Why smart money is already collecting profits

By Jani Ziedins | End of Day Analysis

Nov 07

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The S&P 500 finished Tuesday up a respectable 0.4% as the widely expected pullback from last week’s unsustainable rebound failed to materialize.

Traders have a natural fear of heights, and that causes buying to dry up after big runs like we saw last week. But demand is only half of the equation. At this point, owners are feeling confident and few are interested in selling this big rebound, keeping supply tight and propping up prices.

This inevitable tapering of buying was obvious and is why I was collecting profits late last week. As I wrote last Thursday evening:

To be clear, I’m not calling this a top, but with a big pile of profits in hand, it would be criminal to allow hubris to turn these profits into losses. Remember, we only make money when we sell our best trades. Nearly 200 points in a 3x ETF is good enough for me. At this point, the rewards ahead of us are far smaller than the risks underneath us.

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Hold near 4,400 resistance for a few more days, and these levels will feel less risky. That’s when some of those left behind last week will find the courage to start buying. Until then, prices will likely remain stalled under 4,400 resistance. (Unless the market starts putting the screws to the bears again, and they are forced to cover again at rapidly rising prices, but this is a less likely outcome.)

I like the market here, but the upside is not big enough to justify the risks underneath us. Give it a few more days, and the risk/reward starts to shift in the other direction. But until then, this is a better time to be more cautious than aggressive.

I collected profits, and I have zero regrets, even if Tuesday’s close is a few points above where I sold. Holding a big move too long risks giving it all back, and it would be criminal to allow greed to let last week’s profits escape.

Momentum definitely favors higher prices over the near to medium term, but the incremental rewards of holding for a few more days are nowhere near big enough to justify the risks.

We only make money when we sell our best trades, and for me, that was peeling off very worthwhile profits late last week. Another trade is coming, but I’m comfortable watching the consolidation of last week’s gains from the sidelines.

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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.