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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
The S&P 500 exploded higher Thursday, reclaiming 1.7% of the latest selloff and closing comfortably above 4,400 support. This is a mile from Tuesday’s Chinese drip torture that gave the impression we were on the verge of the next collapse.
And you can count me as one of the fooled. On Tuesday, I wrote a post titled “Why I’m so concerned about a 0.2% loss“.
While most prognosticators quietly sweep their mistakes under the rug, I have no problem admitting my mistakes. In fact, acknowledging our mistakes is the only way we can learn and grow as traders.
But in this particular instance, I wouldn’t say closing my long positions following Monday’s dreadful close was a mistake. While it was ultimately proven to be unnecessary, sound defense is never wrong.
Savvy traders that are successful over the long-term learned early in their career that preservation of capital is far more critical than growing capital. That’s why we only take calculated risks when the risk/reward is stacked in our favor, and even then, we back that up with sensible stops to protect us when things don’t work out in our favor.
To do it all over again, I sill would lock in modest profits on Monday and start looking for the next trade because that is the only sensible move to make in that situation. While it didn’t work this particular time, in a dozen similar setups, it would have been the right call. We play the odds and don’t let the exception to the rule cause us to give up on our well-thought-out rules.
Anyway, enough about that. The next important development is what happened Wednesday afternoon. The inevitable collapse never arrived and an early dip bounced and closed near the intraday highs. While no one is getting rich off of Wednesday’s 0.3% gain, the signal it gave us was compelling and worth acting on.
I always remind subscribers that as soon as we get out, we need to start looking for the next opportunity to get back in. Sometimes the next trade comes along as quickly as a few hours later.
I will be the first to admit Wednesday’s bounce wasn’t all that attractive and I was already suspicious of this market, so my gut told me to ignore the bounce. But I don’t trade my gut, I trade my trading plan and that told me to start with a small position Wednesday afternoon. (Buy every bounce: start small, get in early, keep a nearby stop, and only add to a position that is working)
Wednesday’s 0.3% gain counted as a bounce, so I held my nose and bought it. My trading plan told me to add more following Thursday’s strong open, so I bought more. And here I am, holding a nice profit in a trade I didn’t even want to make! This example highlights why we always follow our trading plan, not our gut.
Now who knows, maybe this is just another false bottom on our way lower. But by jumping aboard this bounce early, I have a nice profit cushion that will more than offset any near-term risk. If this bounce fizzles and retreats Friday or next week, I get out at my stops and try again next time. No big deal. And best of all, by being proactive and getting in early, my stops are already at or above my entry points, so this trade is now nearly free to me. Hard to beat that risk/reward.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was a dreadful session for the S&P 500. While the index only lost 0.24%, the price action leading to that small decline was atrocious. And I’m saying that as a person who typically defends this bull market.
Now, don’t get me wrong, I’m definitely not one of those guys claiming the S&P will collapse back to 1,000. But it will get bumpy over the next few days and weeks. As nimble traders, does it really matter if this retreats to 1,000 or 4,200? Why hold through any losses if we don’t have to?
As I often tell readers, how we finish is far more important than how we start. While Tuesday’s finish doesn’t look bad on a daily chart, how we got there tells us a lot about the market’s mood. TL;DR It isn’t good.
In a mirror of Monday’s lethargic price action, stocks bounced early in the sessions, unfortunately, dip buyers failed to take the bait and prices slumped back to the lows. While dip buyers propped up this bull market all year long, all of a sudden they’ve gone missing and that’s a big problem.
As I wrote to Premium Subscribers earlier Tuesday:
Oversold markets bounce hard and fast and there’s been nothing hard or fast about this latest bounce. While I don’t want to be too negative, it is hard to find anything constructive to say about this price action. Vibrant markets just don’t behave this way.
That said, for those of us paying attention, the market is giving us plenty of warning and we have to be thankful for that. While it feels like stock market crashes are instantaneous, the writing is usually on the walls for days and even weeks ahead of time. Unfortunately, most people don’t react to those early warnings and only move after the pain of regret overcomes them.
The market is giving us a chance to get out and it is best to heed its advice. Maybe this next leg lower only undercuts 4,300 support and bounces off of 4,200. But remember, we can only buy the dip if we have cash and that means selling BEFORE the next leg lower. And later, when everyone else is filled with regret and abandoning ship “before things get worse”, we will be there with a pile of cash, ready to pounce on those juicy discounts.
Remember, savvy traders move proactive, not reactive.
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Monday started off well enough for the S&P 500 with the index quickly bouncing above the key 4,400 support level shortly after the open. While it was a promising start, unfortunately, it was all downhill from there and the index skidded over the next 5 hours, finishing at the daily lows and well under 4,400 support.
As I often write, it isn’t how we start but how we finish that matters most. And by that measure, Monday was a dreadful session. The nice tailwind at the start should have tempted out any dip buyers waiting in the wings and it would have been off to the races. But as it turned out, there those dip buyers were nowhere to be found and gravity dominated the rest of the session.
While I want to give this market the benefit of the doubt, days like today make it really hard. I’ve been advocating buying last week’s bounce, but there was no denying the ominous signals Monday’s fizzle gave off and I started moving those positions to cash.
Maybe the bounce is just around the corner, but it looks like this wants to go lower first and that means stepping out of the way. While a lot of inexperienced traders succumb to the impulse to taunt dip buyers for being wrong, if a dip buyer played his cards right, this was actually a very savvy trade.
I advocate getting in early all of the time because that gives us a ton of flexibility. Buying last week was only a mistake if a person waited and bought well after the bounce was established. But for those of us that got in not long after those 4,300 bounces, we were bailing out in the upper 4,300s and actually collected a few bucks for being “wrong”. A trade with 10% upside potential (3x) and if I’m wrong, I still collect a few hundred bucks? I’ll take that every day of the week and it doesn’t matter what names people call me.
Trade smart and you can have your cake and eat it too.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 continues flip-flopping between freaking out and getting over it. Thursday was the first session the index reclaimed 4,400 in over a week and at least for the moment, bulls seem to be winning this tug-of-war near recent lows.
Thursday’s strength bodes well for the market because we probed the lows multiple times over the last week-and-a-half and so far, 4,300 support has been rock solid.
Stairs up and elevator down is the old market saying. If this market was standing on a trapdoor, each of the violations of support over the last several days were more than enough to trigger the next leg lower. Yet rather than accelerate lower, each bout of selling stalled and bounced.
Going down is supposed to be far easier than going up, yet bears cannot get this market to stay under 4,300 support for more than a few hours. That definitely counts as a win for the bulls.
As for how to trade this, the first thing a market needs to do when it is breaking down is to actually go down. That means anything above 4,400 and everything is fine and dandy. Falling under 4,400 but staying above 4,300 is not a huge deal, especially in the upper end of this range. But it is enough to warrant standing near the exits. Fall under 4,300 and all bets are off and it is time to wait for the next buyable bounce.
Stick to those simple guidelines and trading this dip will be easy money. Maybe this bounce is the real bounce. Maybe it isn’t. But as long as we are smart about our trades and ensure we are in the right place at the right time, we will come out ahead in the end.
If you find these posts useful, please return the favor by liking and sharing them!
Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox every evening.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, receive actionable analysis and a trading plan every day during market hours
Follow Jani on Twitter @crackedmarket
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