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The S&P 500 finished down 0.2% in Wednesday’s relatively quiet session.
As always, there are two ways to look at this week’s price action. The bulls will point to the index holding the vast majority of last Thursday’s 2% pop. The bear’s counterpoint is the rally stalled and is out of gas because it hasn’t been able to add to that pop.
At this point, both sides are stubbornly dug in, leaving us with this sideways draw just under all-time highs.
Too high? Or, not high enough? That’s the million-dollar question.
While both sides have valid arguments and could easily be right, as I wrote on Monday, my money is on the short side. Not because I think the bears are going to win, but because I could enter that trade in a low-risk way.
The rally stalled Friday afternoon, and that lethargic close gave me a short entry with a nearby stop above the intraday highs. If I was wrong, I would get dumped out for a fractional loss. But if the index falls into a very normal and healthy pullback to 5k support, that represents a 2% profit at even money and as much as 6% in a 3x trade.
Even if this short trade has 50/50 odds of working, the simple fact the reward is so much larger than the risk makes this a great trade.
Now, I have no idea if this trade will pay off in the end, but since putting it on last week, I’ve been able to lower my stops to my entry points, even further lowering my risk. I could very easily be wrong and get stopped out at my entry points, but if it doesn’t cost me anything, who cares? It’s like a free lottery ticket. Just because it didn’t pay off doesn’t mean scratching it off was a mistake.
While I’m still holding my short position and the market is moving ever so slowly in my direction, I am getting impatient. If the short trade is going to work, it needs to start working soon. If not, I will pull the plug before my stops get hit. When a trade isn’t working, our stops are our last line of defense, not our only defense.
If prices rally on Thursday, I will pull the plug and collect some trivial profits. While it’s not the trade I wanted, it is hard to complain about being wrong and still collecting a few bucks for my effort.
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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.
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