How to get ready for what comes next

By Jani Ziedins | End of Day Analysis

Oct 01

Free After-Hours Analysis: 

The S&P 500 finished Thursday modestly higher and remained above 3,300 for the fourth consecutive session.

It’s been a good seven days for the index as it reclaimed 180-points from last Thursday’s lows. But these gains leave us near overhead resistance and the rate of buying has slowed down. That’s not a surprise. This remains a volatile period for stocks and every bit of up is typically followed by a bit of down.

Given the headline environment and downward price pressure, trading sideways is actually constructive. It’s only been a few days, but the longer we hold recent gains without retreating, the less likely another major fall becomes.

That said, a big chunk of recent buying came from short-squeezes forcing bears to buy against their will. While short-squeezes trigger some of the most impressive surges, they are not sustainable by themselves because A) most investors don’t short and B) these people are not buying because they want to buy. To keep going higher, we need to recruit an entirely new class of buyers, i.e. those with cash that have been avoiding this market to this point. That is a much harder sell.

If we hold these levels for a few more days, previously nervous owners regain their confidence and those with cash start having more faith in these levels. With the temporary short-squeeze and dip-buying already behind us, we need voluntary buyers to take over and keep pushing prices higher.

As for how to trade this, it’s pretty straight forward. Any breakout must cross 3,400 and any retreat will fall under 3,320. Those are our tripwires. Buy the breakout and short the breakdown. Start small, get in early, keep a nearby stop, and only add to what is working. If we stick to that plan, it doesn’t matter which way this goes next. Be prepared for a head-fake or two along the way but as long as we get in early and get out early, the risks are pretty low.

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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.