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By Jani Ziedins | End of Day Analysis , Free CMU
Free After-Hours Analysis:
Wednesday’s resilient price action shows overnight traders don’t have a clue what they’re doing. The S&P 500 opened Wednesday’s session by gapping down nearly 1%. But those opening levels were as bad as it got and prices rallied nicely through the day. So much for all the death and destruction the futures market predicted a few hours earlier.
The problem with overnight markets is their thin volume allows them to be dominated by emotional retail traders. There is no way institutional investors can find the number of buyers and sellers they need to move their huge positions. That leaves basement dwellers and overseas speculators in control of a market they clearly don’t understand.
While these small traders can influence the open like they did Wednesday morning, when institutional investors show up for regular hours trade, they don’t give a hoot what overnight traders were doing. Instead, most of the time they go back to doing what they were doing the day before, which in this case was buying the bounce.
The best thing we can do if we find ourselves on the wrong side of an opening gap is to keep our cool. Often big overnight gaps reverse within hours. This is exactly what happened Wednesday when the daily low was within an hour of the open and the index rallied through the day, ultimately finished 1.5% above those early doom and gloom levels.
And this strategy isn’t just for protecting existing positions, if we have cash on hand, buy the early bounce with a stop under the early lows and enjoy the ride. If it doesn’t work out, no problem, get out near your entry point and wait for the next bounce.
As for what comes next for the market overall, always pay attention to how we close because how we open doesn’t count for squat. Wednesday was a nice close and even with the wind at their backs Wednesday morning, bears couldn’t extend the selloff. It definitely feels like we are running out of sellers at these levels and that is a recipe for a near-term bounce.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Meltdown, bounce back, meltdown, bounce back; the S&P 500 continues wrestling with what it wants to do next.
Following Monday’s meltdown, it felt like we were standing on a trapdoor, waiting for that next leg lower. Almost on cue, Tuesday bounced back, recovering nearly all of Monday’s losses. And so swings the pendulum of sentiment.
While it definitely feels like a bruising few weeks for bulls, they actually haven’t been doing too poorly since September 19th’s sharp down day. While the market probed and even violated those initial intraday lows, the selling keeps stalling and bounced not long after.
I could delve into all of the fundamental and technical reasons the market is doing what is it doing, but does it really matter? As speculators, all we want to know is how to trade this volatility. Lucky for readers I spelled it out Monday evening:
The simplest way of trading a volatile market is following its lead. If the selling continues Tuesday, we step aside and let it do its thing. If prices bounce Tuesday, we buy the bounce.
Guess what, Tuesday morning brought good news and the bounce is back on! For those of us that acted early, we got in at nice levels and were even able to lift our stops to our purchase price in the afternoon, more or less giving ourselves a free trade.
If this bounce keeps going, great, I collect all of those profits. If the bounce fizzles and retreats again, no big deal, I get out near my entry point and try again next time.
People beg for low-risk, high-reward trades. Well, guess what, the market just answered our prayers. Did you jump on the opportunity?
Now we wait to see what Wednesday brings….
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
The S&P 500 remains near multi-week lows as it processes the recent selloff.
Higher or lower, that is the question. And right now the S&P 500 is standing on the trapdoor.
The encouraging news is we violated recent lows multiple times over the last few sessions without triggering a larger tidal wave of defensive selling. Dip buyers often leave stop-losses under the lows and any violation triggers waves of reflexive selling. But so far, we slipped under the lows from two weeks ago and these subsequent violations failed to trigger follow-on waves of selling.
This is good for the market because it means most owners are holding steady and are not letting some arbitrary level determine their next trading decision. The bad news is the longer we hold near the lows, the more likely it is we violate them and few things shatter confidence like screens filled with red.
While we have inflation, debt ceiling, and Evergrande headlines swirling around us, that is largely a distraction from what is really driving this volatility, sentiment. Traders ignored headlines all year and there is no reason this latest round of headlines is any more significant. Instead, many traders realize it’s been a nice run and they fear the “inevitable” pullback more than anything in the press. These people are not selling because they fear inflation or Evergrande, they are selling because they want to get out before other people start selling. It is simple as that.
And so the answer to the question of what comes next comes down to how many people are confidently waiting for the bounce versus how many are on the verge of abandoning ship.
While lots of people are speculating over what comes next and it’s been a long time since I heard this many people predict a stock market crash, only time will tell what comes next. If there was a reliable indicator, everyone would use it. And since people promote a million different indicators, we know most of them don’t work. Because if one worked, we wouldn’t need the million other indicators.
Anyway, the simplest way of trading a volatile market is following its lead. If the selling continues Tuesday, we step aside and let it do its thing. If prices bounce Tuesday afternoon, we buy the bounce again. And if we get an inconclusive indication (not a bounce and not a further collapse), we simply push this decision to Wednesday.
And as always, start small, get in early, keep a nearby stop, and only add to a trade that is working. While buying Friday’s bounce didn’t work, if we are sensible about the way we enter a position, the risks are small and the potential rewards of getting it right are large.
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What’s a good trade worth to you?
How about avoiding a loss?
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