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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
The S&P 500 added 0.7% on Tuesday, bouncing back from Monday’s ominous intraday reversal. Not bad given how poor Monday’s price action appeared.
If there is one hard and fast rule in the stock market, it is there are no hard and fast rules in the stock market.
Monday morning’s impressive breakout above 3,900 resistance fizzled and evaporated by the close. That intraday reversal is about as bearish as price action gets. But as is always the case, trading signals operate in probabilities, not absolutes.
While a majority of the time price action like Monday’s leads to further declines, it didn’t happen this time, which is normal and expected. Even something that works 80% of the time will still fail one time for every four times it succeeds.
The lack of guarantees in the markets is why I always trade with contingencies in mind. Even though I liked the short setup Monday afternoon, I started with a partial position and placed a stop nearby. That way, if I was wrong, I had an exit plan in place. And it’s a good thing because I ended up using that exit plan Tuesday and that is the only reason my losses were so modest.
No one is ever right all the time, but traders that succeed over the long term make sure their trading plan limits their losses when they are wrong.
While seeing how things turned out Tuesday, it would be easy to say shorting Monday’s intraday reversal was a mistake, but starting with a small position and a nearby stop, my loss was far smaller than the potential reward if I got it right.
I will take that trade every day of the week because while it didn’t work this time, it will produce big profits more often than not.
Small losses and big rewards are how we make money in the market.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 started the second week of 2023 off well enough, adding more than 1% and extending Friday’s employment-fueled gains. Unfortunately, those midday gains proved fleeting and the index retreated back to breakeven by the close.
Over the last few weeks, we could have written off this impotent price action because institutional money was on vacation and this was nothing more than over-active retail traders running amok. But by now most institutional money managers are back in the office and that means this price action counts.
And Monday’s failed breakout doesn’t look good. Stocks rallied to start the week and rather than embrace the strength, big money turned its back and let prices fall.
While one day can’t kill a market by itself, it can put a serious dent in any rebound attempt. Fall much lower and all of Friday’s gains are vulnerable.
The market is at a critical tipping point and how it responds Tuesday will tell us a lot about the market’s mood going forward. Retreat back to 3,800 over the next few sessions and 3,600 becomes the next most obvious target. But on the other hand, if buyers return Tuesday, Monday’s indigestion is forgotten and 4k is up next.
Plan your next trade accordingly.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
2023 started the same way 2022 ended, volatile and directionless. The S&P 500 opened Tuesday’s session with nice gains, but minutes later the index retreated into the red and quickly retested 3,800 support.
As dramatic as that 80-point collapse felt, rather than trigger a bigger wave of follow-on selling, supply dried up and prices bounced, which wasn’t a surprise because that’s exactly what we’ve seen every time the market tested 3,800 support over the last couple of weeks.
Big money is still on vacation, and that means retail investors are still in control. And in typical retail fashion, these impulsive traders overreact to every little bump in the road. Lucky for us, their accounts are so small they run out of money long before they can do any real damage.
Big money starts returning to the office later this week and into next week. That’s when we will get a better sense of the market’s mood and what direction we’re headed next. Until then, expect these choppy reversals to continue.
As for trading this chop over the next couple of sessions, if dumb money is selling, the smart move is fading that weakness. I bought this morning’s bounce off 3,800 support with a stop just under this level. While not a high-probability, high-reward trade, if I can get in with such limited risk, why wouldn’t I give it a shot?
And the same goes for when prices approach the upper end of the recent trading range Wednesday. When dumb money starts buying is when I plan on harvesting profits in this trade.
The next directional move is coming, but we will get a few more of these dramatic intraday reversals first. Might as well take advantage of them while we can.
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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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