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By Jani Ziedins | Free CMU
Cracked.Market University:
Spend any time on the internet and it sounds like everyone makes a killing trading stocks because all you ever hear is people bragging about their big scores. But those of us that have been around the block a few times know better. Unsurprisingly, very few people mention their losses. In fact, most people hide from them. And not just from other people, but also from themselves when they refuse to acknowledge a bad trade by either selling it or tallying the true cost after they close it. But as a matter of transparency, I’m willing to let everyone see what the other side of my personal trading looks like.
First, let’s roll the clock back to Friday afternoon. As I wrote in last week’s free post, I liked the way the S&P 500 bounced back above 3,300 after briefly violating the weekly lows earlier in the day. Big money makes their moves late in the day and they were clearly more interested in buying Friday’s dip than selling it. That resilient price action was a buy signal for me. But rather than rush in with everything I’ve got, I start every trade with defense in mind. My trading plan clearly dictates I start small, get in early, keep a nearby stop, and only add to what is working.
What this means in practice is I prefer being aggressive when buying bounces and that means getting in not long after the bounce. I protect myself by testing the market with a smaller 1/3 position. I further back this up by placing a stop nearby, typically under the recent lows. And I only add to a trade that is working. (I never “average down”)
This recipe often leads to nice opening pops like we saw the previous two Mondays, but I wasn’t as lucky this morning. There was a perfect headline storm over the weekend. Ruth Bader Ginsburg’s death and subsequent nomination fight likely ruins any chance for a near-term Covid stimulus. Then China retaliated against Trump’s Tik-Tok ban by threatening to do the same against foreign companies operating inside China. And finally, parts of Europe are considering a second round of economically devastating shutdowns. Put all of this together and it is no surprise stocks tumbled at the open.
That meant I started the day playing defense. But since I only had a partial position, the losses were very manageable. The one exception I have to my otherwise rigid stop-loss policy follows opening gaps. Rather than sell the open when a gap leaps over my stops, I give the market 10 or 20 minutes to find a near-term bottom and bounce. That new low becomes my new stop and I will sell a violation of that no matter what. If I find myself already down 2% at the open, it isn’t that big of a risk to give the market another 0.25% or 0.5% of slack to see if there will be an early bounce. And most of the time, the market does bounce. Whether that bounce sticks or not is less consistent, at least I gave myself the opportunity to ride a rebound higher. If the early bounce fails, no big deal, I get out nearly where the market opened.
This morning the market attempted a modest bounce following the opening gap, but within an hour, it undercut the early lows and I was out. I even took a stab at a small short following my standard trading plan of starting small, getting in early, keeping a nearby stop, and only adding to what is working. That said, betting against a bull market is one of the hardest ways to make money and I enter these shorts with very low expectations. And just as expected, the early weakness bounced and I was out of my short in a matter of hours. No big deal. Most shorts don’t work, but the few times they do work, they make a ton of money, so they are definitely worth trying. Especially when I can enter and exit them without losing any money like I did today.
Just like Friday, I was impressed with Monday’s late surge into the close. While the market still ended down more than 1%, institutions were clearly more interested in buying the dip than selling the weakness. Right or wrong, big-money moves the market and I follow their lead. For the third time, in two days, I started small, got in early, and left a stop nearby.
Will this afternoon’s buy be any more successful? I don’t know. If it works, I will add more Tuesday and ride this wave higher. If it doesn’t, I’ll make the same defensive moves I made today.
This market is on the verge of making a big move. The only thing that matters is I am in the right place at the right time. If I have to take a few small losses along the way, no big deal. As long as I keep buying the bounces and shorting the breakdowns, I know my payday is coming. The worst thing I can do is give up now just because my last trade didn’t work. As long as my losses are small, I can keep doing this for a long, long time.
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
It was a mixed week for the S&P 500. Monday started with a nice pop as the index launched its second rebound attempt from September’s swoon. Unfortunately, stocks could only string together two winning sessions before three successive losses knocked us back to where we started. So much for bounce attempt #2.
Headlines remain dreadful, but they’ve been dreadful for months and in that regard, nothing has changed. Instead, most of this weakness comes from the high-flying tech sector that led this miraculous charge to all-time highs. Live by tech stocks, die by tech stocks. At least that’s how this has played out so far.
There isn’t anything inherently wrong with the tech trade. These companies are still performing at the top of their game and most are insulated from Covid. In fact, many like NFLX and AMZN actually benefited from the lockdowns.
If it isn’t the fundamentals, what is the problem with the tech trade? Simple. Two steps forward, one step back. Cognitively, everyone knows the market moves in waves, unfortunately, most people forget this very basic concept in the heat of battle. Tech stocks raced higher and it only makes sense that at some point, they take a break and cool off. This appears to be that point.
If September’s dip is a normal and healthy thing to do, there is no reason to panic and abandon ship. The world is not ending and the market is not crashing. This is nothing more than stocks taking well deserved a break. These tech companies were the best-of-the-best coming into September and they will still be the best-of-the-best leaving September. All we need to do is put up with a little near-term volatility. No big deal.
Friday’s intraday dip in the S&P 500 undercut both the weekly lows and made fresh monthly lows. Nervous traders often place their stops under recent lows and that leaves us vulnerable to an avalanche of autopilot selling if the market undercuts those widely followed levels. But guess what happened today when we undercut the lows? Nothing. The market slid past the lows and rather than accelerate lower, supply dried up and prices bounced.
This resilience tells us we are running out of nervous sellers and there is very little supply underneath the market. Most owners do not have their finger on the sell button. If they did, we would have seen that avalanche of selling overwhelm the market this afternoon. Instead, most owners shrugged and kept holding. That is a very bullish development.
As I wrote earlier this week, as long as the S&P 500 remains above 3,300, this continues to be a dip-buying opportunity. Only after the market crashes through 3,300 should we consider shorting. If the imminent collapse is as big as the naysayers claim, we can afford to be a little late and still make a boatload of money. Until then, I’m giving this bull market the benefit of doubt. That means buying every bounce attempt, including Friday afternoon.
Obviously, the first and second bounce didn’t work, but that’s to be expected. If we knew which bounce was the real deal, this would be easy and everyone would be rich. Now that we’re on bounce attempt #3, I’m a little more hopeful. Statistically speaking, the 3rd bounce tends to be the most successful.
As long as we start small, get in early, keep a nearby stop, and only add to what is working, any losses from buying the wrong bounce are small. More important is that we put ourselves in the right place at the right time to profit when this thing finally takes off. If I’m wrong and the market collapses next week, no big deal. I’ll close my long and go short. In fact, my trading account actually prefers a bigger selloff because volatile markets are extremely profitable. The bigger the dip, the bigger the payday.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 hit a rough patch Thursday, retreating nearly 1% and giving back a big chunk of this week’s gains. As bad as it felt, more importantly, the index remains above recent lows and 3,300 support.
At times, it felt like the market was in the middle of a spectacular collapse, especially when prices were down 1.5% and threatening to undercut recent lows. Fortunately, bears couldn’t deliver on those threats. I’m not saying they can’t finish the job tomorrow, but it is worth noting they couldn’t get it done today.
There were not any meaningful headlines driving this selling. Instead, this is simply a natural and periodic shift in sentiment. The market went up for a few months and now it is digesting those gains. Two-steps forward, one-step back. It doesn’t need to be any more complicated than that.
Today’s tumble kills the market’s second rebound attempt in as many weeks, but this isn’t a surprise. The probability of any individual bounce succeeding is relatively small. Sometimes the first bounce sticks. Other times it is the second, third, or fourth try that takes us higher.
If we knew which bounce was the real deal, this would be easy. Unfortunately, we only know what happens after it happens. In this case, the only thing we can conclusively say the first two bounces didn’t work. Will the third, fourth, or fifth attempt be any more successful? Only time will tell.
Up next is bounce number three. Will this one be the real deal? Maybe…maybe not. But statistically speaking, the third bounce tends to be the most successful. Just because the last two didn’t work doesn’t mean we should give up and quit. Unfortunately, that’s what a lot of dip buyers do. They get whipsawed a couple of times, become discouraged, and miss the real bounce.
As long as prices remain above 3,300, the market is grinding its way through the supply nervous sellers and the real bounce is just around the corner. Hold above 3,300 and I will continue giving this market the benefit of doubt. On the other hand, if prices crash under 3,300, all bets are off. But until then, I will keep looking for the next bounce. As I said, often the third time is the charm.
(It appears there was a glitch with my email delivery service and yesterday’s free analysis failed to send. If you missed it, check out: “What it looks like when I’m wrong“.)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
If stock futures are any indication, Thursday is setting up to be a rough session. As I write this, S&P 500 futures are down more than 1%.
Normally, I don’t put much weight in overnight prices. Most of the time the U.S. leads the world, not the other way around. More often than not, a bad day in Asia will moderate by the time the sun reaches our shores. That said, this time feels different. Over the last three days, the S&P 500 gave back nice gains in disappointing afternoon closes. That tells us big money is not convinced and has been selling the strength, suggesting the market is ripe for a near-term pullback to support.
As I’ve been writing over the last week, I’ve been trading this bounce as if it were the real deal. But the entire time I was always prepared to be wrong. My trading plan has me start small and get in early. This approach leaves me with plenty of margin to be wrong. And in this case, it looks like I am on the verge of being wrong.
A third disappointing afternoon Wednesday convinced me to close a portion of my long position. If this was the real deal, prices should have raced higher, not stalled and retreated. While I’m still net long, my smaller position limits my exposure and I still have a profit cushion by getting in early to blunt any weakness on Thursday.
Trading successfully over the long-term isn’t about always being right, but carefully managing our risks when we are wrong. I got into this trade with a sensible plan if I was wrong and now I’m putting it to work.
While it looks like I will be wrong buying this bounce, it was still the right trade. I still believe in this market, but I don’t know if the first, second, or fifth bounce will be the one that finally takes off. That means I treat all of the bounces as if they are the real bounce. As long as I have a sensible plan for getting in and out, the risks are small and manageable. And more important, buying every dip guarantees I will be in the right place at the right time when this thing finally takes off. Until then, I don’t mind taking a few small and targeted losses along the way.
(While I’m still planning on buying the next bounce, if this turns into another panicked rush for the exits, I’ll be happy to short a break under 3,300 with a nearby stop and a plan to harvest profits quickly.)
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By Jani Ziedins | Free CMU
Cracked.Market University:
All too often people think of trading in binary terms. They are bullish or they are bearish. The market is going up or it is going down. I need to be all-in or I need to be all-out. This stock is either racing to the moon or it is in a bubble and on the verge of collapse.
What these people fail to grasp is trading successfully is far easier when we approach the market in shades of gray. We don’t have to be all-in the same way we don’t have to be all-out. Sometimes a trade looks promising but it isn’t fully developed. That’s a great opportunity to test it with a smaller position and see what happens. When the trade starts working, we add more. If it fizzles because we got in too early, no big deal, pull the plug and try again next time. These aggressive trades are not unreasonably risky when our risk is reduced by starting with smaller position sizes.
On the other end of the spectrum, maybe we have a big winner we love, but the recent price-action is throwing off some warning flags. Not enough to abandon ship, but if we lock-in some profits, it becomes far easier to confidently hold the remainder of our position.
Shades of gray is how I felt about today’s price action in the S&P 500. As I wrote previously, I liked Friday’s late resilience after violating the weekly lows and bouncing back. The market confirmed that optimistic sentiment Monday morning when it poped at the open. I started buying partial positions early in this rebound because I could manage my risk by starting small, getting in early, keeping a nearby stop, and only adding to what was working.
Following that simple recipe, I ended up with a full position in a 3x index ETF. Tuesday started well with another opening gap higher and everything looked great. Unfortunately, the market’s midday second-thoughts gave back a big portion of those early gains. That fizzle was enough to give me pause. I still liked the way the market was trading and it is unreasonable to expect stocks to go up every single day. My inclination was to continue giving the rebound the benefit of doubt, but taking some of my position off midday made it a lot easier to confidently stick with my trade.
With one foot in the market and one foot out, no matter what happens Wednesday, I will be in good shape. If the rebound continues, I still have a lot of long exposure. If the market tumbles back to 3,300 support, I reduced my risk and it won’t sting nearly as much because I scaled back.
After the market reveals its intentions Wednesday morning, I will either buy back in or pull the plug and wait for the next opportunity. While other people are stressing over the overnight futures, I will be sleeping like a baby because I know I’m in good shape no matter what happens tomorrow.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 attempted its second rebound off of 3,300 support on Monday. Will this one be any more successful than last week’s fizzle?
Critics will jump on the declining volume, but personally, with as much volume as has moved to dark pools and is no longer counted, I don’t find volume to be anywhere nearly as useful as it was 10 or 20 years ago. In fact, it’s gotten to the point where I don’t even pay attention to volume. Light volume rallies pay just as well as heavy volume ones, so who am I to discriminate?
As I wrote in Friday’s free blog post, I was far more impressed with Friday’s resilient price action:
While the market remains 7% under last week’s highs and bears are the most confident they’ve been in months, their inability to extend the selloff on Friday is definitely noteworthy. We undercut the weekly lows and instead of triggering another avalanche of defensive selling, supply dried up and prices bounce back to breakeven. If this market really was fragile and vulnerable, these little cracks spiral into gaping holes, they don’t bounce back within hours.
I followed that up with:
It all comes down to Monday. A strong open is buyable with a stop near 3,310. If that strength fizzles and prices retreat, no big deal, we pull the plug and wait for the next bounce. But most likely, that strength will stick and even accelerate. Wait too long and there is a good chance you will miss the move.
So far so good. The index gapped higher at the open and it held those gains through the close. For the time being, we have no choice but to continue giving this market the benefit of doubt and that means buying this strength. Start small, get in early, keep a nearby stop, and only add to what is working.
Will the market trade well on Tuesday? If it does, keep adding to Monday’s positions. If it retreats under Monday’s open, no big deal, jump out and wait for the next bounce.
Social media is overflowing with opinions about whether this market will surge or crash. Personally, I don’t care what it does as long as it does something. Right now, it is acting like it wants to bounce and that means I’m buying it. If the sentiment reverses tomorrow and the index crashes under last week’s lows, I have no problem switching directions and following its lead.
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By Jani Ziedins | Weekly Analysis
Free End of Week Analysis:
The S&P 500 started the holiday-shortened week the same way it ended the previous week, deep in the red. That said, Tuesday’s lows were about as bad as it got. The market attempted a rebound Wednesday. Thursday it gave back those gains. And Friday finished flat.
It’s hard to call this week good, but six days into a selloff and it definitely feels like the tidal wave of selling lost a lot of its early momentum.
While the market remains 7% under last week’s highs and bears are the most confident they’ve been in months, their inability to extend the selloff on Friday is definitely noteworthy. We undercut the weekly lows and instead of triggering another avalanche of defensive selling, supply dried up and prices bounce back to breakeven. If this market really was fragile and vulnerable, these little cracks spiral into gaping holes, they don’t bounce back within hours.
If we focus on the last few days, it seems like the market is settling into a stalemate. While this could still break either way, I give the edge to the bulls. Everyone knows market crashes are breathtakingly quick. Sell first and ask questions later is the name of the game. On the other hand, holding steady for three days gives nervous owners time to regain their composure and it suggests fearful supply is drying up. If we hold current levels into next week, bulls will even start getting their confidence back.
It all comes down to Monday. A strong open is buyable with a stop near 3,310. If that strength fizzles and prices retreat, no big deal, we pull the plug and wait for the next bounce. But most likely, that strength will stick and even accelerate. Wait too long and there is a good chance you will miss the move.
The only thing to be wary of is a crash under 3,300. Few things shatter confidence like screens filled with red and if we crash under recent lows, all bets are off and the most aggressive can try shorting. But as long as we remain above 3,310, this is a buyable dip. Remember, start small, get in early, keep a nearby stop, and only add to what is working. If prices crash next week, no big deal, it just gives us more profit potential when the market finally bounces.
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