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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.
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Monday was a bloody session for the S&P 500 as it shed 3% in the index’s worst performance in nearly a year and a half.
Headlines about inflation and rate hikes have been buried by what’s going on in Ukraine and oil price’s race toward historic highs. That said, there were not really any new developments this weekend and the stock market and oil markets are simply reacting to last week’s events.
Technically, Monday’s tumble leaves the index resting just above 4,200 support. This is the third test of support in recent weeks and unfortunately, while double bottoms are a thing, triple bottoms are not. That means the near-term prognosis for the market is not good. If the latest bounce was going to hold, we wouldn’t be retesting it this soon. So expect more pain over the near term.
That said, don’t expect a huge crash. While another -3%, -5%, or -7% wouldn’t surprise me, any overreaction will bounce hard and fast, returning stocks back near these levels within a week or two. So yes, while the near-term pain will get worse, it will be short-lived.
As long as we know what’s coming, we can plan around it. As nimble traders, there is no reason to hold through even a mild 2% dip and I already bailed out of my latest bounce play last week. Hopefully, you did the same.
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As I have been explaining to readers all year, I buy every bounce and that includes February’s latest bounce off of 4,100. But a nearby stop is ALWAYS part of every purchase, starting under the recent lows and then quickly moved up to my entry point as the bounce continues. And when the bounce keeps going, I keep moving my stops up with it.
While February’s bounce is on the verge of failing, I locked in some worthwhile profits last week and I’m getting ready to buy the next bounce.
Remember, we cannot take advantage of these great trading opportunities if we don’t have cash, and that means selling at higher prices.
Buy the bounce, sell the dip, and repeat as many times as necessary. With big, directional moves like these, making money isn’t hard.
Now that we’re in cash, the firs thing we’re doing is looking for that next bounce. Start small, get in early, keep a nearby stop, and only add to a position that is working. Maybe the bounce comes Tuesday. Maybe it doesn’t happen until Wednesday or even next week, but no matter when it happens, I will be there buying it again with open arms.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
S&P 500 futures fell as much as 2.5% during Monday’s overnight session as Russia’s war with Ukraine continued over the weekend and the West tightened the sanction screws on Russia.
But those overnight losses moderated by the open of regular trade to minus 1.5% and even better, the index finished the day down a very modest 0.2%.
While volatility remains off the chart, the index is trading amazingly well given the start of the largest European invasion since WWII. But as I told readers two weeks ago, this paradoxical behavior was expected:
This phenomenon of uncertainty being worse for stocks than bad news is what allows stocks to actually rally once bullets start flying.
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Well, that’s exactly what happened. While this crisis in Ukraine has turned into the worst-case scenario as Russia launched a full-scale invasion, US stocks have actually rallied nearly 7% from Thursday’s open. That’s not what a rational person would expect, but the stock market rarely does what it is supposed to do, so this mindbending move is par for the course.
While it feels a little strange to be profiting off of this conflict in Ukraine and my heart goes out to all of the people affected by this dreadful situation, I’m a trader by nature and when I see a great trade, I cannot help myself.
And given the market’s resilience Monday in the face of escalating economic sanctions, the stock market feels pretty comfortable economically with the way the situation is progressing on the other side of the world. While a massive human tragedy, the impact on US corporate earnings will be limited and is already largely priced into stocks.
As well as the index is acting, there isn’t much to do here except lift our stops to the 4,300 region and see if there is more upside left in this huge bounce.
That said, there is one risk that hasn’t been accounted for in US financial markets and that is Putin getting desperate and using tactical nuclear weapons to beat Ukraine into submission. Flatten one Ukrainian city with tactical nukes and the US stock market will open down 25% or more.
While this scenario seems highly unlikely, that’s the way many people felt about a full invasion early last week. That makes this a good setup for a bifurcated trade. Continue following the indexes higher with a conventional trade but buy a little insurance against the unthinkable by picking up some out of the money puts.
I typically don’t mess with options, but this is one of those cases where they make a lot of sense. The other alternative is staying in cash, but it is hard to resist these profits, so I will continue taking what the market gives me while using stock options to protect my backside against the unthinkable.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Russia invades Ukraine and US stocks rally?!?!
This has to be some kind of gigantic mistake, right?
Luckily for readers, I published a post last week titled “Why stocks could actually rally if Russia invades Ukraine“:
The thing to keep in mind regarding events in Ukraine is markets deal with bad news a lot better than uncertainty. That’s because traders can put a price on bad news and factor it into the market. Unknow outcomes are impossible to quantify and traders tend to let their imagination get the worst of them.
This phenomenon of uncertainty being worse for stocks than bad news is what allows stocks to actually rally once bullets start flying. While no one wants to see that happen, a hot war means we stop debating what could happen and instead focus on the actual impact of the conflict. And in most instances, reality turns out less bad than feared.
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The above analysis spelled out the market’s reaction to a tee when bullets started flying Wednesday night and hopefully readers were prepared because this was a fantastic trading opportunity.
(Note: The scale of this human tragedy in Ukraine cannot be overstated and my heart pours out to all the innocent people caught in the crossfire. But this is a stock market blog and the market has a cold, cruel heart when it comes to these things.)
Not surprising, the S&P 500 reflexively gapped 2.5% lower Thursday morning after the invasion started. But that’s when opportunity presented itself and only a handful of hours later, the index closed nearly 7% above those intraday lows. Blink and you missed an outstanding trade, especially if you use 3x ETFs like I do.
Now, this isn’t to say this was an easy trade. I’ve been looking for the bounce for a couple of weeks and made some premature buys along the way. But by being disciplined and following my trading plan, I made those “mistakes” with partial positions and by getting in and out early, those “failed” trades were mostly breakeven and some even returned a few bucks of profit.
While no one is getting rich trading these mini bounces, that was never the intent. I was big game hunting and I wasn’t going to let a few miscues detur me. Especially when those miscues were so inexpensive.
While some criticized these premature buys, I didn’t give up and my trading account is a lot fatter today because of it.
I cannot predict the future and I don’t know which bounce will be the real bounce. To deal with that, I simply buy all of the bounces because that means I will never miss one. And bounces that don’t work, no big deal, I get out at my nearby stop and try again next time
Rarely is making money this easy or fast. Hopefully, you didn’t miss this trading opportunity.
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As for what comes next, there isn’t much to do except lift our stops and see where this goes. If the emotional selling resumes, no big deal, I take my profits and wait for the next big bounce. I’m happy to keep riding these waves as long as the market is willing.
If you find these posts useful, please return the favor by liking and sharing them!
Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox every evening.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, receive actionable analysis and a trading plan every day during market hours
Follow Jani on Twitter @crackedmarket
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