back to breakeven. Easy come easy go.

But this also isn’t a surprise. Last week I warned readers to expect extreme volatility in both directions for a while. Big moves in one direction are followed by big moves in the other direction.

If a person wants to trade this chop, make sure you get in early and take profits often. Missing entries and exits by a few hours is the difference between nice profits and humbling losses.

Every morning set tripwires in both directions that will trigger automatic purchases or sales. The thing about extreme volatility is it leads to strong intraday moves that are easy to profit from if we have the courage to jump aboard. Leave your bias at the door and be ready to ride this in whatever direction it wants to go.

And if that sounds like too much work or stress, don’t sweat it. There is nothing wrong with waiting for more sane trade to return. Often the best trade is waiting for the next trade.

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Sep 29

Do the debates matter to the market?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It was a very mediocre day for the S&P 500 with prices slipping 0.5%. That said, 0.5% isn’t a big deal given the elevated volatility we’ve been living under since the beginning of September. Considering the widespread nervousness, “only” falling 0.5% could even be called a good day. That said, we need to see a few more resilient days like this to feel more comfortable about the floor under our feet. Overbought markets tumble quickly. If we are still at these levels by Friday, we can start to put a little more faith in these prices.

The big bogie between now and Friday is tonight’s presidential debate. How will this affect the market? The simplest answer is, it won’t. There are a couple of reasons why.

Let’s start with the fact this is a very polarized election. Most peoples’ minds are already made up and nothing that happens tonight will change who they vote for. Crash or soar, it won’t really make a difference for Biden or Trump. The people that loved them yesterday will love them tomorrow and those that hated them yesterday will still hate them tomorrow.

Second, the few people that haven’t made up their minds are clearly not paying attention to politics. If they don’t care enough to have an option, they almost certainly won’t care enough to be watching tonight’s debate (and most likely won’t even vote). I wouldn’t pay much attention to this group.

And finally, the market doesn’t really care about these intermediate points. A good debate by one or the other won’t create a lasting impact on the market because the market doesn’t care about debate performances, only who wins in November. As I already stated, very little can happen tonight to change the course of the election and it won’t affect the market in a meaningful way tomorrow.

That said, maybe we get a knee-jerk Wednesday morning if one candidate screws up badly. But expect that early move to fizzle and be forgotten by tomorrow afternoon. Unless someone commits the unforgivable gaffe of all gaffes, ignore the debate. Expect investors to go back to obsessing over their fear of heights a few hours after the open.

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Sep 28

Is the worst finally behind us?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

On Monday the S&P 500 extended Friday’s bounce and now finds itself 3.2% above Thursday’s close. Not bad for two days of work.

If you assumed there was some huge breakthrough that triggered this buying frenzy, you’d be wrong. The headlines this week are no different than the headlines last week when we were carving out fresh lows. But that’s the way emotional markets work. We didn’t need a reason to crash and we don’t need a reason to bounce.

Even though it feels great to put 150 points of breathing room between us and the recent lows, we should be careful about reading too much into this bounce. If this market can bounce for no reason, then it certainly can fall just as easily for no reason (again).

This remains a volatile market and that means large moves in both directions. As I wrote last week, things will look better once we reclaim and hold 3,320. So far that’s what we’ve done, but we still need to be wary of any dip under 3,300. I don’t expect a big crash, but this will be a choppy market for awhile. Trading this well means getting in early and taking profits early. Wait a few hours too long and those profits will evaporate.

If a person doesn’t feel like dealing with this volatility, there is no need to rush in now. Even if prices rally higher this week, no doubt the next dip will knock us back to these levels, if not even lower. Don’t feel pressured to chase. Just wait for the market to come to you. Often the best trade is waiting for the next trade.

And if a person really wants to short, wait for the next breakdown. No doubt it will be a multi-percent move. Just make sure you are ready to take profits quickly because the next bounce isn’t far away.

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Sep 25

What we learned this week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis: 

It was a dramatic week for the S&P 500 with large swings in both directions. But when the dust settled, the index lost a modest 0.6%. Not bad considering it was down more than 2% percent on multiple occasions this week.

This ended up being the fourth consecutive weekly loss and as discouraging as that sounds, the index actually finished near the weekly highs, largely thanks to Friday’s impressive rebound.

Was it a good week? A bad week? Or a bit of both?

Bears cheered Monday’s violation of 3,300 support and subsequent tumble. But just when the situation looked like it was spiraling out of control, Tuesday’s bounce recovered all of those losses and Bulls were breathing a sigh of relief.

Unfortunately, their relief was short-lived and Wednesday’s one-way selloff sent prices racing back to the lows. Thursday was the least eventful day and ended mostly where it started. And Friday surprised everyone when prices surged, salvaging the week almost entirely by itself.

If that sounds like a lot, that’s because it was.

Before this week, I was giving this market the benefit of doubt. Bull markets rebound countless times but they die only once. On a purely statistical basis, it is always smarter to bet on the rebound. And that is the way I was treading September’s bounce until this week. I was even willing to give Monday’s tumble a pass since we recovered a big chunk of those early losses by the close. As most experienced traders know, it isn’t how you start the day but how you finish that matters most.

Wednesday’s tumble was the one I couldn’t forgive. If the market was truly oversold, prices should have sprung back decisively, not retreated back to the lows. Wednesday told us two things. First, this market is not grossly oversold and ripe for a snapback. And second, there are still a lot of nervous owners barely hanging on.

I’m not bearish by any stretch, but I’m no longer holding out for a big bounce. Markets can only do one of three things, up, down, or sideways. At this point, it looks like this market wants to grind sideways and that means we should expect a lot more choppy trade like this week. There will be big pops and dramatic drops, but expect these moves to fizzle and reverse within days, if not hours.

The best way to trade this chop is to get in early, keep a nearby stop, and just when it feels like things are finally going your way, lock-in profits because the wind is about to change directions. We will see violations of the lows and pops back above support, but rather than chase these directional moves, we should be taking profits and getting ready for the reversal.

And if that sounds like too much work. Don’t worry about it. Sometimes the best trade is to not trade. Better opportunities will be along soon enough. We just have to be disciplined and patient enough to wait for them.

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Sep 24

Is it time to give up on the bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It was another tumultuous session for the S&P 500. The index opened in the red, but not to be deterred, dip-buyers came rushing in and prices recovered nearly half of Wednesday’s tumble. Unfortunately, the buyers couldn’t sustain that momentum and the index slumped back near breakeven by the close.

Under different circumstances, I would have been encouraged by the market’s early refusal to breakdown. But Wednesday’s dreadful reversal forces me to take a more critical view.

Previously, I was giving the bounce the benefit of doubt because every dip this summer bounced within days. Anyone who’s been doing this for a while knows a trend is far more likely to continue than reverse. I was even willing to accept Monday’s tumble under 3,300 support because the market finished well above the intraday lows. (How a day finishes is always far more important than how it starts.)

And then there was Wednesday. The day started well enough but those first few minutes were as good as it got and it was all downhill from there. Oversold markets bounce decisively, they don’t tumble in oneway selloffs. Meaning, this market isn’t oversold yet.

The morning’s bounce was a valiant effort but ultimately doomed to fail. There are still far too many nervous owners praying for a bounce and the supply of sellers is still too deep.

As I wrote yesterday:

I often say we cannot read too much into a single day’s price action. And that’s still true. But I am no longer giving this market the benefit of doubt. [Wednesday’s] dreadful price-action turned this into a show-me trade. Until we recover Wednesday’s highs, I will remain leery of this base. And if we fall under Monday’s lows, look out below.

Nothing happened on Thursday that changed my mind. This continues to be a show-me trade. Until the index gets back above 3,320, I will continue to treat any bounce with suspicion.

That doesn’t mean stocks are standing on the edge of a cliff and we will find ourselves down 20% percent next week. What we are seeing is a normal and healthy part of the basing process. I was originally looking for a quick bounce because that’s how the market has been acting all summer. But this time it looks like it will take longer to process recent gains.

If this market was a coiled spring and ready to pop, it would have happened by now. That tells me we should expect the choppy trade to continue. That means more fizzled bounces and failed breakdowns.

The best way to trade choppy markets is to always be prepared for the reversal. Get in early and take profits quickly. Anyone waiting for a bigger move in either direction will soon watch a nice profit turn into a big loser a few hours later.

If a person doesn’t have the time or risk tolerance to trade around this chop, there is nothing wrong with sitting this one out. Better trades are coming, we just need to be patient and wait for them. (That said, I would be leery of any slip under 3,200. We could still see another stumble or two before we find the real bottom. Remember, it is always better to be out of the market wishing you were in than in the market wishing you were out.)

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Sep 23

When potential turns rotten

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Wednesday was a dreadful day for the S&P 500. The index started with a small gain, unfortunately, that was as good as it got. By the close, the market shed 2.4% in the biggest loss since the early September tumble.

Anyone who’s been reading these posts knows I’ve been giving this market the benefit of doubt as it carved out a base near 3,300 support. Even Monday’s tumble under this level wasn’t a big deal because the index spent the rest of the day reclaiming a big chunk of those early losses. As most experienced traders know, it isn’t how the day starts, but how it finishes that matters most. To me, it looked like the market was finding its footing and getting ready for the umpteenth bounce since the March lows. Then today happened…

There is nothing good to say about Wednesday. It was a one-way selloff that never found a bottom. While the optimist might find some solace that it didn’t undercut Monday’s lows, that’s only because the selloff ran out of time. But hey, there’s always tomorrow! Ugh.

I often say we cannot read too much into a single day’s price action. And that’s still true. But I am no longer giving this market the benefit of doubt. Today’s dreadful price-action turned this into a show-me trade. Until we recover Wednesday’s highs, I will remain leery of this base. And if we fall under Monday’s lows, look out below.

As for how I traded this abomination, I came into the day long and was sitting on a profit cushion from this week’s early bounce. That gave me a little breathing room when prices started retreating shortly after the open. As I wrote yesterday:

By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.

Little did I know I would be putting my contingency plan to work a few hours later. But that’s why we have them. To protect us from bad things when the market goes the “wrong” way. I started peeling off my positions this morning and I was all the way out by early afternoon. Once it was obvious the index wasn’t finding a bottom, I even put on a short.

I’m not a fan of shorting a bull market, but there was nothing good about today and things could get even worse if we fall under Monday’s lows. Today proved there are still a lot of nervous owners left and it could get even worse tomorrow. That said, I’m happy to be wrong. If prices bounce and reclaim Wednesday’s highs, I’ll be ready to buy that bounce. But something tells me that won’t be happening for a while.

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Sep 22

Buyable dip or dead-cat bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 notched its first gain following four consecutive losses. There wasn’t anything meaningful in the headlines driving Tuesday’s 1% pop. Instead, this strength was mostly a response to a little too much selling over the last week.

Everyone knows markets move in waves and it shouldn’t surprise anyone when the tide reverses after a string of days in the same direction. Is that all this is, a one day pop between two long stretches of down days? The cynics certainly think so. But I’m not sure the evidence supports that outlook.

First, we are in a long rally that goes back more than 6 months. This period includes countless dips that bounced back even higher. If the first dozen dips couldn’t break this rally, what makes this latest attempt any different?

Second, the market finished at the intraday highs the last two sessions. While Monday closed in the red, if you look under the hood, the price-action was actually quite bullish as institutional investors chased prices higher into the close. That wave of dip buying carried over to today and helped put together the first up-day in a week.

Third, if this market is going to crash, the first thing in needs to do is make a lower low. As long as we remain above Monday’s intraday lows, this should be treated as a buying opportunity. If we violate the lows, all bets are off and we can short until our heart’s content. Until then, this bounce deserves the benefit of doubt.

Up or down, there is enough emotion wound up in the market that the next move will be big. Maybe prices bounce decisively. Maybe they collapse. Either way, as long as we follow a thoughtful trading plan that puts us in the right spot at the right time, this will be a great ride.

As for what I’m doing, I bought Monday’s late strength and I added more on Tuesday. By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.

When it comes to the market, I don’t care which way it goes. The only thing that maters to me is I’m riding that next wave.

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