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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 surged 1.3% Thursday after we got a few more pieces of data showing inflation continues falling.
Sure, inflation’s retreat is slower than most hoped for or even expected, but most sensible people agree we avoided the worst-case scenario the pessimists were predicting last year. Less bad-than-feared has been the name of the game this year as stocks continue trading near recent highs.
If we look at the headlines that allegedly triggered Thursday’s surge, they are fairly benign. That means it wasn’t the headlines driving this one-way buying frenzy, but traders reacting to the price action. More specifically, overly ambitious bears getting blown out of their short positions.
Lucky for readers of this blog, Thursday’s reversal didn’t catch us off guard. As I wrote Wednesday evening:
The lack of a breakout or a breakdown is frustrating the people who are trading in anticipation of these things. As I’ve been saying for a while, this is a range-bound market and that means lots and lots of reversals. If a person has profits and they are not collecting them, those profits will be gone in days, if not hours.
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While a short squeeze produces quick profits for those of us lucky enough to be positioned on the right side of the reversal, the downside of short squeezes is they don’t have much staying power.
As nice as riding Thursday’s wave higher was, savvy traders are standing next to the exits if they are not already locking in worthwhile profits.
As I’ve been telling readers for months, this is a back-and-forth market, not a directional one. While the headlines are less-bad-than-feared, that’s a long way from being good enough to send stocks back to record highs. Until something changes, expect stocks to continue trading sideways inside the 3,800-4,200 trading range.
No doubt it is hard to pull the plug on a trade that’s working as well as buying Thursday’s rebound, but it is far more painful to watch a winning trade turn into a loser because we got greedy and held too long. Just ask greedy bears that watched all of Wednesday’s short profits vanish into thin air.
And you know what? If we end up collecting profits too early because Thursday really was the start of the next big run to record highs, nothing prevents us from buying back in on Friday or next week.
Until proven otherwise, I will continue taking profits early and often because up to this point, the reversals have never been far away. If we’re not taking profits, then we will get stuck taking losses a day or two later.
This pattern will change at and we will eventtually get a bigger directional move, but this is not that point.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Wednesday down 0.4% after the monthly inflation report dipped to 5%, the lowest reading in nearly two years.
Stocks reflexively rallied on the news of falling inflation. However, the midday strength evaporated when the Fed’s latest meeting minutes revealed they were still contemplating another rate hike at their next meeting.
The good and bad cancel each other out and the market finds itself stuck in the middle of its latest consolidation near 4,100 resistance.
At this point, it would be hard for either bulls or bears to claim recent price action supports their arguments. The March rebound has clearly stalled near 4,100 resistance as prospective buyers grow leery of these elevated prices. But at the same time, bears’ widely predicted collapse from “too high” is nowhere to be found.
At this point, it feels like the market is settling into “just right” as it waits for the next meaningful data point. Stock prices would have reacted far more aggressively if either of Wednesday’s headlines were a surprise. Instead, the market expected inflation to cool modestly and for the Fed to contemplate another rate hike.
The lack of a breakout or a breakdown is frustrating the people who are trading in anticipation of these things. As I’ve been saying for a while, this is a range-bound market and that means lots and lots of reversals. If a person has profits and they are not collecting them, those profits will be gone in days, if not hours.
Savvy traders know this is the environment to stay nimble and take profits early and often. The next big directional trade is coming, but this isn’t it. If you are not taking profits when you have them, you will end up with a pile of losses.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Tuesday almost exactly where Monday’s session ended.
The flat trade over the last week is proving both bulls and bears wrong. As I’ve been writing for a while, this is a sideways market, not a directional one.
Economic headlines are largely stable, meaning bulls are not turning into bears and bears are not turning into bulls. When few people are changing their minds, stocks end up rangebound.
Sure, it’s been a nice run from the March lows, but now that we are at the upper end of the trading range, rather than get greedy and keep holding, savvy traders are collecting profits and getting ready for the next trade.
Trading is a game of managing risks and rewards. March’s run consumed a whole lot of reward, meaning there is far less upside left for those still holding. Pushing up near multi-month highs means the risks of holding is greater than they were at lower levels.
At the same time, only fools are rushing to short everything they can get their hands on because “stocks are too high.” Momentum is far more likely to continue than reverse, so anyone betting against recent strength is going against the odds.
We are traders and we want to trade, but sometimes the best trade is simply waiting for the next trade. Making money is a lot easier when the risk/reward is stacked in our favor.
Maybe we get an unexpected headline that sends us back to the lower end of the 3,800-4,200 trading range. Or maybe something good happens and we push through old resistance. But until either one of those things actually happens, I’m happy watching this from the sidelines.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped another -0.3% Wednesday as the index continues struggling with 4,100 resistance.
While everyone is busy arguing about the latest headlines, what’s on the front pages doesn’t impact the economy and thus, is not important to the stock market. Instead, this latest bout of selling is simply an exhale following last week’s big run to multi-month highs.
Lucky for readers, we were ready for this stalling. As I wrote Monday night:
Stocks move in waves; they always have and always will. After a nice run like that, rather than pat myself on the back for profiting from March’s reversal, I’m getting nervous that too much of a good thing can end poorly for anyone that holds too long.
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Now, to be clear, I’m not calling Tuesday’s opening highs a top, but there always comes the point where we have to decide that good enough is good enough.
Risk is a function of height, meaning these are the riskiest levels since early February. And more than that, March’s 300-point rebound consumed a whole lot of near-term upside. Less reward and higher risk equal an unfavorable time to be buying or holding stocks.
Sure, momentum is higher and that means prices can continue drifting to even higher levels, but all good things must come to an end, and the odds are working against March’s rebound at these prices.
Until proven otherwise, this is a choppy, sideways market and we are currently near the upper end of the 3,800/4,200 trading range. Common sense makes this the place to take profits and prepare for the next trade.
And guess what? If the short squeeze continues next week, there is nothing that says we cannot buy back in and enjoy that ride higher. Just because we sell doesn’t mean we have to give up. We are always in the fight, but savvy traders are not naive enough to push their luck when the risk/reward is no longer working in their favor.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 added 0.4% Monday, extending last week’s big run above 4,100.
These gains leave the index near the highest levels of the year, a far cry from the banking crisis lows from a couple of weeks ago.
It is obvious now that buying the overblown fear was the right call; luckily, readers were ready for it. As I wrote last month, just before the market bottomed and bounced:
[I]f the market bounces following next week’s inflation data, I will be one of the first to jump aboard that bandwagon. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.If the selling resumes and I get dumped out again for a small loss again, it happens. For every bounce that works, there will be two or three that don’t. But as long as my losses are on partial positions and my wins are with full positions, I will come out ahead in the end.
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Now, to be clear, I wasn’t predicting a 300-point rally from those lows over the next few weeks, but I did recognize that the rubber band had stretched pretty far in one direction and the potential for a reversal was high. And that’s exactly what we got.
But now that we are 300 points higher and the crowd is far more comfortable, I’m worried about the opposite.
Stocks move in waves; they always have and always will. After a nice run like that, rather than pat myself on the back for profiting from March’s reversal, I’m getting nervous that too much of a good thing can end poorly for anyone that holds too long.
Don’t get me wrong, I’m not calling this a top. Momentum is far more likely to continue than it is to reverse, but with 300 points of upside in our rearview mirror, this is the wrong time to be getting greedy. Savvy traders are taking worthwhile profits and getting ready for the next opportunity.
That said, the other critical thing is to resist the urge to fall for “too far too fast.” No doubt this latest wave of buying will end in a wave of selling, but we want to see that wave start before we jump aboard the short bandwagon. There are few ways to lose money faster than shorting “too far too fast.” This is one of those times when it is better to be a little late than a lot early.
It’s been a good run, but now is the time to lock in profits and prepare for the next trade. (Which could include catching the next wave higher if the short squeeze keeps going.)
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What’s a good trade worth to you?
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For less than $1/day, receive actionable analysis and a trading plan every day during market hours
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