Why bulls need to get defensive, plus an important lesson from ZM

By Jani Ziedins | End of Day Analysis

Jul 14

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Wednesday was another lazy summer session for the S&P 500 as it added a barely noticeable 0.12%.

Nearly a month ago things looked far less constructive as the index crashed through 4,200 support. But four short weeks later, we are a stone’s throw from 4,400. Funny how that works.

But just like how last month’s dip was bound to bounce, this months’ rally is going to stall. That’s how this game works. Buy when other people are fearful, sell when they are greedy.

Now to be clear, I’m not calling a top, simply pointing out the risk/reward is no longer skewed in our favor. In fact, following a 5% move over four short weeks, the risk/reward is most definitely skewed against us.

Sometimes it makes sense to buy the uncertainty. Other times it makes sense to sell the confidence. And the most important thing to remember is we only make money when we sell our winners. And often the best time to sell is when we are the most reluctant to let go.

Often the most reliable trading signals are buying when you don’t want to buy and selling when you don’t want to sell. Think about that for a second. How many great trades did you miss because you were too afraid to pull the trigger? And on the other side, how many great trades did you let implode because you didn’t want to lock in some nice profits when you had them?

Maybe stocks continue higher. Maybe they stall at 4,400 for a while. Or maybe they retreat and retrench a little before the next leg higher. But no matter what they do, the odds are most definitely stacked against another 5% rally over the next four weeks.

ZM is showing us what happens when we hang on a little too long. As I wrote a couple of months ago, the bounce off of $300 was an attractive buyable entry. But after the stocks rallied more than 30%, I told readers last week this was a good time to protect those profits. And here we are a handful of days later and the stock has already given back 40% of those nice profits. Easy come easy go.

As the stock market saying goes, “bulls make money, bears make money, and pigs get slaughtered”. Don’t be a pig.

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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.