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By Jani Ziedins | Free CMU
Cracked.Market University
Back when I was a novice trader, I used to look at the market and try to figure out where it was headed next. Then I would make my trades based on those predictions. Many times I was right and this approach worked well. Unfortunately, other times it didn’t go as planned and my predictions caused me to go down in flames while holding a position that “just needs a little more time.” I assume all traders have been there at one time or another.
After being handed some pretty humbling losses, I realized this was a foolish way to trade. Unfortunately, that is the way most people still trade.
In yesterday’s post, I wrote about buying the bounce and many readers were shocked. Obviously, yesterday was “a dead-cat bounce and the market was clearly headed lower.” As a seasoned trader, I don’t get that mindset. For me, if the market is going up, I buy it. If it’s going down, I sell it. It doesn’t get any more straightforward than that.
Yesterday, the market went up and regardless of how I felt about the dip and whether it went “too far” or “not far enough”, the market was going up and that created a buying opportunity.
I fully acknowledge that I will never be right all the time. Rather than try to predict the market, I simply follow its lead. When it goes up, I buy. When it goes down, I sell. Was yesterday’s bounce the real deal? Following today’s dismal reversal, obviously not. But if a person is nimble enough to get in early and has the discipline to get out early, they have the luxury of trading these swings with near impunity.
I bought yesterday morning and held the strength through the close. Things were going well enough this morning to keep holding, but a midday fizzle undercut my stops and I was out. If the trade worked, I would have made money. It didn’t work and I lost nothing more than my time.
No doubt people on social media will call me stupid for trying, but personally, I think it is stupid not to try. Especially since this approach allowed me to make a killing riding this “impossible rally” higher since the March lows.
Is the Covid rally dead? Maybe…Maybe not. All I know is if this bounces again, I will be one of the first in line to buy that bounce. If it doesn’t work next time, then maybe it will happen the time after that. As long as I’m savvy with my entries and disciplined with my exits, it doesn’t really matter when it happens. The only thing that matters is that I’m in the right place at the right time when this thing is finally ready to rip. And most likely, that will happen when most people are still predicting bigger losses.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
After weeks of nothing but a boring grind higher, I finally have something interesting to write about. In fact, there is more going on than I have time for!
There are some spectacular things going on with TSLA, but I will save that discussion for another day. In the meantime, it looks like TSLA could claw its way back to $400 over the next few days, especially if the broad market bounces back from last week’s dip.
That segues me nicely to tonight’s main topic, the S&P 500’s impressive bounce this morning. There were not any meaningful headlines driving this strength, but that makes sense since there weren’t any meaningful headlines driving last week’s tumble. As I often say, the market loves symmetry and if we didn’t need news to fall, then we don’t need news to bounce. The herd got spooked last week and this week they realized that might have been an overreaction. Or so it seems.
One day’s price action is not enough to make a definitive proclamation, but it is enough for us to take notice. More important will be how traders respond Thursday. Do they keep buying the dip or does today’s strength fizzle and retreat back under Tuesday’s lows? In one scenario and the dip is already over. The other and lower prices are ahead.
This is an emotional market and that means both outcomes are likely. While I cannot say for sure what’s coming, that doesn’t mean we cannot create an intelligent trading plan that accounts for both outcomes.
Hopefully, regular readers of this blog recognized this morning’s bounce was our signal to put on an initial position. Starting small allows us to be more aggressive while also controlling our risk. If the initial position works, great, we add more. If the second addition works, even better and we add even more.
On the other hand, if the bounce fizzles and retreats Thursday, we have a profit cushion from today to absorb some of the fall and we get out at our stops. No big deal. And rather than give up, if we get squeezed out, that just means we were early and we need to try again. If this isn’t the real bounce, it will be the next one, or the one after that. Buy smart, limit our losses, and always be in a position to profit from the next big move. That’s the way savvy traders profit from these opportunities.
I bought Wednesday’s bounce as if it were the real deal. If I’m right, I keep adding to what is working and enjoy the ride higher. If I’m wrong, I take a small loss and try again. No big deal. Some people need to be right. Me, I’m only looking to make money.
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By Jani Ziedins | Free CMU
Cracked.Market University:
The S&P 500 fell for the third session in a row, retreating 7% from last week’s all-time highs. The spectacular implosion of the tech trade has many wondering if the Covid rally’s best days are now behind us.
First, this is one of the most hated rallies in recent memory. And to be honest, there is a lot to dislike about this market, namely hitting all-time highs in the middle of the biggest economic collapse since the Great Depression. But let’s not allow these minor details to cloud our judgment. This market has been ignoring fundamentals for six months and there is little reason to believe anything changed now. If the headlines didn’t matter then, they probably don’t matter now. And if the market doesn’t care about these things, then neither should we.
Second, arguing with this rally has become a national pastime. Since the earliest days in April, critics have been bashing this strength. As you can see from the above chart, there have been at least 9 different times this market allegedly died. Is there a reason to believe this time will turn out any different?
Without a doubt, this rally will die like all the others that came before it. But if I’m a betting man and there are 10 chances one thing will happen while only 1 chance something else will happen, I’m sure as heck putting my money on the thing that happens 10x more often. This is just a simple numbers game.
While this dip will most likely bounce, that doesn’t mean we can be reckless with our trades. First, I will assume everyone who reads this free blog already locked-in profits when the market first retreated under 3,500. This is where our trailing stops should have been and those would have gotten us out.
Now that we’re in cash, the challenge is knowing when to get back in. Is three days of selling enough? Or will it be five? Or seven? I have no idea and that’s why the savvy dip buyer assumes every bounce is real. While that leads to premature entries, those are not a big deal if we manage our risk properly.
First, we start small. That means entering with a quarter, third, or half of a normal-sized position. That way if we’re wrong, our mistake doesn’t hurt very much.
Second, we buy the bounce early so we can place a nearby stop just under the lows. If the bounce fizzles and retreats, no big deal, we get out and try again. While this often leads to a hand full of small losses, those will easily be overcome when we catch the next big leg higher.
And third, we only add to what is working. The real bounce will take off and it won’t look back. As long as we start early, keep a nearby stop, and only add to something that is working, our risks will be small and our eventual rewards will be large.
This isn’t hard when we approach the market with a thoughtful and sensible plan.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Friday was another bloodbath for the S&P 500 and the index plunged 3% in early trade. The market attempted a rebound shortly after the open, but once that fizzled and undercut Thursday’s lows, the flood gates opened and a tsunami of selling overwhelmed the market. That said, by the end of the day, the index managed to recover a big chunk of those losses.
What’s more important, a second wave of defensive selling and finishing in the red? Or the impressive bounce off the midday lows?
No doubt there are a lot of bears that will disagree with me, but I was impressed with Friday afternoon’s strength. Just when things appeared their bleakest, supply dried up and dip buyers came rushing in. This is especially noteworthy ahead of a long holiday weekend. Investors typically prefer conservative positions when they cannot trade for three days, but this time the discounts were just too attractive for dip buyers to resist.
While it is naive to believe this tumble will be forgotten next week, if the index remains above Friday’s low on Tuesday, there is a good chance this won’t get much worse and this is just another dip-buying opportunity on our way higher.
Without a doubt, volatility will remain elevated and we could even retest Friday’s lows at some point later next week, but we should continue giving this rally the benefit of doubt. Crash under Friday’s lows on accelerating volume and we will be forced to reconsider our outlook, but anything short of that and we should be treating this dip as a buying opportunity.
Hopefully, everyone used their trailing stops to lock-in healthy profits somewhere between 3,500 and 3,450. That means we are sitting on a pile of cash and eagerly looking for the next trading opportunity. Friday’s midday bounce was a good entry point for an initial position and closing well above the lows gave us a second entry point.
Tuesday morning our stops should be near Friday’s lows and if the market trades well Tuesday, we can add more. If we locked-in some profits near 3,500 and are buying back in near 3,400, that’s not a bad trade even if it means sitting through some near-term volatility and whipsaws.
At this point, the only thing that would give me second thoughts is a quick retreat under Friday’s lows. If Friday’s midday bounce fails that quickly, the selling isn’t done and the most aggressive trader can short the index when we fall under Friday’s lows with a stop just above this level.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Well, that was dramatic. The S&P 500 shed 3.5% Thursday in the second-largest decline since the depths of the Coronavirus crash. Only June 11th’s 6% crash was worse.
As awful as this tumble felt, it helps to keep things in perspective. This afternoon the S&P 500 closed at 3,455 after plunging 125 points. This same 3,455 was an all-time high last week. That’s right, up until a few days ago, the market has never been this high. It doesn’t seem so bad when we put it that way.
As with all things in the market, there are two ways to look at this situation. 3,455 is still a very high number and the vast majority of stock owners are still sitting on a mountain of profits. If they shrug this off like they did on June 12th, the worst could already be behind us. On the other hand, the pessimist will point out just how much clear air remains underneath us. The next major support level is all the way back at 3k and falling another 400-points would hurt…a lot.
What’s a trader to do in a station like this? Lucky for regular readers of this blog, I told everyone exactly what to do last night:
I sure a heck didn’t expect today’s bloodbath, but I already had a plan in place to deal with it.
I don’t mention this as often as I should, but I like keeping my stops spread out. Today I had multiple stops between 3,500 and 3,450. This strategy helps me mitigate the inevitable whipsaws. If my first level gets hit and the market bounces, no big deal. Most of my position is still intact and I only miss a little bit before buying back in. If on the other hand, the selloff accelerates, I lock in some of my profits higher up and can actually make money buying back in at lower levels. Anyway, this is what works well for me and helps mitigate the frustration when the market undercuts my stops by 10 cents before bouncing.
As I wrote yesterday, I like this market and paradoxically, today’s dip actually makes me feel better about it. I was growing concerned about this relentless climb and the lack of a meaningful down day. Healthy and sustainable rallies take a step back for every two steps forward they take. If prices bottom and bounce soon, that is an incredibly bullish indication that confirms these prices are legitimate there is more life left in this rally. On the other hand, if prices continue falling, no big deal, my stops were already triggered and I am sitting on a mountain of cash. When the next trading opportunity presents itself, I will be ready for it.
At this point, I don’t see a reason to give up on this market and I will be looking for the next entry point to buy back in. But if the selling accelerates Friday and into next week, I have no problem switching my outlook and following the market’s lead. That’s the best part of being a nimble and flexible trader, I often make more money when I’m wrong.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
This market is on fire. The S&P 500 has been up 9 out of the last 10 sessions. Today’s 1.5% pop is the biggest gain in more than two months, meaning the rate of gains is accelerating, not slowing down. But the real star of the show is tech and momentum stocks with double-digit gains becoming the norm.
While a lot of people are nervous because it feels like this market is getting frothy, and I’m one of them, the thing to remember is bubbles last longer and go further than even the most bullish cheerleaders thought possible. I wouldn’t feel comfortable buying stocks at these ridiculously extended levels, but I sure am glad I’m holding positions with huge profits and I continuing to participate in this runup. And for the time being, I have no interest in selling. I’m following this rally higher with a trailing stop. I have no idea how much further it will go, but I definitely want to be apart of it.
The greatest strength we have as independent traders is the nimbleness of our size. We do in seconds what it takes institutions weeks and months to accomplish. This market is getting absurdly expensive, but we are nimble enough to ride this wave higher and be able to get out right after it rolls over. We don’t need to predict the future if we are fast enough (and disciplined enough!) to react to the market in real-time.
The great thing about euphoric accelerations is they tend to be one-way moves, meaning we can easily follow this rally higher with a trailing stop. Keep it 50-100 points behind the market and we should safely navigate any near-term whipsaws. And you know what? If we get stopped out prematurely, there is no rule prohibiting us from getting back in. If a false alarm squeezes us out, no problem, just jump back in when prices recover.
Stick to the above plan and see how much further this frothiness takes us. No doubt the top is still a good distance above us.
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What’s a good trade worth to you?
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