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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
The S&P 500 tumbled Tuesday for the second session in a row. While two material down days isn’t much fun for stock owners, so far the selling has been contained and the index bounced nicely off of 4,600 support.
During events like this, most people are asking themselves, sell the dip or keep holding?
But the better question is, why not do a little bit of both?
All too often people think of trading as a binary decision. Good or bad. Up or down. All-in or all-out. But that’s not the way savvy traders approach the market. They don’t even restrict themselves to these black and white terms. Instead, they focus on the gray of managing risk.
Is this a good time to be fully invested or does it make sense to peel off some risk? That’s a much different question than should I sell or should I keep holding.
I’m pretty confident this dip will bounce. Because you know what, every dip over the last 10 years has bounced. In fact, every dip in the history of the stock market has bounced back even higher.
The question is if I want to wait that long. And as a trader, the answer is always, “Of course not.”
I started peeling off risk when this starts falling and I start getting edging back in when prices bounce.
Sometimes this approach leads to riding through some whipsaws, like this week. But riding whipsaws sure beats holding something that is falling.
I peeled off some risk Monday afternoon and sold more when the index undercut the opening lows Tuesday morning. But prices bounced nicely off of 4,600 support in midday trade and that was our signal to start buying back in.
Sure, I could have held through this dip. The problem is I never know which dip will turn out to be the real dip and I’m not willing to bet my trading account on always being right.
The simple answer is I treat all of the dips as the real deal and I treat all of the bounces the same way. That way I always ensure I will be standing in the right spot at the right time when the market makes its next big move. And if I have to chase my tail every once in a while, it really isn’t that big of a deal.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 set a new record closing high Friday and then proceeded to give it all back Monday. Easy come easy go, but that’s the way this goes sometimes.
I don’t mind occasional down days mixed in with up days, in fact, I prefer my rallies balanced this way. It keeps things from getting overheated and how healthy, long-term rallies progress.
That said, Monday’s close falls in the disappointing category because it finished on a swift wave of selling and closed at the intraday lows. Thirty minutes before the close, the situation looked pretty decent. But those final 15-minutes changed everything and left me with an uneasy feeling. Not panic, abandon hope, and run for the hills kind of feeling, but it was enough to warrant caution.
If a person is cautious by nature, they could have peeled off some nice profits near the close just in case. But that is only a partial position reduction to better manage risk. On the other hand, a more aggressive person could continue holding since the close was still well above our stops in the mid-460s.
Like a lot of trading, this situation falls in the gray area where individual discretion plays a major role in decinding what to do. Nervous? Sell some. Confident? Hold and see what happens tomorrow. Both are valid ways of dealing with Monday’s disappointing close.
But no matter what we do, anytime we sell, we are always looking for that next opportunity to get back in. If we sold anything Monday afternoon, be ready to buy a bounce Tuesday morning. And if Monday’s selling continues instead, always respect our stops spread across the mid-4,600s.
But no matter what happens Tuesday, Wednesday, and Thursday, any near-term weakness is giving us a buying opportunity. No matter what the cynics claim, weak markets don’t keep setting new record highs. This remains a strong market and there is only one way to trade this and that is from the long side.
Bitcoin keeps hitting its head on $50k resistance and dip-buyers are nowhere to be found. This weekend’s quick poke above $50k didn’t last long and the cryptocurrency retreated back to the mid-$40k’s.
For me, this doesn’t get interesting until it can hold $50k. Until then this is a no-touch. As I often say, it is better to be a little late than a lot early. Just ask anyone that bought a few weeks ago in the upper $50k’s.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 added a modest 0.3% Wednesday, but that was good enough to make this three up days in a row and leaves the index within 1% of all-time highs. Not a bad result given all the panic selling we were experiencing only a few sessions ago.
But that’s the way this usually works. Prices don’t bounce until the crowd has given up and now a lot of impulsive sellers are left watching this rebound from the outside.
I’m a huge believer in using stops to protect my backside. There is never a valid reason for a nimble trader to hold through a larger pullback. But at the same time, I also recognize stops often get us out unnecessarily.
So what’s a trader to do when faced with these competing concerns of selling just before the bounce or holding through a larger decline?
It actually isn’t that hard if we start with a sensible trading plan.
First and foremost, never be foolish and cheat our stops by holding a falling market. I always get out when I say I’m going to get out.
But once I’m out, the first thing I do is start looking for that next opportunity to get back in. Maybe that causes me to chase my tail every once in a while. But you know what? I would much rather chase my tail than A) hold through a larger decline or B) miss out on the next big rebound.
As it turns out, tail chasing is really cheap insurance that helps ensure we sidestep the big declines while also making sure we are in the right spot at the right time to catch the next big wave higher.
All too often people get hung up, thinking a trade is dead once they sell and they have some phobia about getting back in. If it was a great trade before, it is probably still a great trade and there is no reason to avoid it because of a perfectly normal, healthy, and temporary step back.
As for stops, the best way to avoid getting out at the wrong time is by getting out early. Sell at the beginning of the decline when the first signs something is wrong emerge. Not the bottom of a dip when impulsive traders pull the plug after getting overcome by fear and regret.
As I often remind readers, start small, get in early, keep a nearby stop, and only add to a trade that is working. Follow those simple rules and events like Omicron hubbub are nothing more than a blip on our way higher.
GME posted disappointing earnings after the close.
But did this actually surprise anyone? This is a retailer with an obviously obsolete business model.
Their last hail mary is Christmas shopping and if they cannot get their act together this quarter, the company won’t survive, let alone justify of $13 billion valuation.
At best, this is a $15 stock selling for $170. Get out while you still can.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 popped 2% Tuesday and the index is back within 1% of all-time highs.
So much for Omicron. But that’s the way this usually goes. As I wrote last week:
Trends are far more likely to continue than reverse. That’s because a bull market bounces countless times but dies only once…Bears have been wrong all year, so what are the odds they’re right this time? Yeah, not very good.
While this is really easy to say following two big up days, there was nothing easy about buying Friday’s late bounce and adding more money Monday morning. But from years of experience, personal reluctance is usually a really good sign.
As a rule, if I really want to make a trade, it is probably too early. And f I’m dragging my feet and trying to find an excuse to avoid a trade, that is usually a really good sign.
This was definitely the case last Friday. After stubbing my toe buying the previous bounces, it was hard to not get discouraged. But I’ve been doing this long enough to know these trades only work after most people have given up, so the key is being more stubborn than most.
As long as we have a sensible trading plan that is both nimble (getting in early and getting out early) and manages our risk (starting small), we don’t have a lot to fear from buying these bounces and being wrong.
Without a doubt, I got caught on the wrong side of some of last week’s whipsaws, but if the risk is a dozen points on a partial position last week and the reward is more than 100 points of profit on a full position this week, sign me up! I don’t mind being wrong a few times when it pays this well.
And now that the market’s bounced nicely, there is nothing to do but lift our stops and see where this goes.
Last week I asked if FB is so bad it’s good?
Well, we got our answer this week and the answer is a resounding yes. FB is up nearly 8% from last Friday’s lows and anyone that bought the bounce is sitting on some healthy profits.
As I wrote last week:
Violating support before bouncing is an even more bullish trading signal than simply bouncing off of support because it shows selling capitulation and that bears have lost control of this trade.
That’s exactly what happened on Friday and Monday and this FB trade is setting up really nicely. Just like our index trade, lift our stops up to our entry point and see where this goes.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Monday nicely higher as the pattern of alternating up and down moves continue.
Omicron remains a major headline, but while this variant is definitely more transmissible, it doesn’t seem obviously more dangerous than previous strains. In fact, some initial indications suggest it could actually be more mild, especially for those that have been vaccinated.
In separate news, the Fed is still hinting it will scale back monetary stimulus next year. While everyone loves free money, an economy that can stand on its own is even better for stocks.
Despite all of the fearmongering, the index remains within 3% of all-time highs. As much as cynics ridicule this bull, owners are comfortable and continue confidently holding for higher prices.
While conventional wisdom warns us about complacent markets, this bull has been fat, dumb, and happy all year and it doesn’t look like this latest crop of headlines is changing anyone’s minds.
Headlines don’t need to be good for stocks to rally, only less bad than feared and so far none of the worst-case scenarios are playing out. As I often say, a market that refuses to go down will eventually go up.
While buying bounces sounds easy enough, the market is never easy and most bounces throw a few curveballs at us first. If trading was easy, everyone would be rich and we know that’s not the case.
Sometimes we get caught on the wrong side of these whipsaws, but that’s just the nature of the beast. If we can’t handle a little up and down, then we’re definitely in the wrong line of work.
But as long as we stick to our trading plan, these speedbumps are fairly easy to navigate. Remember, success in the market isn’t about individual trades, but the cumulative result when we put all of our trades together.
While riding these whipsaws is frustrating, the reward will be worth it when we find ourselves in the right spot at the right time when the market finally bounces.
Remember, start small, get in early, keep a nearby stop, only add to a trade that is working, and if we get stopped out, no big deal, wait for the next bounce and do it all over again.
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What’s a good trade worth to you?
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