How smart money is profiting from from this chop

By Jani Ziedins | End of Day Analysis

Sep 07

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The S&P 500 slipped 0.3% Thursday, making this the third losing session in a row, and the index opened low enough to have given back all of last week’s impressive gains.

As they say, easy come, easy go. Anyone who got greedy last week and was holding for even higher prices watched all of their profits escape. But this doesn’t surprise those of us that have been doing this for a while. The market rewards those with the courage to buy when others are fearful and sell when everyone else becomes hopeful. The market goes against our innate instincts, which is what makes trading successfully so hard for most people.

Once we recognize these patterns and conquer our impulses, we can make a lot of money from other people’s mistakes. This is what I was telling readers two weeks ago when the crowd was convinced stocks were going crash a lot lower moments before they rebounded 150 points instead.

As I wrote back on August 25th, when the index was probing 4,350 support:

The market’s natural inclination is to go up, and breakdowns are breathtakingly fast. Combine those two concepts, and [August 25th] modest rebound definitely favors the bulls. If we were going to break down, prices should have taken another tumble [today].

Something that refuses to go down will eventually go up, and that’s exactly what happened over the next two weeks. But late last week, when the rebound is obvious to everyone, that’s was when smart money was locking in their 3x ETF profits.

Following that very profitable rebound, on August 30th, I warned:

[T]his is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy…Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down.

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Well, here we are. A big portion of August’s rebound has been wiped out, and the lucky ones have nothing to show for it. Those that couldn’t control their impulses and were chasing prices higher last week, got in right before the fall and are sitting on a humuliating pile of losses. (That said, I do have to thank these tardy buyers for taking my 3x ETFs off my hands and leaving me with a pile of profits!)

As I said above, this isn’t hard once we start following the patterns and conquering our impulses.

As for what comes next, these swings are vanilla sentiment gyurations and nothing more. Going up and down like this is as natural as breathing for the market. Since the latest wave of selling wasn’t propelled by meaningful and unexpected headlines, it won’t go far and we are nearing the bottom.

That means locking in our short 3x ETF profits and getting ready to buy the next bounce. It will probably take one or two more tests of 4,400 support before we bounce for good, but taking profits a little early makes sure we are in the right spot to take advantage of the next trading opportunity, which is most likely buying the bounce Friday or early next week.

And when this dip finally bounces, don’t expect it to go far and take worthwhile profits off the table as soon as we have them because, just like this week, it won’t be long before those profits get away from anyone that gets greedy and holds too long.

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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.