When a setup doesn’t work out

By Jani Ziedins | End of Day Analysis

Oct 27

Free After-Hours Analysis: 

The S&P 500 slipped a modest 0.3% on Tuesday and it finds itself down another 0.5% in after-hours trade. Not what I was hoping for and it seems like this weakness ants to stick around a little longer.

As I wrote Monday evening, retaking 3,425 Tuesday would have been a great entry point. Remember, we don’t buy dips, we buy bounces. Reclaiming 3,425 support would have done two things. First, it would have demonstrated resilience and proved dip-buyers were back in control. Second, it would have given us a clear entry-point with a sensible nearby stop-loss. Buy the bounce with a nearby stop and the risk/reward is skewed heavily in our favor. If the bounce returns to the upper end of the trading range, we make a few bucks. If it fizzles and retreats, we lose a few pennies. I really like that risk/reward.

Alas, it wasn’t to be. Stocks never reclaimed 3,425 and I was left watching this listless grind from the sidelines. While I didn’t get the bullish trade I was hoping for, by having a clearly defined prerequisite for entering the market, I never bought the dip and I avoided this subsequent weakness.

Going forward, if prices fall even further, no big deal. In fact, additional weakness works out even better for me because the lower prices fall now, the more profit opportunity there is buying the next bounce.

Adjusting this trade for the more aggressive trader on Wednesday: If prices undercut Monday’s lows (3,365ish) and continue falling, short that weakness with a stop just above this level. If prices gap under Monday’s lows at the open but quickly bounce back above, buy that bounce with a stop just under this key level.

As volatile and emotional as this market is getting, expect the next directional move to be swift and decisive. That means jumping in early and hanging regardless of which direction it is headed.

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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.