Free CMU Archives - Cracked.Market

Jan 10

How savvy traders deal with their mistakes

Free After-Hours Analysis:

The S&P 500 added 0.7% on Tuesday, bouncing back from Monday’s ominous intraday reversal. Not bad given how poor Monday’s price action appeared.

If there is one hard and fast rule in the stock market, it is there are no hard and fast rules in the stock market.

Monday morning’s impressive breakout above 3,900 resistance fizzled and evaporated by the close. That intraday reversal is about as bearish as price action gets. But as is always the case, trading signals operate in probabilities, not absolutes.

While a majority of the time price action like Monday’s leads to further declines, it didn’t happen this time, which is normal and expected. Even something that works 80% of the time will still fail one time for every four times it succeeds.

The lack of guarantees in the markets is why I always trade with contingencies in mind. Even though I liked the short setup Monday afternoon, I started with a partial position and placed a stop nearby. That way, if I was wrong, I had an exit plan in place. And it’s a good thing because I ended up using that exit plan Tuesday and that is the only reason my losses were so modest.

No one is ever right all the time, but traders that succeed over the long term make sure their trading plan limits their losses when they are wrong.

While seeing how things turned out Tuesday, it would be easy to say shorting Monday’s intraday reversal was a mistake, but starting with a small position and a nearby stop, my loss was far smaller than the potential reward if I got it right.

I will take that trade every day of the week because while it didn’t work this time, it will produce big profits more often than not.

Small losses and big rewards are how we make money in the market.

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Dec 05

Is smart money betting the eighth time is finally the real one?

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

The S&P 500 fell -1.8% Monday and finds itself retesting the all-important 4k level after smashing through this key resistance level only four sessions ago.

As impressive as last Wednesday’s 3% blast through 4k resistance was, it turns out a lot of investors have a fear of heights and few were willing to chase Wednesday’s surge even higher. That lack of follow-on demand allowed the index to slip all the way back to the widely followed 4k level.

Often resistance turns into support and we will learn early Tuesday if that’s the case this time. If the selling continues Tuesday morning, last Wednesday’s buying frenzy could finally be the climax top bears have been calling for and it is all downhill from here. But what are the odds?

As you can see from the above chart, there have been eight potential “tops” since the October lows. And seven of those “tops” ended in even higher prices. Is the eighth time the charm? Will this one finally be the real top?

While only time will tell what comes next, the one thing we know about up-trends is they continue countless times but they can only reverse once.

Trading is a form of betting, so the question is, should we bet on the outcome that happens 90%+ of the time? Or the trade that is right less than 10% of the time?

Until proven otherwise, I will continue giving the October rebound the benefit of doubt and there is nothing in the last three sessions of selling that changes my outlook.

All of that said, as much as I believe this latest swoon will ultimately resolve to the upside, my trailing stops got me out in the mid-4k’s. And no matter how much I disagree with a selloff, there is one thing I never do and that is argue with the market.

But just because I locked in profits Monday morning doesn’t mean I need to stay out. I’m already looking for that next bounce and I could be buying back in as soon as Tuesday morning if we get a nice bounce off of 4k support.

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Sep 21

I was wrong and it wasn’t so bad

By Jani Ziedins | Free CMU

Free After-Hours Analysis:

Whelp, that didn’t work. Tuesday evening I wrote a post titled, “Why I’m holding stocks ahead of the Fed’s rate-hike.” And 24 hours later, everyone knows that was the exact wrong move to make. But that’s the way trading goes sometimes.

If a person’s trading plan requires them to be right 100% of the time, they’re not going to last very long. The hard truth is successful trading means being wrong…a lot. If a person can’t handle that, they better find something else to do because trading isn’t for them.

In fact, the number one difference between successful traders and unsuccessful traders is how they handle being wrong. (Everyone has good ideas, it’s how they handle their bad ideas that drags most people down.)

Successful traders take their losses quickly and move on. Unsuccessful traders argue with the market and stick with their losers. As overly simple as this sounds, that really is all that separates good traders from everyone else.

Take my wrong trade on Wednesday. As I wrote Tuesday evening, I came into the Fed announcement holding stocks. But lucky for me, this was a new position and I always start trades with partial positions until they prove themselves. If I’m going to be wrong, it is a lot easier being wrong on a third or half position. And when I’m right, I keep adding partial positions until I’m fully invested.

And more than starting small, it is just as important to get in early. I picked up those positions Tuesday afternoon. By the time the Fed selloff started Wednesday afternoon, I was already sitting on a decent profit cushion, giving me a reasonable amount of protection. Sure, the index crashed 1% after the Fed’s announcement, but starting from +0.7% mitigates a big chunk of that sting.

And most importantly, when my trading thesis blew up moments after 2pm, I had no choice but to admit defeat and pull the plug. There was no giving it a few more minutes. If something is going to work, it is going to work. When the market took off in the wrong direction, it meant I was wrong and the only thing to do is get out and minimize the damage.

Sure, the market bounced hard an hour later, but I resisted the temptation to chase because the market wasn’t acting the way I expected, so it meant I was missing something. Rather than try to desperately salvage a bad trade, I simply let it go. And that proved to be a good decision because that bounce fizzled and there was a lot more selling left to do.

I was wrong on Wednesday. But more importantly, I lived to tell the story and I’m not going to let one trade discourage me. Like a city bus, the next trading opportunity will be along any minute.

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May 17

Why buying bounces is a lot easier and safer than most people think

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

The S&P 500 added 2% Tuesday and finds itself more than 200 points above Thursday’s intraday lows. Not bad, not bad at all.

Blink and you missed a great trade. But that was always going to be the case. Stocks snap back from oversold levels quickly. Wait a day or two for confirmation and you missed a whole lot of gains. And more than just lost profits, buying this late leaves a person vulnerable to a routine intraday step back, like the 40-point retreat we saw Tuesday morning.

As risky as it feels, buying the bounce early is the safest place to jump aboard. Distilled to its core, risk is nothing more than a function of height. The higher we are, the more room we have to fall. And on the other end, the further we fall, the less room we have left to fall.

It never feels this way in the heat of the moment. Most people are most confident at the top and scared at the bottom. But savvy traders know real risk is the exact opposite of perceived risk.

Everything felt great in January, but with 20/20 hindsight, obviously, January was a terrible time to be buying and holding stocks.

Now that the index is nearly 900 points lower, everyone is terrified of stocks, but common sense tells us it is far safer to be buying stocks down here than it was back in January.

It never feels good buying stocks after big pullbacks and buying Thursday’s late bounce was anything but easy. But three sessions later and the index is dramatically higher. It’s gotten to the point where my stops are already comfortably above my entry points, making this mostly a free trade for myself.

Keep going and I make a pile of money. Retreat and I get out at my stops and collect a few bucks for my time. Not a bad way to be wrong. But the only reason this trade is working so well for me is because I had the courage to get in early.

But none of this will surprise readers of this blog. As I wrote last Thursday:

While I feel a little silly buying [Thursday’s] bounce given how many false bottoms we’ve had over the last several weeks, I did it anyway because that’s what my trading plan told me to do. I started with a small position and a stop under intraday lows.

Will Thursday’s late rebound stick? Probably not. But I buy all of the bounces because I’m not psychic and I don’t know which one will work. The only way to make sure I don’t get left behind is to buy all of them. And by starting small, getting in early, keeping a nearby stop, and only adding to a trade that is working, I can buy these bounces with very little risk.

Well, here we are a few days later and I’m sitting on a nice pile of profits.

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As for what comes next, most of the market’s failed bounces turned tail within days, so four days into this bounce and it already looks different than the ones that let us down.

There are no guarantees in the market and this one can fail at any moment too, but it looks good so far and that means I will continue giving it the benefit of doubt. Anything above 4k and we are doing well.

I’m lifting my stops and watching to see how far this rebound goes. Hopefully, you are right there with me.

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Apr 07

Why I’m buying the bounce off of 4,450 support even though it probably won’t hold

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

The S&P 500 bounced off of 4,450 Thursday, making this the second day in a row 4,450 support held.

Headlines are a mess, which is to say, not much has changed.

Investors are slowly coming to terms with our new reality and most owners who are afraid of these things bailed out a long time ago. Running out of fearful sellers is keeping supply tight and putting a floor under stocks.

Two steps forward, one step back.

The index exploded 450 points higher from March’s oversold lows. But as expected, we have fallen into a very normal and healthy step back from those highs.

Is a 180 point pullback enough? Maybe. Maybe not. We won’t know until after it happens, which means as traders, we have to make decisions based on incomplete information.

While most people try to guess which bottom is the real bottom, I’ve been doing this for far too long to fall for such foolishness.

I realized a long time ago I can’t pick bottoms. But just because I can’t pick a bottom doesn’t mean I cannot trade bottoms. In fact, buying dips is one of my favorite ways to make money. But rather than guessing which bounce will be the real bounce, I hedge my bets by buying ALL of them.

Start small, get in early, keep a nearby stop, and only add to a position that is working.

Following those simple rules, I buy all of the bounces. Some of them work. Most of them don’t. But by starting small, getting in early, keeping a nearby stop, and only adding to a position that is working, the cost of being wrong is small.

In fact, many times I actually get in early enough to make a few bucks buying the wrong bounce. That’s because I quickly lift my stops to my entry points and then even a little higher as the bounce progresses. And when the bounce fizzles, I pull the plug at my raised stops, collect a few bucks, and wait for the next bounce.

The key is starting small and getting in early. And of course, keeping a nearby stop and only adding to a position that is working. Have I mentioned that yet?

But seriously, as nimble traders, there is no reason we have to pick and choose bottoms when we can simply buy all of them with very little risk.

I’ll let other people guess, for me, I’m sticking with the sure thing.

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Mar 22

Why buying something that feels so wrong almost always turns out so right

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

Tuesday was another good session for the S&P 500 as the index closed at the highest levels in over a month.

But paradoxically, headlines are not improving. Oil remains at the highest levels in eight years, inflation is at 40-year highs, the Fed is cooling the economy with a long string of rate hikes, and the war in Ukraine gets uglier by the day.

But as is always the case in the market, anyone waiting for headlines to get better before buying is going to be waaaaaay too late.

To get the best prices (and make the most money!), we have to buy before everyone else feels comfortable. And this crazy environment definitely counts as one of those times when most people don’t feel comfortable.

The market is forward-looking by nature and that means it trades based on what it thinks is going to happen in the future, not what is going on today. While all of the above situations are dreadful, they are not getting materially worse. And as is often the case, “less bad than feared” is an excellent reason to buy stocks.

As I’ve been saying all year, markets hate uncertainty more than they hate bad news. The market’s correction started on the double gut punches of rate hikes and a full-on war in Ukraine.

While it is obvious stocks will fall in an environment like that (and is why I recommended readers bailout back in early January), but two months later and there is far less uncertainty. Now the market can finally put a dollar amount on inflation, rising interest rates, the war, sanctions, and oil prices.

We are no longer worried about what could happen but are finally able to price in what is happening. And as is almost always the case, reality is turning out less bad than feared. (Our reality is most definitely ugly, but not nearly as ugly as the market’s runaway imagination.)

As wrong as this rally feels, this is the way it always goes. Savvy traders buy when everyone else is too afraid to buy because that’s the point when everyone who is going to sell has already sold and supply dries up. That capitulation point always occurs when headlines are their worst.

While there is always room for things to get worse (Inflation breaching 10%, oil breaking $150/bbl, Russia bombing Polish airfields, or Russia nuking Ukrainian civilians), it will take a significant escalation for stocks to crash under recent lows.

Trading always involves risk, but savvy traders trade what is happening, not what could happen. The greatest strength we have as independent traders is the nimbleness of our size. While I like the way the market is trading right now, if something changes tomorrow, no big deal, I lock in some really nice profits in the mid 4,500s and wait for the next bounce.

As for anyone sitting out of this market and looking to get in, I’m sorry to say, but this is most definitely the wrong time to be buying. These big two steps forward are poised for a very normal and healthy step back. Wait for that step back before jumping in.

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Mar 18

Why this week’s big bounce was inevitable

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

The S&P 500 surged 290 points since Monday’s close and is now sitting at the highest levels in a month. And to think, five days ago the crowd was predicting another big crash. So much for conventional wisdom.

In percentage terms, the index is up 6.9% since Monday’s close. Catch this wave in a 3x ETF and now we’re talking about real money! Not bad for a week’s worth of “work”.

Now, I wish I could say I knew the market was going to bottom Monday afternoon and rally sharply the rest of the week. Unfortunately, I’m not psychic and was along for the ride like everyone else.

But while I couldn’t predict the exact when and where this rebound was going to happen, I knew the odds of a sharp bounce were good. This is a volatile market and that means oversized moves in BOTH directions.

First, the market loves symmetry, meaning big drops are followed by big bounces.

Second, headlines are dreadful, but they haven’t been getting worse. The correction since the January highs priced in a lot of bad news. Owners that fear these headlines have been given plenty of time to bail out of the market and have been selling to far more confident dip buyers.

And third, as I’ve written before, the market hates uncertainty more than bad news. While nothing is getting better, we can finally quantify what we’re dealing with. Ukraine is horrific, but it isn’t turning into WWIII. The spike in oil prices stabilized in the low $100s. And the Fed is only planning to push interest rates up near 3%.

While none of this qualifies as good news, it wasn’t as bad as some people feared and stocks have rebounded in a “less bad than feared” trade.

Given the above, I knew the market was poised for a big bounce, what I didn’t know was when. And that’s why I started buying bounces the week before. When I don’t know which bounce will turn out to be the real bounce, the only way to make sure I don’t miss it is to buy all of the bounces.

But rather than do this in a reckless, pick a spot and wager everything on it sort of way, I start small, get in early, and keep a nearby stop. When a bounce fizzles and retreats, no big deal, I get out and wait for the next bounce. And when that one fizzles, I get out and try again.

Two weeks ago people thought I was crazy buying these bounces. But markets don’t bottom until most people have given up. That simply means I need to be more persistent than the average trader.

Some of my early buys turned a small profit. Others broke even. And a few lost a few bucks. Throw all of those trades together and it was largely a wash. But more important than the profit or loss on those small trades is I was ensuring I would be standing in the right place at the right time when the real bounce finally came along.

I’m more than happy to lose a few dozen points on a 1/3 position when the potential upside is 300 points on a full position. This is the kind of risk/reward traders dream of! All it takes is the vision and courage to buy when everyone else thinks we’re foolish. Four days later and who’s the real fool?

At this point, there is nothing to do but lift our stops up near 4,400 and see where this goes. (You bought the bounce on Tuesday, right?)

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Jan 25

The market gods answered your prayers. What are you waiting for? Plus the next profit opportunity in TSLA

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

Tuesday was another wild session for the S&P 500 as it swung between 3% losses and breakeven before eventually finishing down an intermediate 1.2%.

When is a 1.2% haircut actually considered constructive price action? When it follows a 4% intraday reversal the day before. In this case, two steps forward, half a step back. It is hard to call Tuesday a bad day given what could have happened.

If Monday’s sharp rebound was a house of cards, it would have collapsed Tuesday during that early 3% retreat. But instead of spiraling out of control, supply dried up and prices spent most of the day comfortably above those early lows.

Everyone laments how they wish their favorite stocks would pull back so they could buy more. But every time the market gods answer our prayers, most people lose their nerve. Instead of loading up on all of those wished-for discounts, most people join the panicked herd dumping stocks. Pretty ironic, eh?

While it feels like these selloffs and bounces come out of nowhere, that is almost never the case. Like a lobster resting in a cool pot of water, the heat comes on gradually.

Back in early January, we got that first interest rate fueled 2% tumble. But the market actually gave us plenty of time to get out near 4,750 when prices undercut recent lows. (You use trailing stops right???) That was our first and best signal to start peeling off profits. A few days later, the index bounced off 4,600. People who missed the first 4,750 selling opportunities were given another chance to get out.

And here we are, two weeks later, testing 4,200.

As I told readers back on January 5th when all of this started:

I came into Wednesday with sensible trailing stops spread across the lower to mid 4,700s to protect my profits “just in case”, but I was already pulling the plug on some of those positions long before those stops got hit. As easy as it is to buy back in, there is no reason to stick around when the tide so obviously starts turning against us. When the panic selling hits, I want to be one of the first to get out, not one of the last. And that means acting early and decisively.

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That was then, but what about now?

While Monday’s 4% rebound left a lot of people flat-footed, Tuesday’s retrench gave everyone another shot at buying those big discounts. Did you have the nerve to take advantage of it?

Remember, start small, get in early, keep a nearby stop, and only add to a position that is working. Follow those simple guidelines and you can profit from these great trading opportunities too.

If prices retreat later this week, no big deal. We get out at our stops and then buy the next bounce. It really isn’t that hard.

If a person is paying attention, the market isn’t nearly as cruel as its reputation. Look for the clues and you can avoid most of the carnage and be there to profit from everyone else’s misfortune.

Keep your cool during times like this and making money is pretty easy.

Much like the indexes, TSLA gave us a nice buyable bounce Monday.

If we sold the violation of $1k support last week, we were sitting on a pile of cash looking for the next trading opportunity. And as luck would have it, it only took two trading sessions for TSLA to give us the next entry point. Buy the bounce with a stop under Monday’s lows.

Maybe this bounce holds or maybe it doesn’t. But someone that bought the $850 bounce is already well ahead of the TSLA owner that held this retreat from $1,200.

Profit comes to those willing to act. Everyone else gets left holding the bag. Don’t be everyone else.

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Jan 20

Why smart money was buying Thursday morning’s bounce. Plus, why NFLX owners only have themselves to blame

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

Thursday’s session for the S&P 500 was far more dreadful than the day’s 1.1% loss suggests.

The day started off well enough when the index popped nicely at the open and rallied all the way to 4,600 support by late morning. But rather than propping up the market, 4,600 turned into a ceiling and that was as good as it got. By the end of the session, the index shed 120-points from those intraday highs and crashed through recent lows. Ouch!

But if Thursday was such a dreadful session, why were savvy traders buying that morning bounce?

The answer is simple, it gave us a nice, low-risk entry and it would have been foolish to not take it.

All too often novice traders fixate on whether a trade worked or not. But what these rookies fail to realize is a good process is far more critical to long-term success than the result of any individual trade.

For example, if an eccentric trader bought far-out-of-the-money call options based on an astrology chart, just because the trade worked for him that single time doesn’t mean it was a good trading decision.

While people often claim it is better to be lucky than good, the problem with luck is it always runs out.

Stick with a good process and we don’t need luck, we just need to be smart enough to stick with it.

Even something with an incredible 80% win percentage will still fail one time out of every five. Does it make sense to throw out a highly reliable process simply because it didn’t work that one time? Of course not.

And the same goes for buying this Thursday morning’s bounce.

Now, don’t get me wrong, buying bounces doesn’t work 80% of the time. Not even close. In fact, it only works about 30% of the time. But the win percentage isn’t the genius of the trade. It’s the unbelievable risk/reward these setups give us.

Buy the bounce early with a partial position. When prices continue higher, as they usually do, move our stops up to our entry points. Bam, this just turned into nearly free trade.

If Thursday’s bounce returned to the highs, like every other dip has over the last 14-months, that’s 200 points of profit in our pocket. If the bounce stalls and retreats, like it did Thursday, we get out at our entry point for what we paid. No harm no foul.

So a trade with 200 points of upside and close to zero downside? Who cares if it only works 30% of the time, we should be buying it every chance we get.

This is why smart money was buying Thursday’s early bounce.

And you know what? I will do it again Friday if we get the same setup. Except this time there will be 300 points of potential upside if we return to the highs. Bring it on!

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NFLX got hammered after the close following disappointing subscriber growth. While the after-hours losses put the stock back to $400, that’s a long, long way from the $700 autumn highs.

But here’s the thing, savvy traders are not taking tonight’s 20% haircut. This stock has been in free-fall since failing to hold $600 support at the beginning of January. If a person didn’t sell the first $600 violation, there was no excuse to keep holding after it fell under December’s lows.

Big selloffs like this are many months in the making and while it feels like it hits us all of a sudden, anyone caught up in this ignored a lot of very obvious sell signals. I mean seriously, the stock gave us THREE chances to get out at $600!

And while it feels like this cannot possibly get any worse and it has to be close to a bottom, just ask a PTON owner how much lower these things can fall.

I like NFLX. They have a great product. But this is a momentum stock and the momentum is clearly in the wrong direction.

I’m more than happy to buy the next bounce, but it needs to bounce first.

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Jan 14

When chasing your tail is the smart trade. Plus what to do with TSLA

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

The S&P 500 went for another wild ride on Friday.

The index gapped lower at the open, but as is often the case with opening gaps, supply dried up within minutes and prices bounced back to breakeven. (I’ll get into the reasons why this happens so often in another post. Sign up for free email alerts so you don’t miss it.)

Unfortunately, the relief was short-lived and prices quickly slumped back near the opening lows when dip buyers failed to show up and support the early buying.

But rather than crash through the lows and trigger another wave of panic selling, supply dried up for a second time and the index actually bounced back to breakeven, even managing to eke out a small, 4-point gain by the end of the day.

Phew, that was a mouthful and it was definitely a topsy-turvy session. But what it wasn’t was another rout. Bears had the perfect setup to launch another big wave of panic selling, but they couldn’t get stock owners to play along. And that’s a pretty good indication bulls are still in control of this market.

As I often remind readers, it’s not how we start but how we finish that matters most. And while it is hard to get excited about a measly 4-point gain, that is actually a respectable win given where the index spent most of the session.

In fact, I was encouraged enough by this price action to start buying back in. If this market was fragile and vulnerable to a larger collapse, it would have happened Friday. The fact we closed well above early lows tells me this market wants to go higher, not lower.

To the untrained eye, it looks like I am chasing my tail these last two weeks because I keep getting in and out of the market. (And it definitely feels like I am chasing my tail!)

I sold the initial dip at my stops in the upper 4,700s. Then I bought the first bounce late last week but ended up getting dumped out during last Friday’s pathetic close. I tried again this Monday, buying that impressive bounce. That trade worked well until Thursday’s interest rate second-guessing told me it was time to get out again. And then as I wrote above, I bought back in Friday afternoon.

I hate buying and selling this often. But that’s what my trading plan tells me to do at each of these junctures and I know better than to question my trading plan. When done right, my trading plan A) keeps me safe and B) makes sure I am in the right place at the right time to take advantage of the next big move.

If that means I have to chase my tail every once in a while, so be it.

While I collected a small profit this week arbitraging these whipsaws, that’s not the reason I’m selling these dips and buying these bounces. I’m doing it to protect myself from a larger selloff.

I will be the first to admit I can’t predict the future and I don’t know if this pullback will bounce at 4,600, 4,400, or 4,200. What I do know is it doesn’t matter if this is a 200 point pullback or a 600 point pullback, I don’t want to hold through either of those pullbacks.

When I move to the safety of the sidelines, I no longer care if it is a 200 point or a 600 point pullback. And as soon as I’m in cash, the first thing I’m doing is looking for the next buying opportunity so I can get back in.

Maybe Friday’s buy will prove to be a mistake. And I’m okay with that. I simply get out and try again. Or maybe the market bounces nicely Tuesday and I add more.

Either way, it doesn’t matter to me as long as I’m standing in the right place at the right time.

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TSLA took a big hit Thursday, but more importantly, the stock held $1k support.

While it is more fun watching a stock go up every single day, we know that’s not realistic.

TSLA is trading well enough to stick with as long as it remains above $1k support. In fact, for those that missed the first bounce, this pullback is giving you a second chance to get in.

Buy the bounce with a stop just under support.

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Dec 14

Is smart money buying or selling this dip?

By Jani Ziedins | Free CMU

Free After-Hours Analysis:

The S&P 500 tumbled Tuesday for the second session in a row. While two material down days isn’t much fun for stock owners, so far the selling has been contained and the index bounced nicely off of 4,600 support.

During events like this, most people are asking themselves, sell the dip or keep holding?

But the better question is, why not do a little bit of both?

All too often people think of trading as a binary decision. Good or bad. Up or down. All-in or all-out. But that’s not the way savvy traders approach the market. They don’t even restrict themselves to these black and white terms. Instead, they focus on the gray of managing risk.

Is this a good time to be fully invested or does it make sense to peel off some risk? That’s a much different question than should I sell or should I keep holding.

I’m pretty confident this dip will bounce. Because you know what, every dip over the last 10 years has bounced. In fact, every dip in the history of the stock market has bounced back even higher.

The question is if I want to wait that long. And as a trader, the answer is always, “Of course not.”

I started peeling off risk when this starts falling and I start getting edging back in when prices bounce.

Sometimes this approach leads to riding through some whipsaws, like this week. But riding whipsaws sure beats holding something that is falling.

I peeled off some risk Monday afternoon and sold more when the index undercut the opening lows Tuesday morning. But prices bounced nicely off of 4,600 support in midday trade and that was our signal to start buying back in.

Sure, I could have held through this dip. The problem is I never know which dip will turn out to be the real dip and I’m not willing to bet my trading account on always being right.

The simple answer is I treat all of the dips as the real deal and I treat all of the bounces the same way. That way I always ensure I will be standing in the right spot at the right time when the market makes its next big move. And if I have to chase my tail every once in a while, it really isn’t that big of a deal.

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Nov 01

A smart mistake, a smarter correction, and TSLA to the MOON!

By Jani Ziedins | Free CMU

Free After-Hours Analysis:

Last Wednesday I slammed the S&P 500 for its dreadful close. Then the index proceeded to show me up by setting three record closes in a row. Funny how that works.

This reversal highlights just how nimble we need to be as traders. We cannot allow ourselves to get hung up on opinions. Even reliable trading signals can lead us astray. (An impossibly high accuracy rate of 80% is still wrong one out of five times!)

Now don’t get me wrong, I’m not suggesting taking risk off the table last Wednesday afternoon was a mistake. In fact, it was the only sensible decision to make. But just because we took risk off the table last Wednesday doesn’t preclude us from adding that money back in Thursday morning when the worst failed to materialize and prices bounced back.

I took my lump Thursday morning and I’m better for it. And even though I lost some money in the exchange, I’m more than happy to pay a small price now to avoid a bigger loss later. Remember, this isn’t about getting every trade right. It is about making more money than we lose. Sometimes that means taking small losses and I’m always fine with that as long as it allows me to be in the right spot at the right time when the big moves happen.

This is also a good opportunity to talk about position sizes. While a lot of people think in binary terms and move all-in and all-out of the market, that often is an expensive approach that magnifies mistakes and compounds regret.

I like moving in partial positions. Start with a quarter, third, or even half position. Only add more if that initial trade is working. If you are wrong, you only lost money on a partial position.

And even more advantageous, this risk management strategy allows us to be even more aggressive with our initial trades. We no longer need to wait for confirmation. Instead, we jump on the first hints of a selloff or bounce. I sold 1/3 last Wednesday afternoon and I bought 1/3 back Thursday morning. While my ego was a little bruised, my trading account hardly missed a beat.

TSLA is positively on fire. Good thing readers of this blog have been hanging on since the $600 bounce off of support and have been moving up their stops up ever since.

This price action is getting downright silly but it usually does with these extreme highfliers. Impossibly high gets even higher and that’s definitely the case with TSLA. As I wrote last week:

Now don’t get me wrong, I am most definitely not a TSLA bull and this looks as sustainable as all those dot-com names back in 2000. But I’m a trader and it doesn’t matter to me where this stock will be five years from now. If it is going up today, I want to be aboard and enjoying the ride. We can worry about all of that other stuff when it eventually becomes an issue. Until then, “don’t worry, be happy.”

Well, last week’s $1k breakout turned into $1,200 Monday and who knows what Tuesday holds. No doubt this will get really ugly at some point, but until then, keep holding for higher prices and lifting our stops. Stick to this simple strategy and we will be sitting on a pile of cash when everyone else is wondering what happened to all of their amazing profits. (Remember, we only make money when we sell!)

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Oct 21

If you missed this bounce, use this simple and reliable trick next time

By Jani Ziedins | Free CMU

Free After-Hours Analysis:

Thursday was the S&P 500’s seventh up-day in a row. Not a bad run from a market that most people, including myself, thought was on the verge of the next lower. But that’s the way this game works. Prices don’t bounce until the crowd has given up on the bounce. And now we are left with a mountain of regretful sellers who are kicking themselves for acting so hastily.

Lucky for regular readers of this free blog, I wrote the following seven sessions ago:

Wednesday’s 0.3% gain counted as a bounce, so I held my nose and bought it. My trading plan told me to add more following Thursday’s strong open, so I bought more. And here I am, holding a nice profit in a trade I didn’t even want to make! This example highlights why we always follow our trading plan, not our gut.

While I didn’t like this bounce initially, I bought it anyway because that is what my trading plan told me to do, and now I’m sitting on a pile of profits. Funny how that works.

I’ve been doing this for a long time and my gut tends to be right more often than not, but every time my gut and trading plan disagree, I always go with my trading plan because it is right far more often than my gut. No surprise an objective, unemotional, thoughtful plan can outperform an emotional, egotistical, and a sometimes irrational bag of meat (i.e. me).

While years ago I would overrule my trading plan, almost every time I did, I came to regret it not long after. Get beat over the head with humbling losses often enough and eventually, I learned my lesson. And now I always follow my plan no matter what my gut thinks. Today I am sitting on a pile of profits in a 3x ETF because of that lesson I learned the hard way all those years ago.

If you messed up this trade, don’t be too hard on yourself. Count this as a learning experience and try to do better next time.

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Oct 14

Turning mistakes into dollars

By Jani Ziedins | Free CMU

Free After-Hours Analysis:

The S&P 500 exploded higher Thursday, reclaiming 1.7% of the latest selloff and closing comfortably above 4,400 support. This is a mile from Tuesday’s Chinese drip torture that gave the impression we were on the verge of the next collapse.

And you can count me as one of the fooled. On Tuesday, I wrote a post titled “Why I’m so concerned about a 0.2% loss“.

While most prognosticators quietly sweep their mistakes under the rug, I have no problem admitting my mistakes. In fact, acknowledging our mistakes is the only way we can learn and grow as traders.

But in this particular instance, I wouldn’t say closing my long positions following Monday’s dreadful close was a mistake. While it was ultimately proven to be unnecessary, sound defense is never wrong.

Savvy traders that are successful over the long-term learned early in their career that preservation of capital is far more critical than growing capital. That’s why we only take calculated risks when the risk/reward is stacked in our favor, and even then, we back that up with sensible stops to protect us when things don’t work out in our favor.

To do it all over again, I sill would lock in modest profits on Monday and start looking for the next trade because that is the only sensible move to make in that situation. While it didn’t work this particular time, in a dozen similar setups, it would have been the right call. We play the odds and don’t let the exception to the rule cause us to give up on our well-thought-out rules.

Anyway, enough about that. The next important development is what happened Wednesday afternoon. The inevitable collapse never arrived and an early dip bounced and closed near the intraday highs. While no one is getting rich off of Wednesday’s 0.3% gain, the signal it gave us was compelling and worth acting on.

I always remind subscribers that as soon as we get out, we need to start looking for the next opportunity to get back in. Sometimes the next trade comes along as quickly as a few hours later.

I will be the first to admit Wednesday’s bounce wasn’t all that attractive and I was already suspicious of this market, so my gut told me to ignore the bounce. But I don’t trade my gut, I trade my trading plan and that told me to start with a small position Wednesday afternoon. (Buy every bounce: start small, get in early, keep a nearby stop, and only add to a position that is working)

Wednesday’s 0.3% gain counted as a bounce, so I held my nose and bought it. My trading plan told me to add more following Thursday’s strong open, so I bought more. And here I am, holding a nice profit in a trade I didn’t even want to make! This example highlights why we always follow our trading plan, not our gut.

Now who knows, maybe this is just another false bottom on our way lower. But by jumping aboard this bounce early, I have a nice profit cushion that will more than offset any near-term risk. If this bounce fizzles and retreats Friday or next week, I get out at my stops and try again next time. No big deal. And best of all, by being proactive and getting in early, my stops are already at or above my entry points, so this trade is now nearly free to me. Hard to beat that risk/reward.

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Oct 06

Why overnight market moves are so misleading

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Analysis:

Wednesday’s resilient price action shows overnight traders don’t have a clue what they’re doing. The S&P 500 opened Wednesday’s session by gapping down nearly 1%. But those opening levels were as bad as it got and prices rallied nicely through the day. So much for all the death and destruction the futures market predicted a few hours earlier.

The problem with overnight markets is their thin volume allows them to be dominated by emotional retail traders. There is no way institutional investors can find the number of buyers and sellers they need to move their huge positions. That leaves basement dwellers and overseas speculators in control of a market they clearly don’t understand.

While these small traders can influence the open like they did Wednesday morning, when institutional investors show up for regular hours trade, they don’t give a hoot what overnight traders were doing. Instead, most of the time they go back to doing what they were doing the day before, which in this case was buying the bounce.

The best thing we can do if we find ourselves on the wrong side of an opening gap is to keep our cool. Often big overnight gaps reverse within hours. This is exactly what happened Wednesday when the daily low was within an hour of the open and the index rallied through the day, ultimately finished 1.5% above those early doom and gloom levels.

And this strategy isn’t just for protecting existing positions, if we have cash on hand, buy the early bounce with a stop under the early lows and enjoy the ride. If it doesn’t work out, no problem, get out near your entry point and wait for the next bounce.

As for what comes next for the market overall, always pay attention to how we close because how we open doesn’t count for squat. Wednesday was a nice close and even with the wind at their backs Wednesday morning, bears couldn’t extend the selloff. It definitely feels like we are running out of sellers at these levels and that is a recipe for a near-term bounce.

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Jan 28

Why everyone will be right about GME, but still end up losing everything

By Jani Ziedins | Free CMU

Cracked.Market University:

Everyone is talking about GME, but how can you not when we are witnessing something we will likely never see again in our lifetimes?

If GME at $40 seemed ridiculous, then $100 is absolutely bonkers. And I can’t even begin to think of a word that adequately describes the $483 it hit this morning.

If someone told me a stock would explode 2,463% in four short weeks, surely they just cured cancer, cracked the code for cold fusion, or invented an anti-gravity machine. Obviously, whatever they did, it would change life as we know it.

Yeah, no. GME is a pedestrian company that sells used video games on physical disks. And not only did this company not cure some great ailment, it probably won’t even survive long enough to see the 2024 Paris Olympics.

That probably explains why the stock collapsed 77% in two short hours this afternoon as it tumbled all the way back to $112.

The most fascinating thing about this week’s move from $65 -> $483 -> $112 -> $193 is EVERYONE was right!!! The bulls were right about this “going to the moon.” And bears were right that it would collapse in a gigantic fireball.

Between this week’s 640% surge and subsequent 77% collapse, everyone had the chance to be right. And most GME speculators were sitting on a huge mountain of profits. Some profits even reached seven figures!!!

But as good as this seemed for everyone involved, virtually all of these traders will ultimately lose money. And not just a little money. But they will likely lose all of their money on this trade. (And some will lose even more than that!)

The problem is when these people are sitting on a mountain of profits, rather than thank their lucky stars and lock-in these once-in-a-lifetime profits, they are too busy gloating and taunting the other side. Instead of being satisfied with nearly $500, bulls insist on waiting until this goes all the way to $1,000. And bears that captured a 77% tumble in 120-minutes, rather than jump on this historic move, they demanded it to go all the way to $5.

And you know what, both sides are equally guilty of holding too long and letting these historic profits evaporated before their very eyes. As the saying goes, “bulls make money, bears make money, and pigs get slaughtered.”

Don’t be a pig and take these spectacular profits when you have them. Because if you don’t, they will almost certainly be gone in a few hours.

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Oct 29

The smartest way to trade this volatility

By Jani Ziedins | Free CMU

Free After-Hours Analysis:

Stocks bounced back Thursday and recovered a respectable chunk of Wednesday’s losses. In fact, it even got to the point where anyone who shorted Wednesday’s crash was left sitting on a pile of losses. Ouch! So much for chasing an easy short. But that’s not unusual. Anyone that shows up late to the party is often left holding the bag.

Crashes by nature are breathtakingly quick and they usually end with sharp bounces. Hold a few hours too long and nice short profits evaporate before our eyes. That’s exactly what bit everyone who shorted Wednesday’s tumble and didn’t harvest profits.

That’s not to say bulls don’t also commit the same foul. The indexes are down in Thursday’s after-hours session and virtually every bull that bought Thursday’s bounce is now sitting on a pile of losses. How’s that for equal opportunity humiliation!

And so continues the meatgrinder, a.k.a. the stock market. This is an extremely volatile period for equities and that means big swings in both directions. Every day of up is inevitably followed by a day of down.

There is nothing wrong with being aggressive and grabbing ahold of these large intraday swings. But be smart enough to recognize these profits are fleeting and they will be gone within a few hours. Take worthwhile profits and be ready to do it again in the other direction a few hours later.

As for what comes next? Expect more of the same. Wednesday’s 3.5% tumble was far too large to brush off with a single up-day. This volatility will stick around until at least after the election and probably a couple of weeks beyond that too.

That said, there is no reason to fear this volatility as long as we are smart about it. Put tripwires on either side of the open and grab ahold of that early move, whichever direction it happens to be. Place your stop-loss just on the other side of the open and be ready to lock-in a pile of worthwhile profits later that afternoon. Rinse and repeat the next morning.

If the trade doesn’t work and we get stopped out, no big deal, especially if we got in early enough and were able to move our stop to our entry point. That turns this into a free trade. It’s hard to beat that risk/reward.

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Sep 21

CMU: How I traded Monday’s tumble

By Jani Ziedins | Free CMU

Cracked.Market University:

Spend any time on the internet and it sounds like everyone makes a killing trading stocks because all you ever hear is people bragging about their big scores. But those of us that have been around the block a few times know better. Unsurprisingly, very few people mention their losses. In fact, most people hide from them. And not just from other people, but also from themselves when they refuse to acknowledge a bad trade by either selling it or tallying the true cost after they close it. But as a matter of transparency, I’m willing to let everyone see what the other side of my personal trading looks like.

First, let’s roll the clock back to Friday afternoon. As I wrote in last week’s free post, I liked the way the S&P 500 bounced back above 3,300 after briefly violating the weekly lows earlier in the day. Big money makes their moves late in the day and they were clearly more interested in buying Friday’s dip than selling it. That resilient price action was a buy signal for me. But rather than rush in with everything I’ve got, I start every trade with defense in mind. My trading plan clearly dictates I start small, get in early, keep a nearby stop, and only add to what is working.

What this means in practice is I prefer being aggressive when buying bounces and that means getting in not long after the bounce. I protect myself by testing the market with a smaller 1/3 position. I further back this up by placing a stop nearby, typically under the recent lows. And I only add to a trade that is working. (I never “average down”)

This recipe often leads to nice opening pops like we saw the previous two Mondays, but I wasn’t as lucky this morning. There was a perfect headline storm over the weekend. Ruth Bader Ginsburg’s death and subsequent nomination fight likely ruins any chance for a near-term Covid stimulus. Then China retaliated against Trump’s Tik-Tok ban by threatening to do the same against foreign companies operating inside China. And finally, parts of Europe are considering a second round of economically devastating shutdowns. Put all of this together and it is no surprise stocks tumbled at the open.

That meant I started the day playing defense. But since I only had a partial position, the losses were very manageable. The one exception I have to my otherwise rigid stop-loss policy follows opening gaps. Rather than sell the open when a gap leaps over my stops, I give the market 10 or 20 minutes to find a near-term bottom and bounce. That new low becomes my new stop and I will sell a violation of that no matter what. If I find myself already down 2% at the open, it isn’t that big of a risk to give the market another 0.25% or 0.5% of slack to see if there will be an early bounce. And most of the time, the market does bounce. Whether that bounce sticks or not is less consistent, at least I gave myself the opportunity to ride a rebound higher. If the early bounce fails, no big deal, I get out nearly where the market opened.

This morning the market attempted a modest bounce following the opening gap, but within an hour, it undercut the early lows and I was out. I even took a stab at a small short following my standard trading plan of starting small, getting in early, keeping a nearby stop, and only adding to what is working. That said, betting against a bull market is one of the hardest ways to make money and I enter these shorts with very low expectations. And just as expected, the early weakness bounced and I was out of my short in a matter of hours. No big deal. Most shorts don’t work, but the few times they do work, they make a ton of money, so they are definitely worth trying. Especially when I can enter and exit them without losing any money like I did today.

Just like Friday, I was impressed with Monday’s late surge into the close. While the market still ended down more than 1%, institutions were clearly more interested in buying the dip than selling the weakness. Right or wrong, big-money moves the market and I follow their lead. For the third time, in two days, I started small, got in early, and left a stop nearby.

Will this afternoon’s buy be any more successful? I don’t know. If it works, I will add more Tuesday and ride this wave higher. If it doesn’t, I’ll make the same defensive moves I made today.

This market is on the verge of making a big move. The only thing that matters is I am in the right place at the right time. If I have to take a few small losses along the way, no big deal. As long as I keep buying the bounces and shorting the breakdowns, I know my payday is coming. The worst thing I can do is give up now just because my last trade didn’t work. As long as my losses are small, I can keep doing this for a long, long time.

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Sep 15

CMU: How savvy traders look at the market

By Jani Ziedins | Free CMU

Cracked.Market University:

All too often people think of trading in binary terms. They are bullish or they are bearish. The market is going up or it is going down. I need to be all-in or I need to be all-out. This stock is either racing to the moon or it is in a bubble and on the verge of collapse.

What these people fail to grasp is trading successfully is far easier when we approach the market in shades of gray. We don’t have to be all-in the same way we don’t have to be all-out. Sometimes a trade looks promising but it isn’t fully developed. That’s a great opportunity to test it with a smaller position and see what happens. When the trade starts working, we add more. If it fizzles because we got in too early, no big deal, pull the plug and try again next time. These aggressive trades are not unreasonably risky when our risk is reduced by starting with smaller position sizes.

On the other end of the spectrum, maybe we have a big winner we love, but the recent price-action is throwing off some warning flags. Not enough to abandon ship, but if we lock-in some profits, it becomes far easier to confidently hold the remainder of our position.

Shades of gray is how I felt about today’s price action in the S&P 500. As I wrote previously, I liked Friday’s late resilience after violating the weekly lows and bouncing back. The market confirmed that optimistic sentiment Monday morning when it poped at the open. I started buying partial positions early in this rebound because I could manage my risk by starting small, getting in early, keeping a nearby stop, and only adding to what was working.

Following that simple recipe, I ended up with a full position in a 3x index ETF. Tuesday started well with another opening gap higher and everything looked great. Unfortunately, the market’s midday second-thoughts gave back a big portion of those early gains. That fizzle was enough to give me pause. I still liked the way the market was trading and it is unreasonable to expect stocks to go up every single day. My inclination was to continue giving the rebound the benefit of doubt, but taking some of my position off midday made it a lot easier to confidently stick with my trade.

With one foot in the market and one foot out, no matter what happens Wednesday, I will be in good shape. If the rebound continues, I still have a lot of long exposure. If the market tumbles back to 3,300 support, I reduced my risk and it won’t sting nearly as much because I scaled back.

After the market reveals its intentions Wednesday morning, I will either buy back in or pull the plug and wait for the next opportunity. While other people are stressing over the overnight futures, I will be sleeping like a baby because I know I’m in good shape no matter what happens tomorrow.

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Sep 10

CMU: Was buying Wednesday’s bounce dumb?

By Jani Ziedins | Free CMU

Cracked.Market University

Back when I was a novice trader, I used to look at the market and try to figure out where it was headed next. Then I would make my trades based on those predictions. Many times I was right and this approach worked well. Unfortunately, other times it didn’t go as planned and my predictions caused me to go down in flames while holding a position that “just needs a little more time.” I assume all traders have been there at one time or another.

After being handed some pretty humbling losses, I realized this was a foolish way to trade. Unfortunately, that is the way most people still trade.

In yesterday’s post, I wrote about buying the bounce and many readers were shocked. Obviously, yesterday was “a dead-cat bounce and the market was clearly headed lower.” As a seasoned trader, I don’t get that mindset. For me, if the market is going up, I buy it. If it’s going down, I sell it. It doesn’t get any more straightforward than that.

Yesterday, the market went up and regardless of how I felt about the dip and whether it went “too far” or “not far enough”, the market was going up and that created a buying opportunity.

I fully acknowledge that I will never be right all the time. Rather than try to predict the market, I simply follow its lead. When it goes up, I buy. When it goes down, I sell. Was yesterday’s bounce the real deal? Following today’s dismal reversal, obviously not. But if a person is nimble enough to get in early and has the discipline to get out early, they have the luxury of trading these swings with near impunity.

I bought yesterday morning and held the strength through the close. Things were going well enough this morning to keep holding, but a midday fizzle undercut my stops and I was out. If the trade worked, I would have made money. It didn’t work and I lost nothing more than my time.

No doubt people on social media will call me stupid for trying, but personally, I think it is stupid not to try. Especially since this approach allowed me to make a killing riding this “impossible rally” higher since the March lows.

Is the Covid rally dead? Maybe…Maybe not. All I know is if this bounces again, I will be one of the first in line to buy that bounce. If it doesn’t work next time, then maybe it will happen the time after that. As long as I’m savvy with my entries and disciplined with my exits, it doesn’t really matter when it happens. The only thing that matters is that I’m in the right place at the right time when this thing is finally ready to rip. And most likely, that will happen when most people are still predicting bigger losses.

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