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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 tumbled at Tuesday’s open, easily undercutting 4,100 support. But within 10 minutes, the storm passed and it was all uphill from there. By the close, the morning’s 1% loss turned into a very respectable 1% gain.
If trading were easy, everyone would be rich. Sometimes the market needs to convince us we’re wrong moments before proving us right. It appears that’s all Tuesday’s momentary violation of 4,100 was, a little head fake before resuming May’s rebound.
The encouraging thing about the dip under support is it didn’t find many sellers. In fact, within minutes supply dried up and prices bounced. While I’d love to see the index charge higher every single day, the market doesn’t work that way. Sometimes we need to go through a few stepbacks before we can start the next leg higher.
As I wrote in Monday evening’s free post, I pulled the plug on a portion of my position Monday afternoon when early strength fizzled and the index closed at the intraday lows. While that weakness didn’t cross my stops, it was enough of a warning flag to convince me to take some risk off the table.
That caution appeared to be the right call when the index tumbled Tuesday morning. In fact, that gap jumped over some of my stops. But an opening gap is the single exception to my stop loss rule. Rather than reflexively sell the open, I give the market 15ish minutes to find its footing because more often than not, opening gaps bounce. Since I already took the biggest lump at the open, holding for a few more minutes to see if prices bounce doesn’t add a lot to my risk. If the selling continues, I get out a few points lower. If prices bounce, the early lows become my new stops and I keep holding.
As luck would have it, Tuesday’s early weakness bounced and I didn’t have to sell. And more impressively, when the index retook 4,100, I started adding back in what I sold the previous afternoon.
The market has a nasty habit of knowing exactly where our stops are and it loves violating them. But the best part about being a nimble trader is we can both stay safe and still be in a position to profit from the upside. As easy as buying back in is, there is no reason to stubbornly hold a dip. For as many times as being stubborn works, there are a dozen times it bites us in the ass. I would much rather sell and buy back in hours later than I would watch the losses pile up as I keep waiting for a bounce that never comes.
That sounds like a lot of effort for what amounted to an unnecessary trade, but protection against larger losses doesn’t come free. Just because holding worked this time doesn’t mean it will work next time. (Just ask all the people waiting for the market to bounce back above 4,500.)
Now that the index is back above 4,150, I can spread my stops across the lower 4,100s. If we retest support again this week, there is no coming back from that and lower prices are ahead. But since four tests of 4,100 support over the last five trading sessions failed to break the dam, it appears we are standing on solid ground and a continuation to 4,300 is the most likely outcome.
Keep holding for higher prices and continue lifting our trailing stops.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Monday 0.3% higher and remains above 4,100 support for the sixth session in a row.
While that sounds like a decent result, open the intraday chart and the situation looks a lot less encouraging. This is the second day in a row the index finished at the intraday lows and the fourth time that’s happened out of the last five sessions.
As I often remind readers, it’s not how we start but how we finish that matters most. While Monday finished in the green, that 0.3% close was well under the morning’s highs. The index popped 1.3% in early trade, buyers disappeared, and we finished at the intraday lows. That’s as ugly as it gets for a day that technically finishes green.
The index is still a handful of points above 4,100 support, but at this rate, a violation is all but inevitable.
I still think May’s rebound has the potential to challenge 4,300 over the next few weeks, but we need to tread carefully over the next few days. The market is far stronger than any of us and it doesn’t care what we think. If it wants to dip under 4,100 and retest 4k support, who am I to argue with it? I will gladly take profits near 4,100 and wait to buy the next bounce.
While my stops are spread under 4,100 support and they didn’t get violated by Monday’s late retreat, the weak closing price action convinced me to start peeling off some profits proactively. Buying back in is always a lot easier than praying the market bounces back to the levels I wish I sold at.
I shifted to a defensive posture and took some profits but I only peeled off a partial position. Rather than lurch all-in and all-out of the market, I like hedging my bets by moving in partial positions. If the index tumbles Tuesday, I took some profits at higher prices and have those funds safely in my pocket. On the other hand, if the index bounces back Tuesday, I’m still holding a partial position and can put the rest of my money back in. That’s a win-win in my book.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday’s session got off to a rocky start after MSFT issued a revenue warning. That was enough to push the S&P 500 into the red for the third day in a row.
But as I often write, how we finish is far more important than how we start. And by that measure, Thursday turned out to be a fantastic session. Over the next several hours, the index surged 100 points, not only pulling itself out of that early hole but also erasing all of Tuesday’s and Wednesday’s losses, leaving us at the highest levels in nearly a month.
While headlines continue to be overwhelmingly negative and suggest lower stock prices, after two months of living under these storm clouds, it seems like we finally ran out of fearful owners willing to sell a retelling of those same old headlines.
No matter what the headlines are, eventually we reach a point where we exhaust the supply of sellers and that’s when those headlines stop mattering, ie the bad news gets priced in. A spike in oil prices. The Fed promising two more half-point hikes this summer. Inflation weighing on corporate earnings. It’s all a slightly different version of what we’ve been hearing for months.
As bad as things seem on the surface, we always reach a point where the market goes too far and prices bounce back despite the headlines. It took a while, but it seems like we finally passed that near-term capitulation point.
At this point, 4,300 is still very much on the table. Maybe this ultimately turns out to be nothing more than a dead-cat bounce on our way lower. But the near-term trend is decisively higher and that makes this a very buyable bounce.
Follow the headlines and we’d never buy anything. But do this long enough and it becomes obvious that even the most dreadful bear markets have big bounces on their way lower.
I’m not convinced this will be a particularly bad bear market. But even if that’s where we are headed, this is still a great near-term buying opportunity.
If this rebound stalls and retreats Friday or early next week, no problem, I pull the plug at my trailing stops, collect some handy profits and run. But until that happens, this is acting like it still wants to go higher and that means riding this wave as far as it will take me.
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