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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Thursday’s session essentially unchanged, but anyone who only saw that flat close would have no idea of the wild ride the market took us on.
Before the opening, we got the latest CPI data that showed inflation trucking along at a 3.2% rate in July. Not good, but also not bad. In fact, this initially appeared to be the Goldilox number many investors hoped for, and prices surged more than 60 points shortly after the open. So far, so good. Unfortunately, the market had other plans.
Rather than attract a follow-on wave of buying, big money started selling the early strength until it was all gone, and we finished the day right back where we started.
While we should resist the urge to get overly pessimistic following a session that closed flat, it is hard to find much good to say about Thursday’s price action.
This was the third time in recent weeks the market took a strong open and fumbled it into a disappointing close. Remember, how we close matters far more than how we start. And by that measure, it is hard to get excited about the market’s mood. We’ve passed up multiple opportunities to bounce back to the highs because the sellers keep taking over.
I’m not going to give up on this market just yet because trends are far more likely to continue than reverse, but we can only give it so many free passes before we have to take a far more critical look. 4,450 has been acting as support this week and the 50dma is quickly catching up. Stay above these key technical levels and smart money is still giving the uptrend the benefit of the doubt. But fall under these levels and all bets are off.
As crazy as it sounds, I will be happy to buy a bounce off of 4,450 Friday, but I will start small and keep a nearby stop because if the selling returns, it will get ugly and we shouldn’t expect 4,450 to save us again.
On the other hand, if a violation of 4,450 turns devolves into a waterfall selloff, that becomes a nice short entry with a stop just above Thursday’s close.
The market is at a tipping point and about to break strongly in one direction or the other. While bulls and bears are busy arguing over who is right, I’m waiting for the market to reveal its hand so I can jump aboard the next move. As long as I’m making money, it doesn’t matter to me who is right.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
It’s been a choppy few sessions as the S&P 500 takes a step back from 4,600 resistance.
Between a sluggish Chinese economy and renewed scrutiny of regional banks, overnight futures traders were not in a good mood Tuesday morning and the index skidded more than 1% in early trade. But as ominous as that open felt, most investors shrugged and didn’t sell. The initial wave of selling stalled 90 minutes after the open and the index bounced more than 30 points by the close. Even though the session ultimately closed down 0.4%, considering how the session started, it was a good day for bulls.
As I’ve written in previous posts, the domestic equity market hasn’t cared about China in years and the regional banking crisis is old news. If these events hadn’t taken us down previously, there is little reason to think Tuesday’s headline reruns would turn out any differently. While any headline can trigger momentary bouts of second-guessing near recent highs, we need something truly new and unexpected to flip the market’s stubbornly half-full mood.
At this point, this latest test of 4,500 support looks like nothing more than a vanilla step back following a big run higher. Without a doubt, the selling can resume, but given this afternoon’s nice bounce, it doesn’t look like this is the end of the uptrend.
For the nimble, Tuesday’s bounce was buyable with a stop under those early lows. If the bounce continues on Wednesday, add more and lift stops. If the selling returns, get out and wait for the next opportunity. This is an easy setup for those with the courage to take advantage of the market’s momentary second-guessing.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped another quarter percent Thursday, adding to Wednesday’s US debt downgrade selloff.
But as far as selloffs go, Thursday’s decline was fairly benign. The index hit its lowest point early in the morning, and prices were comfortably above those initial levels for the remainder of the session, even getting into the green for a bit.
Lucky for readers, Thursday’s midday bounce wasn’t a surprise:
We traveled this road 12 years ago, the last time US debt was downgraded. That 2011 episode launched a meaningful, multi-month selloff in stocks. Are we in store for the same thing this time? No, probably not.
Novel events trigger fear and uncertainty because no one knows what is going to happen and with nothing to go on, people often fear the worst. But since we’ve already been down this downgrade path, there will be far less uncertainty this time.
Less uncertainty = less anxiety = less impulsive selling
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Runaway selloffs, well…runaway. They crash day after day and don’t look back. Thursday’s price-action was the opposite of runaway selling. The index opened low, and rather than rush for the exits, dip-buyers gobbled up the discounts and bid up prices.
The thing about panicked selloffs is we need panic. Thursday’s constructive trade took a load of pressure off of nervous owners. Another reassuring session like this on Friday and the 2023 US debt downgrade crash is already over.
Savvy traders recognized early Thursday that the next wave of selling wasn’t coming, and rather than argue with the market, they collected profits and got ready for the next trade.
Now, don’t get me wrong, we could definitely fall into another hole of impulsive selling on Friday, but at this point, the odds of that happening are not very good. If owners were going to panic, it should have happened on Thursday. Another flattish session on Friday and most owners will be breathing a sigh of relief since most investors are reluctant to sell their favorite stocks at a discount.
As for how to trade Friday, savvy traders are already in cash and ready to jump on the next trading opportunity. If the aggressive selling returns Friday morning, short that with a stop above Thursday’s close. On the other hand, if prices turn green on Friday, buy the bounce with a stop under Thursday’s lows.
As I wrote earlier in the week, I was positioned for this selloff, and it turned into a great trade with 3x leverage. But if the selloff is already showing signs of bouncing, it is time to collect profits and get ready for what comes next. I don’t care what happens as long as my trading plan keeps me on the right side of the market.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 tumbled Wednesday after a rating agency downgraded US debt.
We traveled this road 12 years ago, the last time US debt was downgraded. That 2011 episode launched a meaningful, multi-month selloff in stocks. Are we in store for the same thing this time? No, probably not.
Novel events trigger fear and uncertainty because no one knows what is going to happen and with nothing to go on, people often fear the worst. But since we’ve already been down this downgrade path, there will be far less uncertainty this time.
Less uncertainty = less anxiety = less impulsive selling
But just because we won’t fall into another spiral of impulsive selling doesn’t mean this event cannot drag down equity prices over the near term. The market experienced a whole lot of up lately, and no matter the reason, these lofty prices left us vulnerable to a very routine and even healthy step back.
At this point, I’m looking at 4,600 as a tipping point. Either we keep going higher, or we don’t. If the rally resumes later this week or next week, I will buy back in. But if the market is finally ready to take a break and cool off, I’m happy to short the step back to 4,400 support.
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There is no way I could have predicted this debt downgrade, but when stocks are this elevated, the next wave of selling is never far away.
Now that we have a potential catalyst to kick off the next wave of profit-taking, it is finally time to start challenging “too high.” Remember, smart traders never short strength, we wait until that strength starts crumbling.
Savvy traders were shorting Wednesday morning’s weakness. By getting in early, our stops are already adjusted to our entry points, making this a low-risk trade.
By being proactive, we limited our risks. If we are wrong, we won’t lose much. But if we are right, there are a whole lot of profits headed our way. Low risk and big rewards are the trades we dream of.
If the selling continues on Thursday, we can add more to our short position and lower our stops, giving ourselves even more protection. On the other hand, if prices bounce above Wednesday’s intraday highs, it is time to start pulling off our shorts. And if we rally back to Tuesday’s close, the selloff is already over and it is time to start buying the bounce.
I still think this weakness has room to run and 4,200 is a very realistic target. But I’m not married to that outlook and will change my views as soon as the market proves me wrong by bouncing back near recent highs.
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