Category Archives for "Free Content"

Jun 18

A lot can change in a few short weeks

By Jani Ziedins | End of Day Analysis

Free After-Hours Update

Trading Plan: at the end of this post.

The S&P 500 burst higher Tuesday, ending last week’s stalemate between 50dma support and 2,900 resistance. The market is excited to see the ECB and Fed inching toward economically stimulating rate cuts. Further boosting sentiment, Trump and the Chinese president scheduled a face-to-face meeting next week to resolve their trade differences.

Three weeks ago the market was in the dumps and traders were abandoning stocks ahead of what many assumed would be a much larger summer swoon. Fast forward to this his week and everything is great and the market is approaching all-time highs. And so swings the pendulum of sentiment. But these developments shouldn’t come as a surprise for regular readers of this blog.

Two weeks ago I wrote the following:

“[W]e trade the market we are giving and so far this one keeps acting like it wants to go higher. As long as we hold 2,800 support, then we should continue giving it the benefit of doubt.

I won’t pretend like I know what Trump is going to do and if those decisions will push the US into a recession. Instead, we follow the market’s lead. If it doesn’t want to be bothered by these things, then neither should we.

[I]f prices continue recovering next week and remain above 2,800 support, Monday’s dip to 2,750 was just another buyable bump on our way higher.”

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Now that prices bounced back near all-time highs, the question is, “what comes next?” I wish I could say the path is rosy for as far as the eye can see. Unfortunately, that is never the case. Momentum is definitely higher and prices will creep back toward all-time highs next week and even start encroaching on 3,000, but the thing we need to remember is we are stuck in the slower summer season. That means big money is on vacation and without their buying power, it will be hard for smaller investors to fund a larger directional move. For that, we need big money and they won’t be back until the fall. So temper your expectations until then.

The biggest headlines ahead of us continue to be a resolution/breakdown of the US/Chinese trade negotiations and a change in the Fed’s interest rate policy. A constructive trade deal would remove a major uncertainty hanging over the market. A breakdown and escalation will renew uncertainty. I wish I could predict the outcome, but it is hard when dealing with leaders and their egos. Neither leader wants to be viewed as caving and that is how we got to this point. Will it get better? Maybe. But there is also a reason this has dragged on for nearly a year without a resolution.

Luckily, the market has been placing less emphasis on the trade war. People who fear these headlines sold a long time ago and were replaced by confident dip buyers who don’t mind these headlines. This process of purge and replace is how markets price bad news in. Eventually, it gets to the point where there is no one left to sell a headline and the market stops caring. The longer this trade war drags on, the closer we get to that point. May’s tumble started when Trump surprised everyone by doubling the taxes on Chinese imports. While that lead to some near-term weakness, it was short lived and the market has since recovered nicely. A further escalation will send a shock through the market again, but this reaction will be even smaller.

Far more important to traders is what the Fed does. Expectations of rate cuts grow by the day. Disappointing employment numbers were met with cheers earlier this month because that increases the odds of a rate cut. It is actually getting to the point that the market will be disappointed if the Fed doesn’t cut rates soon. And given how cautious the Fed has been, there is a good chance it could continue its “wait and see” approach. That would disappoint the overly optimistic take the air out of this hope-filled rebound.

I won’t pretend like I know what Trump and the Fed will do next. Instead, I will focus on the market and make my trading decisions based upon what it is doing and where the risks lie. The market is acting well, but prices are quickly approaching resistance near the old highs. The higher prices go, the greater the risks. The swift June rebound means buying now is riskier than it was a few weeks ago. If the market is settling into a summer trading range between 2,800 and 2,950, this is a better time to be taking profits than adding new money. That said, if the bad news holds off for a couple of weeks, we could see prices inch toward 3,000. But as always, there are no guarantees in the market. What a person does here depends on their timeframe and risk tolerance.


Trading Plan

Most Likely Next Move: Momentum is higher and prices will return to 2,950 resistance and even break through it over the next couple of weeks if the bad news holds off.

Trading Plan: Approaching resistance is a better place to be taking profits than adding new money. If the market continues to trade well, we can always buy back in. If prices stumble, a person cannot buy the dip unless they have cash.

If I’m Wrong: The Fed cuts rates and Trump and the Chinese kiss and makeup. Adding monetary stimulus and removing political uncertainty will send prices sharply higher. But if these events trigger a bigger move, there will be plenty of time to jump aboard it.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jun 06

The good and bad of trading this market

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

TL;DR: At the end.

On Thursday, the S&P 500 continued its rebound from a dip under 2,800 support. But such a reversal shouldn’t surprise readers of this blog. Last week I wrote:

“Tuesday’s tumble challenges 2,800 support for the third time this month and obviously, there are two ways this plays out. Either the market collapses, or prices bounce. Of course, what that looks like over the next few days and weeks is less obvious. The most likely scenario is prices crash through 2,800 support and just when things look their most hopeless, supply dries up and prices bounce.

 

The stock market loves fooling everyone and violating support just before bouncing is the best way to trick both sides into giving away money. Convince the bulls to abandon their favorite positions all while tempting bears to jump on the short bandwagon. But rather than prove these second-guessers and cynics right, the market embarrasses both by turning around not long after they make their bearish trades.”

And so far that is exactly what happened this week.

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Now that prices are back above 2,800 support, the question is what comes next?

The biggest headline in front of us is Monday’s deadline for new tariffs on all Mexican imports. If Trump follows through on his threats, it creates an all-new front to his trade wars. This adds punitive taxes on imports from our two largest trading partners. New taxes are great if you are a government bureaucrat and love spending other people’s money. Unfortunately, new taxes are a burden on hard-working American consumers and US business. And as most business savvy people know, increasing taxes is never good for the economy.

It doesn’t matter what the Fed does, if the US economy falls into a recession, stocks will go down. Click To Tweet

The biggest threat is if these growth robbing taxes push the US economy into a recession and is why the Fed is growing increasingly cautious. They told us this week they were open to rate cuts if the trade war weakens the US economy and those comments kicked off the latest rebound. But in reality, it doesn’t matter what the Fed does, if the US economy falls into a recession, stocks will go down.

No matter what happens months from now, we trade the market we are giving and so far this one keeps acting like it wants to go higher. As long as we hold 2,800 support, then we should continue giving it the benefit of doubt. But if we cannot hold this critical support level and start a new trend of lower highs, we need to shift to a more defensive outlook and for the first time in a long time, that includes our long-term investments.

I won’t pretend like I know what Trump is going to do and if those decisions will push the US into a recession. Instead, we follow the market’s lead. If it doesn’t want to be bothered by these things, then neither should we. If it wants to overreact to them, then that reaction is what we need to base our trades on.

Prices peaked in early May near 2,950. We bounced up to 2,875 in mid-May. And now we are bouncing to 2,840 in early June. If prices fall under 2,800 next week, that will mark our third lower-high and things don’t look good. But if prices continue recovering next week and remain above 2,800 support, this Monday’s dip to 2,750 was just another bump on our way higher.

Politicians are holding this market hostage and traditional stock analysis doesn’t apply. The best we can do is follow the market’s lead and trade accordingly. Click To Tweet

I wish I could be more definitive with my outlook, but politicians are holding this market hostage and traditional stock analysis doesn’t apply. The best we can do is follow the market’s lead and trade accordingly.


Most Likely Next Move: If prices hold above 2,800 next week, then all is good. If we crash back under support so quickly after retaking it, demand is becoming a serious problem and we should expect lower lows.

Trading Plan: Buy the dip, but keep a tight stop. Start small and only add more after the trade starts working.

If I’m Wrong: Trump’s trade war is killing this bull market and that will show up as a series of lower highs. If investor sentiment flips, this could be the start of a much longer retreat.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 28

How to trade the latest test of 2,800 support

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday, the S&P 500 tumbled for the twelfth time this month on lingering trade war fears. May is on track to be the worst month of what was an otherwise outstanding 2019.

All of this started several weeks ago when Trump caught the market by surprise when he slapped additional tariffs on Chinese goods. China responded by retaliating several days later with further tariffs on US goods.

Trump continued escalating the rhetoric Tuesday when he threatened “substantial” increases on existing Chinese tariffs. Rather than getting better, Trump’s trade war keeps getting worse. No matter what Trump and his supporter believe, the stock market definitely does not agree with this trade war.

That said, this trade war has been with us for over a year and no matter how bad the headlines appear, anything will get priced in eventually. And that includes Trump’s trade war. He doubled Chinese tariffs this month, but the stock market is only down 4%. That’s not because these new tariffs don’t matter. They absolutely do because all taxes are bad for the economy. But the stock market hasn’t reacted in a dramatic way simply because the people who care about these things sold last year and were replaced by confident dip buyers. Eventually, there comes a point when we run out of new people willing to sell a headline. That’s when those headlines stop mattering.

Granted, a 4% pullback feel huge given how gentile this year’s climb higher has been, but we need to keep it in perspective. 5% pullbacks are a common occurrence in every bull market. So, the question is if this May swoon is nothing more than a normal and routine 5% pullback, or if this is the start of something far more insidious?

How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse? Click To Tweet

The first thing we should remember about market crashes is they are brutally quick. This month’s selloff started several weeks ago when Trump unexpectedly jacked up the tariffs on Chinese imports. How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse? That’s not how the market normally works.

Tuesday’s tumble challenges 2,800 support for the third time this month and obviously, there are two ways this plays out. Either the market collapses, or prices bounce. Of course, what that looks like over the next few days and weeks is less obvious. The most likely scenario is prices crash through 2,800 support and just when things look their most hopeless, supply dries up and prices bounce.

The stock market loves fooling everyone and violating support just before bouncing is the best way to trick both sides into giving away money. Convince the bulls to abandon their favorite positions all while tempting bears to jump on the short bandwagon. But rather than prove these second-guessers and cynics right, the market embarrasses both by turning around not long after they make their bearish trades.

Hopefully, everyone has their trading plan laid out and already know how they will respond to this violation of support. Will you hold thorough it? Will you sell defensively and be ready to jump back in after the bounce? It all depends on our outlook, risk tolerance, and time frame. What it should never be based on is how we feel in the moment. Only fools let the market turn their emotions against them. Savvy traders plan their trades ahead of time and then trade their plan as conditions warrant.

That said, there is nothing wrong with trimming a position to help sleep at night. But if you sell, always be ready to jump back in as soon as conditions warrant it.


Most Likely Next Move: The dip violates 2,800 support before bouncing.

Trading Plan: Get defensive if needed, but be ready to buy the dip once prices find a bottom.

If I’m Wrong: Waves of emotional selling overwhelm the market and prices tumble all the way to 2,600 support.


Bitcoin popped this weekend. While this strength gives me pause, the cryptocurrency keeps doing everything it needs to do and $10k is the next target. That said, we need to be careful because there are clear signs of market manipulation. All of the big moves over the last few weeks have come in the middle of the night and over the weekend. Times when the volume is the lowest and easiest to manipulate. There is a good chance some unscrupulous players could be jacking up the price in order to suck gullible buyers in so they can sell to them in a classic pump-and-dump.

The buying frenzy in Bitcoin is being driven by the price increases, not a greater adoption of cryptocurrencies. Unless BTC starts delivering on some of its disruptive promises and becomes more ingrained in the economy and consumer behavior, this latest bounce will be nothing more than a fleeting speculative bounce in a much bigger bear market.

BTC keeps acting well and momentum is higher, but the crash will be hard and fast once the music stops. The next move is probably still higher, but we won’t get much warning when this ride ends.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $BTC.X

May 23

Not dead yet

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

TL;DR: At the end.

Thursday was another ugly session for the S&P 500 as the index shed 1.2%. After a calm, even boring spring, volatility is roaring back. What this means for the market’s next move is the point of this analysis.

The primary catalyst for this month’s second-guessing is the latest flareup in Trump’s trade war with China. But as unnerving as the situation feels, the index is still holding above long-term support at 2,800.

In Tuesday’s free blog post I wrote the following:

“Quite simply, a market that refuses to go down will eventually go up. As long as we continue holding 2,800 support, the situation is constructive. Eventually headlines will let up and at this point, the only thing we need to rally back to the highs is less bad news.”

And two days later, nothing changed. Fear of new headlines is weighing on traders’ moods, but so far this latest bout of selling only brought us back to support.

The thing to remember about routine dips back to support is they always feel like things are about to get a lot worse. If they didn’t, no one would sell and prices wouldn’t dip in the first place.

So the question we have to ask ourselves is if this dip is the real deal and things are on the verge of getting a lot worse? Or if this is just another vanilla pullback back to support and savvy traders are buying these discounts?

Trumps has been waging his trade war for more than a year, and despite some volatility in the stock market along the way, the economy has swallowed all of the previous escalations fairly well. Without a doubt, these additional taxes on businesses and consumers are not helping the US economy, but so far they don’t seem to be doing a large amount of damage.

The thing to remember about headlines is once the market comes to terms with them, they get priced in and stop mattering. By the time the crowd knows about something, most people have already made all the trades they want to make. The people who fear Trump’s trade war sold last year and were replaced by confident dip buyers willing to hold these risks. Once we run out of people willing to these headlines, they stop mattering.

Without a doubt, we should be cautious as the market flirts with violating support, but until the market gives us a reason to stop trusting it, we should continue giving it the benefit of doubt. These trade war headlines are nothing new and if they haven’t broken this market already, they are unlikely to do so now.

That said, anything is possible when it comes to crowd psychology and we always need to be prepared for the unexpected. Few things shatter confidence like falling prices and I reserve the right to change my mind if we crash under 2,800 support and the selling accelerates. But rather than fear further weakness, the trader in us should be cheering over the opportunity to buy in at even better prices.


Most Likely Next Move: This test of support will hold and prices will eventually drift back to the highs as the market settles into a summer trading range.

Trading Plan: Get defensive if prices crash through 2,800 support. Baring that, stick with what has been working and that is believing in this market. If a person is nervous, consider selling a portion of your position and then buying back in after the market finds its footing.

If I’m Wrong: The market crashes through 2,800 support and that shatters confidence. If the selling spirals out of control, don’t expect it to stop until we reach 2,600 support.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 21

Sliding into a trading range

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 is recovering from this month’s trade war swoon. Prices bounced off 2,800 support last week and are attempting to retake the 50dma.

As bearish as the headlines appeared, the market has been holding up remarkably well. Crashes from unsustainable levels are breathtakingly quick. This is the third week since Trump escalated the trade war and so far prices are only down a couple of percent. If this market was fragile and vulnerable to a collapse, we would have tumbled a lot further by now.

Quite simply, a market that refuses to go down will eventually go up. As long as we continue holding 2,800 support, the situation is constructive. Eventually headlines will let up and at this point, the only thing we need to rally back to the highs is less bad news.

That said, Memorial Day is just around the corner and we are quickly approaching the summer trading season. Big money managers are heading off to their cottages and that means less buying.

A market that refuses to go down combined with lethargic summer demand is the perfect recipe for a trading range. 2,800 support is the lower bounds and last month’s highs near 2,950 is the upper edge. Until further notice, a move to the lower end of this range should be bought and a rally to the upper end should be sold.

Most people know markets trade sideways more than they go up or down, yet every time they approach the lower end of a range, people cannot help but be overcome by feelings of doom and gloom. The same happens at the upper end, except this time people are counting all the money they will make as prices keep racing ahead. Unfortunately, these reactions end in people buying the highs and selling the lows.

It’s been a great year and it only makes sense prices will stagnate for a while as we consolidate recent gains. Stick with your favorite long-term investments. But over the next few months, the best money will be made swing trading a rangebound market. Currently, we are on the upswing following last week’s bounce off support and the next move is still higher. But rather than get greedy when we return to the highs, takes some profits and get ready to do it again.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

May 16

Don’t fear the normal and healthy

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

After tumbling five out of six sessions and challenging 2,800 support Monday, the S&P 500 has been on a rip ever since. Prices are still underneath the highs, but this rebound has done a lot to alleviate last week’s trade war fears.

But this shouldn’t come as a surprise. Monday evening I wrote the following:

“But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.

In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.”

And that is exactly what happened. The trade war headlines climaxed Monday morning and so did the selling.

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Rather than fear Monday’s tumble, smart traders were buying the discounts. People always pray for a pullback. Unfortunately, when the market gods finally answer their prayers, most people end up being too afraid to buy.

And even worse, reactive traders sold the dip and are stuck buying back in at higher prices. Sell low and buy high. Do that a few too many times and they won’t have any money left to trade.

Now that Monday’s lows are 75-points behind us, the question is what comes next?

The market is acting well. Pullbacks to support are perfectly normal and healthy. Unfortunately, most people forget about this fact when we are stuck in the middle of one. As long as we continue holding 2,800 support, all is good.

That brings up the one nuance we need to be wary of. There are few things more bearish than a bounce that fails to stick. If this rebound fizzles and prices tumble under the lows, that tells us demand evaporated and lower prices are ahead. But that is the worst case scenario. As long as this week’s gains stick, then all is good.

In fact, things are great. We challenged support and the bulls won. That doesn’t mean prices will continue racing higher, in fact, they could retreat some over the next few days. But as long as they remain above 2,800 support, that tells us the bull market alive and the uptrend will continue. If this market was fragile and on the verge of crashing, it would have happened by now.

Stick with what has been working, whether that is buying the dips, or patiently sitting on your favorite buy-and-hold stocks. Let the other guy give away his money by overreacting to these normal and healthy dips.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

May 13

Are things about to get a lot worse?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update: Special Edition

I normally publish free blog posts on Tuesday and Thursday evenings, but Monday’s dramatic tumble warrants a special edition.

TL;DR: At the end.

The S&P 500 tumbled Monday in the second largest drop of the year, shedding 2.5% after Trump and China escalated their trade war to the next level. Last week Trump followed through on threats to increase tariffs to 25% and China retaliated this weekend with reciprocal tariffs. As bad as it sounds, stocks are still holding critical 2,800 support, even if just barely.

While dramatic, no one should have been surprised by Monday’s tumble. On May 2nd when prices were near all-time highs, I told readers to be mindful of a larger pullback to support;

“If prices tumble under 2,900 and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.”

Here we are 11 days later and traders are running around like the world is ending. The thing to remember is these things are not nearly as scary when we see them coming and can develop an intelligent trading plan ahead of time.

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Markets go up and markets go down. That’s what they do and everyone knows it. Pullbacks to support happen all the time and shouldn’t surprise anyone. Yet they always do. By rule, they have to. If they didn’t, no one would sell and we wouldn’t dip in the first place. Every dip, no matter how trivial it looks after the fact, always felt real in the moment.

And now that we find ourselves at support, we have to ask ourselves if this is just another routine, buyable dip. As I already stated, every dip feels like it is about to get a lot bigger. That’s the only reason people sell the dip. Yet every dip in history ended in a bounce. And every time that bounce happened when people were the most pessimistic.

A funny thing happens when pessimism climaxes. That is the point when everyone who could be scared out of the market is finally scared out of the market. When the crowd finally gives up hope is the exact point when we run out of sellers, supply dries up, and prices bounce.

Are we at that point now? In a normal market, yes, we are moments away from the bounce. Maybe prices dip under 2,800 before supply dries up and prices bounce. Or maybe we already hit that capitulation point Monday afternoon. Either way, we are only talking about a handful of points either way. A dip buyer would be sitting on nice profits next week or the week after even if they got in a little too early or a little too late.

But that is only if this is a normal market and this is a routine pullback to support. That means the million dollar question is if this pullback is normal or abnormal.

The edge case occurs when things get wonky and the market goes into full-blown panic mode. Not only do the typical Chicken Littles run around claiming the sky is falling, but the far more confident dip buyers have second thoughts. That is what happened last year when prices tumbled more than 400 points in December.

Could that happen here? Sure. It can happen anywhere at any time and is one of the biggest risks to owning stocks. But as bad as it is, these panics are rare.

The line in the sand is 2,800. This support level stretches back to last fall’s big selloff and was major resistance for several months. Once prices finally break through resistance, it becomes support. And right now it is our lifeline.

Hold this level for a few days and all is good. The things about stock crashes is they are brutally quick. They happen before people have time to think and make rational trading decisions. This is the land of sell first and ask questions later. But if that is how this works and the market holds 2,800 support for several days, then we can be fairly certain the emotional selling died up. At least as far as last week’s headlines are concerned. Meaning it would take a new round of headlines to knock us lower.

But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.

In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.

The thing to remember about falling stock prices is they are actually less risky to buy. That’s because a lot of the damage has already been realized. People are afraid of falling off of buildings, not falling off the ground. Yet paradoxically in the stock market, people are most comfortable on the top of tall buildings and most afraid when standing on the ground. Even though prices could fall a little further tomorrow and the day after, it is still far less risky to buy today’s dip than last week’s highs.


Most Likely Next Move: This is a buyable dip and if the market didn’t bottom Monday, it will happen Tuesday or Wednesday.

Trading Plan: People pray for a dip so they can get in at cheaper prices. But every time the market answers their prayers, they lose their nerve. Don’t lose your nerve.

If I’m Wrong: Prices tumble under 2,800 support and the reactive selling intensifies instead of dries up. Dipping under 2,800 is okay as long as we bounce back above not long after. But if we crash through support and finish the day at the lows, fear is taking over. But rather than fear the fall, take comfort in knowing even better bargains are coming.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 09

A plan to trade Trump’s trade war

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Thursday was another rocky session for the S&P 500. China countered Trump’s trade war rhetoric with some of their own. That threw cold water on global stocks overnight and the S&P 500 tumbled at the open, crashing through minor support at 2,850. While it looked like it was going to be another ugly day, Trump lifted hopes when he said a deal was still possible, sending a wave of relief through our markets and erasing a big chunk of those initial losses.

This is a headline-driven market and nothing else matters. Trump’s self-imposed deadline is Friday and no matter what happens, expect something dramatic. If Trump strikes a deal, stocks will surge in relief. If talks break down and Trump follows through with his punitive tariffs,  markets will tumble. While that is stating the obvious, the most likely outcome is a combination of the above, a postponement and continued negotiations. That is half-full enough to keep the optimists in the stock market and half-empty enough to keep wary traders from buying the dip.

While the market’s next move hinges on what Trump and the Chinese do, those outcomes will have less impact over the medium- and long-term. Trump started his trade wars last year and has long said he is willing to tax everything imported from China at 25%. The market lived under these clouds for a long time and the risks have not prevented stocks from rallying to all-time highs. No doubt the same will happen this time too.

Even if Trump escalates the trade war for the umpteenth time, the market will react, get used to it, and then move on. Good news, bad news, it all gets priced in and then forgotten. Trump’s trade war is no different.

Up, down, or sideways, the next question is how to trade this. Personally, I don’t have any insight into whether Trump and the Chinese will strike a deal Friday or not. I don’t try to predict the headlines and I’m not going to start now. That said, how the market reacts to these headlines will give us something good to trade.

If a deal is reached: All is forgiven. The stock market is off to the races and we should stick with what has been working, which is buy-and-hold. The market will rally in relief as one more risk falls by the wayside.

If negotiations continue in a constructive way: The market will rally some as we avoid the worst case scenario. The market is buyable for anyone with a longer-term investment horizon. But as we’ve seen countless times over the last 12 months, there is lots of back and forth during these protracted negotiations. That means we should expect some dips and gyrations along the way as the inevitable snags drag us down. That means better prices might be ahead of us if someone wants to take advantage of a short-term move. As long as the market trades sideways and remains volatile, buy the dips and sell the rips.

And if talks fail: Let the market tumble. But rather than fear the collapse, get ready to buy the inevitable oversold condition. Emotional traders make poor decisions and that includes selling stocks at unreasonably low prices. Their pain becomes our gain. (You remembered to keep some cash handy to buy the dip right?)

Get a resolution and prices will quickly return to the highs. Protracted negotiations mean we could see further weakness. And a busted deal will lead to a sharp, but buyable selloff.

It is cliche, but only because it is true, “Plan your trade, and trade your plan.”

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

May 07

When this dip stops being buyable

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It’s been a volatile few sessions for the S&P 500. It started last week when the Fed disappointed investors after telling us rate cuts were not being considered in response to slowing global growth. Then this weekend Trump shocked markets by announcing he was slapping additional tariffs on China.

So much for the easy glide higher. But we always knew the good times could not last and a bout of volatility was inevitable. We couldn’t predict the why and when, but the fact this happened shouldn’t surprise anyone.

The question everyone wants to be answered is if this is just a quick bout of indigestion. Or if this is the start of a larger pullback. For that, we need to dig deeper and look at the evidence.

Last week’s dip due to the Fed’s disappointment was fleeting and by Friday, prices had already returned to the highs. That decisive resilience told us those worries were not a serious threat to this market. But this week’s tumble following Trump’s trade war escalation is far less compelling.

Stock owners always run the risk of new and unexpected headlines. But this latest round of trade war rhetoric is not new and it is not unexpected. The trade war started more than a year ago and six months ago Trump threatened to tax everything coming out of China at 25%. But these headlines fell off the front pages during this year’s historic rebound and traders had largely forgotten about them…..until this week.

There are two reasons I don’t think this latest escalation is a big deal:

First, last year’s trade wars didn’t break the economy. Meaning a further escalation will probably also have a limited impact. These developments are most definitely not helpful, but they are not crippling either. We need to be wary of a tipping point where a little extra has an oversized effect, but assuming we avoid that, the next round of tariffs will have as limited of an impact as the previous rounds.

Second, it is widely known Trump judges his presidency by the performance of the stock market. As he shifts into reelection mode, he will be far more pragmatic and won’t take risks that damage his chances. While he might act tough, if this starts dragging down the stock market, expect him to back off pretty quickly.

No doubt lingering uncertainty will drive near-term volatility, but it will be far less dramatic than last year. Most of the people who fear trade war headlines bailed out last year and were replaced by confident dip buyers.

The next meaningful support level is 2,850 and the 50dma. That was a near-term bottom for Tuesday’s selling. Break that and far more durable support rests underneath us at 2,800. If that fails to hold, then we need to reevaluate all of our assumptions. But until then, this is just another buyable dip on our way higher. People always pray for a pullback, but when the market gods answer their prayers, they are too scared to buy the discounts.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 02

Should stock owners be worried?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

It’s been a dramatic two days for the S&P 500. Between Wednesday afternoon and Thursday morning, the index shed more than 50 points over a few short hours of trading. That volatility was a radical departure from the gentile glide higher trades have grown accustomed to.

Wednesday the Fed reiterated its policy of keeping interested rates steady, but it disappointed some investors when it said it was not considering rate reductions in response to slowing global and domestic growth. That disappointment triggered a two-day wave of reflexive selling that didn’t stop until we tumbled to 2,900 support.

Everyone loves a market that goes up nearly every day with dips measured in hours instead of days. These periods of calm spoil investors. But the inevitable arrival of volatility shouldn’t surprise anyone. And to be honest, Wednesday’s initial 0.75% decline and Thursday’s 0.21% followup loss barely qualify as volatility in conventional markets. This week’s moves only feel dramatic because of how calm things have been.

There are two ways to interpret this hiccup. Either it is an aberration that will vanish as quickly as it hit. Or this is the first jolt at the start of a bumpier ride.

Thursday morning started well enough with dip buyers rushing in and pushing prices above Wednesday’s lows, unfortunately, the lift was short-lived and prices quickly tumbled to new lows. The resulting selling picked up speed and didn’t stop until we exhausted supply almost exactly at 2,900 support.

The most encouraging development Thursday is prices closed well off the lows. The morning freefall bounced off near-term support and after that, traders were far more inclined to buy the weakness than continue selling it.

While this pullback is small, 2019 has been a year of small pullbacks. The thing about trends is they are far more likely to continue than reverse. (they continue countless times, but reverse only once) As long as we keep holding above 2,900 support, I will keep giving the benefit of doubt to this rally.

But if prices tumble under 2,900 Friday and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.

What a person does in any of the above scenarios should already have been decided. Smart traders plan their exit before they even enter a trade. That’s when they decide if it will be a quick trade or a long-term investment. Whether they will sell into strength on the way up, or use a trailing stop to lock-in profits before the fall. There are many ways to trade, the important thing is to make those decisions during the clarity that comes before a position is put on. In the heat of battle, even the most experienced trader is vulnerable to making an impulsive decision if they don’t have a plan.

My personal preference is to sell early on the way up. That way I have cash on hand and am looking for a buying opportunity when everyone else is scared and worried about bigger losses. But that is what works for me. You need to decide what works for you. And no matter what you do, plan your trade and trade your plan.

I’d love to see this dip go further because that creates even more profit opportunity for swing-trade. Unfortunately, I don’t think I’ll be that lucky and this will bounce quickly like every other dip this year.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

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