All Posts by Jani Ziedins

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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.

Nov 07

Should we trust this rebound?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 exploded higher Wednesday following the U.S. midterm election that saw Democrats take control of the House and Republicans add to their majority in the Senate. There was a little bit of good news for everyone and that put traders into a buying mood.

These gains erased a big chunk of October’s selloff. Anyone who sold defensively over the last several weeks is coming to regret that hasty decision. But that is the way the market works. Every buyable dip feels like we are on the verge of a much larger collapse. If it didn’t, no one would sell and we wouldn’t dip in the first place.

With the benefit of hindsight, it is easy to look back and see the bounce off of 2,600 support was the obvious bottom. But since this bottom was only a couple of weeks ago, it isn’t hard to recall exactly how hopeless the outlook was when we reached those lows. Traders were not excited to buy the dip, they terrified of the next leg lower. Remember how you felt at that moment and don’t forget it. That is what every buyable dip feels like.

For those of us that have been doing this a while and lived through countless dips like October, we know better than to overreact to periodic bouts of emotional selling. As I wrote on October 23rd:

“Over the last 69 years, only 11 times have prices tumbled more than 15% from the highs. We often think of big crashes like 1987, the Financial Crisis, or the Dot-Com bubble. But those events are exceedingly rare. All the other pullbacks over the last 69 years have been 15% or less. While 15% is a lot, it isn’t terrifying. And even better, all of those under 15% pullbacks were erased within a few months. Small and short. That sounds like something we can live with.”

And so far, that is precisely what happened this time. There was no real substance behind October’s selloff and that is why we recovered so quickly. The only people who lost out were the ones that overreacted to the fearmongering. That said, there is nothing wrong with selling defensively and it can even be profitable. The key is knowing when to get back in.

October 30th, the day after the market bounced off 2,600 support, I wrote a post titled “What Makes Tuesday’s rebound different

“no matter which side of the bear/bull debate you stand on, there is an excellent chance this market is ripe for a sharp move higher.

2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.”

That was a bold prediction when prices were in the low 2,600s and it was met with a lot of skepticism, but it doesn’t seem so far-fetched after the market closed at 2,813.

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Predicting the market isn’t hard because it keeps doing the same thing over and over again. The challenge is getting the timing right. While it was nice to see this 200+ point rebound coming before it happened, what readers really want to know is what comes next.

While I’d love to say we will continue surging up to all-time highs, that isn’t how this works. October’s selloff did a lot of damage to investor confidence and it will be a while before people feel comfortable chasing prices back to the highs.

This rebound recovered nearly two-thirds of the October selloff and that is about as far as these things go before they start running out of steam. Momentum could carry us up to the 50dma and even 2,870 where this whole thing started, but we should expect demand to dry up soon.

For short-term traders, this is definitely a better place to be taking profits than adding new money. At the very least, expect prices to consolidate for a while as investors warm back up to this market. But more likely, volatility will persist and that means a dip back to 2,700 support would be a normal and healthy part of this recovery.

Anyone scared out during October’s selloff and looking to get back in, resist the urge to chase prices higher over the next day or two. Instead, wait for the inevitable pullback and consolidation over the next few weeks. Volatility is still high and that means big moves in both directions are ahead of us. But as long as the economic data holds up, the worst is already behind us.

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Jani

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Nov 01

Is this rebound still buyable?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

A lot can change in 36-hours. Monday afternoon stocks cratered, shedding more than 100 points from the early highs. There are few things more frightening than a strong open that devolves into a panicked selloff. That plunge shoved us under the prior October lows, triggered another avalanche of reflexive selling.

But just when things were the most hopeless, prices bounced sharply off 2,600 support and the market hasn’t looked back. While it is only three days, prices have reclaimed a big chunk of October’s selloff and the mood has definitely shifted. Panic has given way to cautious optimism. No longer is the crowd fixated on trade wars, Chinese growth, and peak earnings. Instead, traders are remembering the U.S. economy is still in pretty darn good shape.

There comes a point in every emotional selloff when things go too far and are ripe for a snapback. That is exactly what I told readers to expect in Tuesday’s free blog post:

“If there is one thing both bulls and bears can agree on, it is that markets don’t move in straight lines. It has been a brutal October for stocks. At the very least, a near-term bounce is overdue. After definitively undercutting the early October lows and setting off a tidal wave of panicked defensive selling, this is about as good of a double-bottom setup as we will ever see.”

Three days later and 140-points higher, that is precisely what happened. Sign up for Free Email Alerts so you don’t miss profitable insights like these.

So far I’m stating the obvious because everyone already knows what happened. What readers are more interested in is what comes next. And for that, we can also look back at what I wrote on Tuesday because it is still relevant today:

“2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.”

We already checked 2,700 off the to-do list, and as expected, the gains slowed a little after we reclaimed this critical support level. But this is just a pause before the next leg higher.

After Thursday’s close, AAPL reported record earnings, but gave a slightly disappointing revenue forecast. Last week the exact same story played out in AMZN and is what contributed to Monday’s collapse. But the thing about headlines is they lose their bite with each retelling. Apple’s disappointment could weight on prices Friday, but it won’t be anywhere near as big of a deal as it was when AMZN told us the same thing. The shock wears off over time and life moves on. That is exactly what is happening in Thursday’s after-hours trade as the S&P 500 only dipped a fraction of a percent following AAPL’s “disappointing” news.

While the next move is still higher, we shouldn’t expect prices to race back to all-time highs. As I wrote earlier, everyone knows markets don’t move in straight lines and that means any rally higher will end in a step-back. Bulls and bears will argue if this will be two-steps forward, one-step back, or one-step forward and two-steps back. At this point, it doesn’t really matter because the next move is higher and the move after that will be a step-back. Once we get there, we can weight the likelihood of higher-lows or lower-highs. But until then, enjoy the (somewhat bumpy) ride higher.

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Jani

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Oct 30

What makes Tuesday’s rebound different

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

There is a good chance that weeks from now we will look back at this Tuesday as a key turning point in S&P 500. It was only the second time the index finished in the green in the last ten sessions, but that’s not the only thing that made it feel different. Volume has been ramping up over the previous six sessions and Tuesday’s rebound was the highest of them all. Clearly, something big is happening, the only question is what.

If there is one thing both bulls and bears can agree on, it is that markets don’t move in straight lines. It has been a brutal October for stocks. At the very least, a near-term bounce is overdue. After definitively undercutting the early October lows and setting off a tidal wave of panicked defensive selling, this is about as good of a double-bottom setup as we will ever see.

While nothing in the market is ever certain, double bottoms are some of the most resilient bottoming signals the market gives us. Prices undercut the prior lows, triggering an avalanche of reactionary selling. But rather than trigger the next leg lower, that dip is the last gasp of defensive selling. Once we run out of emotional sellers, supply dries up and prices rebound.

Monday’s frighteningly horrific collapse was as bad as it gets. We opened green, but it was downhill from there and by early afternoon, the index shed more than 100-points. But what if that really was “as bad as it gets”? Maybe, just maybe, that was the worst and everything will get better from here. As the saying goes, it is darkest just before the dawn.

As I already stated, both bulls and bears can agree a bounce is coming. And most bears will even concede that the biggest bounces come in bear markets. This means that no matter which side of the bear/bull debate you stand on, there is an excellent chance this market is ripe for a sharp move higher.

2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.

But just like how selloffs don’t go in straights lines, neither do recoveries. After recovering 200-points from the selloff’s lows, it will be time for another dip. How big of a dip depends on which side of the bear/bull debate you fall on, but at least both sides can agree that a bounce and a dip are still ahead of us. We can argue about the magnitude after we get there.

If a person wants a preview of what this looks like, scroll your favorite charting software a little to the left and see what took place this spring. A big crash in February, a sharp rebound from the lows, and a pullback from the rebound’s highs. Predicting the market isn’t hard. That’s because it keeps doing the same thing over and over again. The challenge is getting the timing right.

There are no guarantees in the market and the best we can do trade when the odds are stacked in our favor. This selloff is ripe for a bounce and right now that is the high probability trade. If it doesn’t work out this time, we retrench and try again.

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Jani

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Oct 23

CMU: How much worse will this get?

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Update:

Tuesday was another ugly open for the S&P 500 as overnight weakness in Asia and Europe pressured our markets. We crashed lower at the open and undercut this selloff’s prior lows near 2,710. But rather than trigger another avalanche of defensive selling, that early dip was as bad as it got. Supply of nervous sellers dried up after the first hour of trade and we recovered a majority of the losses by the close. Not very often does a 0.5% loss feel like a good thing, but that is what happened today.

Even though Trump’s tariffs haven’t done much harm to our economy, they are strangling the already weak Asian economies, most notably China. While this is Trump’s desired outcome, global markets are more intertwined than ever and what huts one is felt by everyone else. By taking down China, Trump is indirectly taking down our markets.

The biggest question is what comes next. Is the worst already behind us? Or are we on the verge of another tumble lower? I wish I knew for sure, but the best we can do is figure out the odds and make an intelligent trade based on the most likely outcome. For that, a look back at history is the most logical place to start.

The above chart shows pullbacks in the S&P 500 from all-time highs since January 1950. That gives us nearly 70 years worth of data to analyze.

One of the most notable things is how rare big selloffs really are. Over the last 69 years, only 11 times have prices tumbled more than 15% from the highs. We often think of big crashes like 1987, the Financial Crisis, or the Dot-Com bubble. But those events are exceedingly rare. All the other pullbacks over the last 69 years have been 15% or less. While 15% is a lot, it isn’t terrifying. And even better, all of those under 15% pullbacks were erased within a few months. Small and short. That sounds like something we can live with.

Currently we find ourselves 7% from the highs. Those losses are already behind us and we cannot do anything about them. But we can prepare for what comes next. Assuming we are not on the verge of another Financial Crisis or similar catastrophe, the most likely outcome is a dip smaller than 15%. From current levels, that is another 8%. But that is the worst case. The actual dip will most likely be smaller than 15%.

Over the last 69 years, the S&P 500 has tumbled between 10% and 15% 22 times. That’s about once every three years. Not unheard of, but not common either. The last pullbacks of this size were 15% in 2016 and 12% earlier this year. Are we due for another one? Maybe. But it definitely doesn’t seem like we are overdue given we already had two over the last two years.

More common are pullbacks between 5% and 10%. There have been 36 of these over the last 69 years, meaning these happen every year or two. From 7%, that means we could be as little as 1% or 2% from the bottom. And even better is most of these 15% or smaller pullbacks return to the highs within a few months.

We are down 7% and there is nothing we can do about that. But going forward we have a decent probability of only slipping a little further. And assuming the world doesn’t collapse, worst case is another 8%. While that wouldn’t be any fun, is that really worth panicking over?

The price action has been weak the last few days and that led to today’s weak open. And the market loves double-bottoms, meaning we could see a little more near-term weakness. But what is a little more downside if we will be back at the highs in months month? While I cannot say the bottom is in yet, the odds are definitely lining up behind buying this market, not selling it.

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If you found this post useful, Follow Me on Twitter so you don’t miss future updates: 

Jani

What’s a good trade worth?
How about avoiding a loss?

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