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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
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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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 tumbled 0.8% Tuesday as it undercut both the 50dma and 4,450 support in midday trade. While an afternoon bounce reclaimed 4,450, it wasn’t enough to get the index back above the 50dma.
[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.
[E]xpect a little more cooling off over the next few sessions. For the most aggressive, they can short any incremental weakness but keep positions small and profit targets close. Shorting an uptrend is one of the hardest ways to make money in the market, and it requires impeccable timing.
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Well, here we are, three sessions later, and the index is down ~50 points. While 50 points doesn’t sound like a lot, that turns into real money in a 3x ETF.
For the unfortunate masses who held the previous trade too long, they watched a big chunk of their profits escape during Wednesday’s decline. For the nimble traders that collected worthwhile profits last week and then flipped direction, that’s well over 100 points of profit for a few days’ work. Do that a couple of times a month, and now we are talking real money.
As for what comes next, the market loves symmetry. Since we didn’t rally very far from the August lows, we shouldn’t expect this subsequent step-back to be very large. Maybe Wednesday’s test of 4,450 support is all we need to reset the clock. If that’s the case, we should hold above Wednesday’s lows for the remainder of the week.
On the other hand, if we retreat under Wednesday’s lows, look for the selling to push us back near 4,400 support. At this point, I would expect that to be the last gasps of selling before bouncing. (If it’s not, the August lows are under serious threat.)
As I wrote last week, I wasn’t expecting a lot from this week’s retest of support, and that means I was already peeling off my short profits. If the bounce continues on Thursday or Friday, I’m pocketing all of those short profits and going long again. But if we can’t hold Wednesday’s lows, I’m jumping back on the short bandwagon…
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If you find these posts useful, help me out by liking and sharing them!
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