The simple mistake both bulls and bears keep making

By Jani Ziedins | End of Day Analysis

May 05

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The S&P 500 finished Friday sharply higher as Thursday’s second thoughts are ancient history. The index closed up 1.8% following strong earnings from AAPL and a robust monthly employment report.

The cynics claim strong employment is bad for stocks, but the market no longer falls for the “good is bad” argument, and the index reclaimed the previous two days of selling.

As I’ve been saying for months, this is a choppy market and that means big reversals. Rather than jump on the bull/bear bandwagon every time the market approaches one end of the trading range, smart money is getting ready for the reversal.

And this is exactly what I told readers in Thursday evening’s post titled, “Why smart money is getting ready to buy the next bounce”:

[N]ow that the index slipped back near the April lows and the 50dma, we find ourselves on the other side of this pendulum. Rather than aggressively short this weakness, we should be getting ready for the next bounce. For shorts, that means locking in worthwhile profits. For everyone else, that means getting ready to buy the next bounce.

As I said earlier in the week, 4,200 is still very much in play and nothing has changed, the market is simply taking the long road to get there.

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Markets trade sideways 60% of the time, and this is one of those times. I still expect the index to challenge 4,200 over the next couple of weeks, but even that will only amount to a poke above this key level before slipping back into the trading range.

And I fully expect the sideways grind to continue as we transition into the slower summer months. If this market was going to break out or break down, it would have happened. The best play here is trading these small swings, taking profits, and then getting ready to go in the other direction.

Friday gave us the bounce we’ve been waiting for, and there isn’t much to do other than keep holding, adding more, and lifting our stops. We will be looking to lock in profits soon, but we still have upside left, and it is worth holding a little longer.

That said, our stops need to be at or above our entry points. There are zero excuses to allow a winning trade to turn red on us. As easy as it is to buy back in, pull the plug at our stops and then get ready to buy back in, which could be as soon as a few hours later. But as long as the keeps going up, we keep holding and lifting our stops.

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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.