When it works, it really works!

By Jani Ziedins | End of Day Analysis

May 04

Free After-Hours Analysis:

Monday evening I wrote the aptly titled post, “Why I’m not giving up and neither should you.” In it I said:

Everyone knows markets move in waves, yet people always forget this very simple fact in the heat of battle. Sell at the top, not at the bottom. Buy at the bottom, not at the top. While everyone understands that, so few people actually do it.

I bought last Thursday’s bounce. It looked great. But as is often the case, it didn’t work. I got dumped out near my entry points for a very inconsequential breakeven trade, and now I’m buying Monday’s late bounce. See how that works?

Will I make money Tuesday? Maybe, maybe not. But with my stops already near my entry points, I don’t have much to lose if I’m wrong and everything to gain if this finally takes off.

Well, here we are two days later and man did this thing take off. (Trade this in a 3x ETF like I do and that adds up to real money!)

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The Fed jacked up interest rates in the biggest one-day jump in two decades. How did the market respond? By rallying 3% on Wednesday. Funny how that works.

But this doesn’t surprise long-time market watchers. “Sell the rumor, buy the news” is as old as the market itself. Stocks tumbled weeks ago when Powell told us he was going to raise rates by 0.5%.

And guess what? The Fed did exactly what Powell told us he was going to do. But stocks rallied 3% anyway. That’s because as is usually the case, the market overreacts to bad news and then it pops back when reality turns out less bad than feared. In this case, the market cheered when Powell said the Fed wasn’t considering 0.75% rate increases anytime soon.

Anyway, as I wrote in Monday’s post, markets move in waves and it shouldn’t surprise anyone when a month-long skid ends in a big bounce.

While catching this bounce wasn’t easy and there were several false bottoms along the way. By starting small, getting in early, keeping a nearby stop, and only adding to a trade that’s working, I got out of my “mistakes” for breakeven.

More important than the result of those little tests is that I was making sure I was always going to be standing in the right place at the right time. While those previous bounces fizzled and dumped me out near my entry points, I knew the big pop was coming. And as it turned out, Wednesday was that day.

As for what comes next, Monday very well could be a near-term capitulation bottom and that means higher prices are still ahead. For those of us that got in early, move stops up to protect profits and keep holding to see where this goes.

For those that missed the bounce, the bounce will probably continue higher over the next few days and weeks, but buying late means taking a lot more risk. This shows why smart money is buying when everyone else thinks they are acting foolish. The real bounce doesn’t happen until after most people have given up, and that’s why savvy traders are more persistent than most people.

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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.