Don’t make the same mistake bears just made

By Jani Ziedins | End of Day Analysis

Aug 29

Free After-Hours Analysis: 

The S&P 500 popped 1.5% on Tuesday as the index put the screws to the bears.

There were some minor economic headlines, but certainly nothing worthy of launching the index through the 50dma and 4,450 resistance. Instead, this was a massive short squeeze. Bears spent last week planning all of the things they were going to buy with their profits, and instead, found themselves dumped on their butts with a big pile of losses.

But that’s the way this goes. This is a volatile market, and if we are not taking worthwhile profits when we have them, we will be taking losses a few days later.

Luckily, Tuesday’s pop didn’t surprise readers of this free blog because we’ve been riding this rebound and collecting a big pile of 3x ETF profits along the way. As I wrote Monday evening:

As for what comes next, I like what I see. No one is talking about the Chinese economy anymore. If the market doesn’t care, then we don’t care. Powell’s speech last Friday couldn’t bring out the sellers either. And, we violated 4,400 support multiple times over the last two weeks without triggering another follow-on wave of defensive selling, telling us there is not much supply left under our feet.

A market that refuses to go down will eventually go up, and that’s the way this trade is coming together. Stick with what is working and keep lifting our stops.

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Now that the bears have been squeezed out, who is left to keep buying and pushing stocks higher? That’s a good question.

As good as the market looks right now, this is when smart traders are switching to defense. The market didn’t get surprised by amazing and unexpected news, so we shouldn’t expect a huge repricing of stocks. Instead, bears got their latest trade wrong, and this bounce is correcting that fairly minor mistake. Is there a reason to keep racing higher? No, probably not.

Now, don’t get me wrong. Stocks could easily continue racing back to the highs. But that’s not the most likely outcome, and we shouldn’t base our next trade on hope of the unlikely.

We collect worthwhile profits when we have them because if we hold too long, this volatile market will steal them back. Just ask the bears what that feels like.

We don’t need to dump everything, but we should lift our trailing stops to protect our profits and even consider locking in some worthwhile profits proactively. Remember, we only make money when we sell our favorite positions.

Keep holding, lifting stops, and even taking some profits off the table proactively. And once we are out, start looking for that next trade, which could include buying a continuation higher if that’s what the market wants to do.

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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.