Why the path of least resistance is higher, not lower

By Jani Ziedins | End of Day Analysis

Aug 28

Free After-Hours Analysis: 

The S&P 500 added a respectable 0.6% on Monday, extending Friday’s 0.7% bounce, and the index is setting up for another run at 4,450 resistance.

Lucky for readers of this free blog, we saw this rebound coming last week when I wrote on Friday:

The market’s natural inclination is to go up, and breakdowns are breathtakingly fast. Combine those two concepts, and Friday’s rebound definitely favors the bulls. If we were going to break down, prices would have taken another tumble on Friday.

It doesn’t take much to trigger the next wave of selling, but so far, this [rebound] is acting well enough to keep giving it the benefit of the doubt. At this point, I’m cautiously optimistic [last] Thursday’s tumble was the fluke, not [September 18th’s] rebound. For the time being, I’m a buyer of Friday’s bounce, with stops not far behind.

If the bounce continues on Monday, I let those profits come to me. If the selling resumes, I get out for a minor loss and try again next time. Lots of upside and limited downside. What’s not to like about this trade?

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As expected, the index rallied on Monday, and I was able to move my stops up to my entry point, turning this into a low-risk trade. If the selling resumes on Tuesday, I get out near my entry points, no big deal. If the bounce continues, I let all of those 3x ETF profits come to me.

Low-risk/high-reward trades are what we dream of. But these setups are only possible when we have the courage to jump aboard a rebound early.

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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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.