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Dec 16

What smart money is doing with their short positions

Free After-Hours Analysis:

The S&P 500 fell another 1% on Friday, making this the third down day since Wednesday’s Fed meeting. But as dire as that sounds, the index only lost 2% this week. While not great, this is hardly free-fall material.

Powell did his best to rain on the market’s parade, but it is unlikely his comments changed many peoples’ minds. Those that were bearish Wednesday morning are just as bearish today and those that were bullish are just as bullish.

Obviously, the bulls didn’t get that warm and fuzzy feeling from Powell’s press conference, but that lack of comfort hasn’t translated into a panic on the streets yet.

Inflation is moderating, the labor market remains tight, the economy is chugging along, and the Fed promises to fight inflation to the end. So pretty much everything that we knew last week. And if this is what we were thinking last week, there is no reason for stock prices to deviate in a significant way from where they were last week. Find support near 3,800 and this week’s selloff is nothing more than a routine bit of down following a nice bit of up.

Having shorted the post-Fed crash on Wednesday, I’m sitting on a nice pile of profits. At this point, I’m far more paranoid about losing those profits than interested in pushing my luck to make a few more bucks. I took some partial profits Friday afternoon and I will sell even more Monday if prices bounce.

Maybe the reflexive selling extends into next week and I’m selling these partial positions too soon. But that’s okay because taking worthwhile profits is never a mistake. I know I can’t pick the bottom, so I’m not even going to try. If the selling continues, I will profit from the partial positions I’m still holding, so it really is a no-lose situation for me.

As for what comes next, if prices bounce Monday morning, I’m closing the remainder of my shorts and even going long if those early gains persist for an hour or two. Starting small and putting a stop under the early lows would be a great, low-risk entry.

But my perfect setup would be a sharp selloff Monday morning that falls over three percent before bouncing hard in a capitulation bottom. I don’t think we will be that lucky, but that is what I’m hoping for.

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Dec 15

Who knew being wrong could be this profitable?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 extended Wednesday’s post-Fed selloff by crashing another 2.5% on Thursday.

The Fed did what everyone expected when it raised rates another 0.5%. What unnerved investors was the hard-line Powell took when answering questions about how high rates will eventually get and how long they will stay there. Long gone is the affable Uncle Jerome and he’s been replaced by the hard-edged Sergeant Powell.

But this isn’t totally unexpected since the bubbling relief felt in the market over the last few months is threatening to undo all the hard work the Fed has been doing by raising rates. If investors return to the punchbowl too soon, the Fed will have no choice but to raise rates even higher to break inflation. The Fed needs to keep a lid on the market’s optimism, and the last two sessions had the desired effect.

While I still count myself as one of the soft-landing optimists, I know better than to trade my opinion. As I wrote Tuesday night before the Fed’s policy statement:

Give the market a few minutes to process the news and be careful because the initial knee-jerk is often in the wrong direction, but after a handful of minutes, the market will no longer be able to hide its true intention and it will be a big move. Whether that is up or down is anyone’s guess, but as nimble traders, there is no need to guess. Follow the market’s lead and let the profits come to us.

Well, here we are down more than 4% from the Fed announcement. While my optimistic inclination was misplaced, my agnostic trading plan was spot on the money. No one likes being wrong, but a big pile of profits definitely cushions the ego blow. In fact, if I can make this much money being wrong, here’s to hoping I’m wrong a lot more often.

As for what comes next, shorting stocks is one of the hardest ways to make money because the windows of opportunity are so small and the inevitable bounce comes hard and fast.

Closing Thursday near the intraday lows means we can continue holding Wednesday’s short positions, but be sure to lower our trailing stops. By this point they should be even lower than our entry points, making this a very low-risk trade. But we’re not looking for low-risk, we are looking for profits and that means keeping a close eye on this one.

Maybe prices bounce Friday, but more likely the next bounce comes early next week. Lock in profits when it arrives and then get ready for the next trade.

As much as bears want to believe stocks are headed back to October’s lows, this will bounce long before then. Don’t get greedy and be sure to lock in worthwhile profits. Remember, we only make money when we cash in our winners.

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Dec 14

The best way to trade the post-Fed letdown

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The Fed did what everyone expected Wednesday and raised interest rates by another 0.5%. That said, the stock market slipped from its midday highs when the Fed’s forward-looking guidance implied another 0.75% of hikes were headed our way in 2023. That was slightly more than investors were prepared for.

But as wild as the previous Fed meetings have been for the stock market, Wednesday’s 0.6% decline was fairly benign. No doubt it was rough getting to -0.6% as the index shed nearly 90 points in the hour after the announcement, but the selling found a bottom in afternoon trade and the market reclaimed 30 of those 90 points by the close.

While these are still big price swings, volatility is definitely coming down as traders get more used to our new reality. What could have triggered a multi-percent selloff months ago, this time market seemed content with little more than a half percent decline Wednesday. That suggests the market is not as overextended as the critics claim. And that makes sense because nearly a year into 2022’s bear market, most overreactive traders have already left the building.

But a loss is a loss and when combined with Tuesday’s bearish intraday reversal, that suggests there is more selling pressure at these levels than interest in buying.

As I wrote Tuesday, weakness after the Fed statement was shortable with a stop above the pre-announcement highs, which is exactly how I traded it. (I came into Wednesday directionally agnostic and was just as willing to buy a pop following the Fed announcement.)

Any further weakness on Thursday or Friday is a clear invitation to add to our short positions with a stop above Wednesday’s intraday highs. If the selling continues, be sure to move our stops down to our entry points in order to turn this into a low-risk trade.

Limited risk and lots of profit potential, what’s not to like about this trade?

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Dec 13

Why Tuesday’s bearish reversal doesn’t mean anything

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Tuesday was another wild ride for the S&P 500 as an encouraging monthly inflation report sent stocks flying at the open. Unfortunately, that was as good as it got and the index gave up a majority of those early gains when follow-on buyers failed to show up.

Usually, this kind of bearish reversal is well…bearish. But Tuesday’s price action doesn’t count because the market discounted those early gains. As I’ve been saying for days, the only thing this market cares about is the Fed’s policy outlook and we won’t know what that is until Wednesday afternoon. While Tuesday’s fizzle would ordinarily be a big red flag, given what is really important to this market, the lack of follow-on buying was expected because a modestly improved inflation report is not what is driving this market.

That said, Tuesday’s big pop does show what kind of potential there is to the upside if we get the right cocktail of encouraging news Wednesday. So as high as it feels like we are given inflation and a potential economic slowdown, high is far more likely to get even higher than it is to peak and reverse.

I count myself as an optimist and am looking for prices to continue rallying from the October lows over the near term, but I’m not married to that outlook and will grab on whichever direction the market wants to go Wednesday afternoon.

Give the market a few minutes to process the news and be careful because the initial knee-jerk is often in the wrong direction, but after a handful of minutes, the market will no longer be able to hide its true intention and it will be a big move. Whether that is up or down is anyone’s guess, but as nimble traders, there is no need to guess. Follow the market’s lead and let the profits come to us.

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Dec 12

The safest way to get ready for the Fed

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Monday was a good session for the S&P 500 as it recovered all of Friday’s losses and then some on its way to a +1.4% gain.

As expected, the market is trading sideways ahead of the Fed’s interest rate policy announcement on Wednesday, and anyone overreacting to these daily gyrations is having a tough time. The catalyst for the next big move comes Wednesday afternoon. Until then, everything else is random noise.

The only thing that would interest me over the next 48 hours is if the selling or buying gets carried away ahead of the rate announcement and that’s only because it skews the risk/reward in the other direction. The higher (or lower) we go ahead of time, the less room there is to keep going higher (or lower), and conversely, there is a lot more free space to reverse and go the other direction if the news disappoints (or beats expectations).

I wasn’t expecting much and Monday’s gains erasing Friday’s losses confirms that the direction is sideways, not up or down.

As I’ve written many times since the October lows, I like this market and think the odds of a continuation higher is the most likely outcome. The offset is there is more risk to the downside if anything goes wrong.

Rather than put myself in a position where I could get run over by a freight train Wednesday afternoon if I was wrong, I’m happy being a little late to the party to make sure I get on the right side of this trade.

Until Wednesday afternoon, I’m mostly just watching and waiting. Once the next big directional move reveals itself, I’m grabbing on and enjoying the ride.

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Dec 06

Why I’m not giving up on the rebound yet

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 crashed through 4k support Tuesday and ended up threatening 3,900 support before recovering a handful of points in the final minutes of the session to finish in the mid-3,900s.

Again, economic headlines were mostly benign and this continues to be a sentiment-driven trade as recent “hope for less bad” morphs into “fear of worse”.

Big stock market crashes are driven by significant and unexpected developments. So far, we can say neither of those criteria have been in play this week. Instead, this is little more than a normal and healthy pullback from multi-month highs.

Everyone knows stocks cannot go up every single day and down days are part of every move higher. But that never stops the naysayers from coming out every time the market slips a handful of points.

As I wrote Monday evening, this is the 8th retreat from relative highs since the October lows. And for those that are counting, seven of those retreats ended with stocks rebounding to even higher prices. While it is too early to say conclusively this will bounce higher, if we want to bet on the high probability outcome, always bet on the continuation because rallies continue countless times but they can only die once.

But just because we expect this dip to bounce doesn’t mean we need to hold it all the way down. I locked in some really nice profits at my trailing stops in the mid-4k’s and I’ve been waiting for the next bounce from the safety of the sidelines. And as a matter of fact, since I’m in cash, the lower this goes now, the more money I make buying the inevitable bounce, so lower is better for me.

But as I said above, I don’t see a lot of downside potential in this pullback and we are most likely close to the bounce. If not Wednesday morning, then that afternoon or over the next two days. Don’t stray too far because the next buying opportunity is almost here.

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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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Dec 02

Why smart money is sticking with the October rebound

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 tumbled -1.5% Friday morning after the monthly employment report beat expectations.

If this reflexive selling felt strange, you are not alone and the stock market spent all Friday rallying back from those opening levels, erasing virtually all of them by the close.

Apparently some investors still believe “good is bad”, but as we saw Friday, the majority of the market doesn’t agree.

Inflation is steering the Fed’s interest rate policy decisions and if the Fed can bring inflation down without crushing employment, all the better. This is the widely hoped-for “soft landing”. Is it possible? Maybe, maybe not, but with inflation headed in the right direction while employment remains robust, that suggests this Goldilocks scenario is still possible.

At this point, the market remains in a half-full mood and that means it is not buying the bearish interpretation of November’s better-than-expected employment. Until something changes, that means the path of least resistance remains higher.

If this market wanted to go down, there have been more than enough excuses to send prices tumbling. The simple fact we remain near multi-month highs tells us the ground under our feet is solid and Friday’s rebound confirms it.

Quite simply, if this market was truly fragile and vulnerable, it would have crashed by now.

Sometimes the hardest thing to do is to stick with a winning trade when everyone around us is telling us why we are wrong. But since we trade the market, not opinion, this counter-intuitive strength is far more important than what anyone else says. The simple fact prices keep going up when the crowd thinks it should be going down is our signal to stick with it.

We will run out of buyers at some point, but this is not that point.

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Nov 17

When is a loss bullish?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Thursday was another wild session for the S&P 500. Overnight futures traders abandoned ship and sent the index tumbling at the open. But rather than join the dash for the exits, big money started buying those discounts and it was all uphill from there.

As I often remind readers, it’s not how we start but how we finish that matters most. And by that measure, Thursday’s 0.3% loss was actually a very bullish performance. Rather than join the selling, most owners shrugged and kept holding. That resilience is always a good sign. If this market was overbought and as fragile as the cynics claim, we would have opened low and kept falling. Instead, the selling stalled out of the gate and the index recovered almost all of those early losses by the close. For a down day, it doesn’t get much better than that.

The market loves to convince us we are wrong moments before proving us right. And now that we moved past the “convincing us we are wrong” part, it is time to get on with “proving us right”. As I said above, if this market was weak, we would be challenging the lows, not bouncing back toward the highs. 4,100 is still very much in the cards.

As for trading this morning’s weakness, if a person was tricked out by those early losses, there is nothing wrong with that. More important is we stay nimble and open-minded after getting out. Sometimes the next buying opportunity is only hours away. And today was one of those days. As easy as it is to get back in, we should never let ourselves get left behind if the market tricked us with one of these false alarms.

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Nov 16

Why this isn’t the top

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 slipped 0.8% Wednesday, giving back all of Tuesday’s gains and leaving us stuck under 4k resistance for the fourth session in a row.

As I’ve written previously, it is not a surprise to see the October rebound stall at prior resistance levels as the cynics inevitably claim the index is too high and on the verge of collapsing. But one of the first things experienced traders tell new traders is, “Never try to pick tops.” That’s because what looks like a top is almost never the top. And I have a strong suspicion that this week’s “top” is nothing but another pause on our way higher.

Everyone knows markets move in waves, but that never stops people from calling every down day the start of the next big selloff. As much as I’d love to see prices rally every single day, everyone knows that’s not possible. So why overreact when we get one of those inevitable red sessions?

At this point, I don’t see anything out of the ordinary about Wednesday’s losses and this week’s struggles with 4k resistance. In fact, this price action actually looks constructive because across several days of testing the weekly lows, every single time supply dried up and prices bounced. That’s a characteristic of a strong market, not a weak one.

If this rebound was as fragile and overbought as the critics claim, we would be crashing back to the lows, not stubbornly hanging out near multi-month highs. Follow the market’s lead and ignore the noise.

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Nov 15

The simple mistake that keeps costing bears money

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Tuesday was another back-and-forth session for the S&P 500. The index exploded above the psychologically significant 4k level when another monthly inflation reading came out better than expected. Unfortunately, that early enthusiasm fizzled and the index retreated back to breakeven just after lunchtime. But just when the cynics thought they finally won a battle, an afternoon rebound reclaimed +0.9% of those early gains.

The cynics thought they finally broke the October rebound when they kicked it back under 4k. For a bear that believed this rebound was nothing more than smoke and mirrors, that retreat under 4k was too good to resist and the shorts piled in hard and fast.

But there is a very good reason all new traders are warned against picking tops. The biggest problem bears have to deal with is the odds are simply not in their favor. This rebound has been charging ahead for over a month and Tuesday set yet another multi-month high. That means anyone betting against this rebound has been losing piles and piles of money for weeks.

Sure, this rebound will stall and retreat like all of the others that came before it, but was Tuesday that day? No, probably not. Think about it this way, if something continues dozens of times but it can only reverse once, what are the odds that today is that single day when it finally reverses? Yeah, not very good.

Of course I would prefer to see the market go up every single day, but everyone knows that’s not realistic. Yet every time the market slips a few points, the crowd can’t resist labeling it a top.

It always takes stocks time to push through prior resistance levels because that’s where people love to call tops. But as I wrote previously, this market wants to challenge 4,100. If it was as weak and fragile as the critics claim, we would have already failed by now. As much as people hate chasing a market that’s gone up, the contrarian trade is betting on the continuation and not joining the chorus rooting against it.

The headlines are improving and the bears are losing the argument. Maybe things will get worse, but for that to happen, we need to see things actually start getting worse. We never trade what could happen, we trade what is happening. And right now this market keeps telling us it wants to go higher.

Protect our profits by moving stops up to the mid-3,900s and keep holding for higher prices. And remember, as soon as we get out, always be ready to get back in if the dip proved to be a false alarm.

This rebound will continue countless times and it will die only once, which side do you want to bet on?

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Nov 11

Why this rebound still has room to run

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

After some early flirtations with breakeven, the S&P 500 finished Friday on solid ground, adding 1% to Thursday’s towering gains and the index closed at the highest level since early September.

We finally got some good news on inflation Thursday morning and that sent stocks popping like a cork. As I’ve been writing for a while, inflation has been moderating as this spring’s willy-nilly price hikes have given way to price-sensitive consumers pushing back and hunting for the best deals. Add to this the glut of inventory that built up following the post-pandemic over-ordering and few businesses have the courage to keep raising prices this fall.

As fast as stocks shot up Thursday, it’s tempting to think this surge went too-far too-fast, but that only applies to long and extended runups. Thursday was a single session on the heels of multiple large down days, so we are nowhere near overbought right now and this pop still has room to run. I’m not talking about many hundreds of points, but once we get through 4k, it won’t take long to challenge 4,100.

Sometimes the market needs to convince us we are wrong before it can prove us right, and Wednesday’s post-election selloff definitely did a good job of challenging my conviction. But the art of trading is knowing when to admit defeat and when to get stubborn. And Wednesday was one of those stubborn days.

Now, I’m most definitely not advocating stubbornly holding a tumble under our stops, but there are times when we see the market breakdown in a way we didn’t expect and that tells us to pull the plug long before our stops get hit. But I fully expected Wednesday’s knee-jerk selloff to exhaust itself quickly because this is a Fed driven market that doesn’t care about politics. And Thursday’stowering reversal confirmed the Fed is far more important than who controls Congress.

Even though Wednesday’s dip went a little further than I expected and squeezed me out at my highest stops, I wasn’t worried about the rest of my positions and was willing to continue holding them. If stocks crashed Thursday, I would have admitted defeat and pulled the plug. But lucky for me, stocks went the other direction on Thursday and my conviction was rewarded handsomely.

As I said, there is never an excuse to hold under our stops, but sometimes we have to know when to pull the plug early and when to stand our ground. Wednesday was definitely a stand-our-ground kind of day.

And trust me, as easy as that is to say today, it was anything but easy to do on Wednesday. But that’s where our analysis and trading plan help us stick with what we should be doing.

As for what comes next, keep holding the rebound and lift our stops to the lower 3,900s. 4,100 will be here soon enough.

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Nov 10

Why smart money ignored the election

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 added a towering 5.4% Thursday, making this one of the biggest up days in stock market history.

As much as I expected inflation to start moderating, I never expected the market to react in such an oversized way to what was a fairly modest change in inflation. But the trend is everything and Thursday morning’s inflation reading suggests our inflation fever is finally breaking.

Netting out Wednesday’s -2% post-election hangover, we’re “only” up 3.4% from Tuesday’s close, which is still a lot, but a tad more reasonable. And more importantly, Thursday’s gains put the rally to 4k back on track. (And at this rate, we could be there Friday morning!)

As much as bears tried to punish stocks for Republicans’ underperformance in the midterm elections, as I wrote Tuesday evening, this market isn’t concerned with politics.

The stock market really isn’t concerned with politics this time around because it knows the Fed is the one controlling the economy. By Wednesday afternoon, expect the election to be old news for the market and it will go back to what it was doing before, which is obsessing over inflation and rate hikes.

If the market’s attention is going back to what it was doing before the election took over the airwaves, that means October’s rebound is back on and 4k is within reach.

Well, it turns out my Wednesday afternoon forecast was a tad premature, but hopefully, most readers can forgive me for being off by a few hours.

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As expected, the only thing that matters to this market is inflation and rate hikes and Thursday morning’s lower-than-expected inflation reading means the Fed doesn’t need to move as aggressively with future rate hikes.

Sometimes it is better to be lucky than good and Thursday was one of those days. I was fairly certain Wednesday’s election-fueled selloff would fade quickly. What I didn’t expect was Thursday’s historic gains following a “less bad than expected” inflation report, but that’s the way this game goes sometimes. The important thing is recognizing the direction the wind was blowing because we can’t get lucky if we don’t know which side of the street to stand on.

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Nov 09

The levelheaded way to approach Wednesday’s selloff

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The Republican’s widely anticipated “red wave” turned out to be little more than a “red ripple”.

As is often the case, the market’s reflex is to buy Republican victories and sell Democrat wins. And Wednesday was no different with the index tumbling 2% following the latest Republican letdown.

While this politically skewed view of the stock market is easily debunked by looking at historical performance under different administrations, that doesn’t stop partisan investors from sour grapes selling in the hours and days after an election.

Now, I will be honest, I had no issue with stocks slipping in a knee-jerk reflex to the Republican fumble, but I thought the market would find its footing and move past the election by Wednesday afternoon. A split government is a split government and Republicans don’t need large majorities or even both houses to stifle the Democrat’s legislative agenda. But obviously, the market saw it differently and the selling continued through the afternoon.

There are two possible explanations for this:

If the market’s latest rebound from the October lows was built on expectations of a “red wave”, that means there is a lot of air underneath us since this “red wave” failed to materialize. Partisans buying the rumor and then the rumor turning out to be wrong is a recipe for falling stock prices.

On the other hand, maybe Wednesday’s one-way selloff was little more than the herd following each other off the cliff. Few things shatter confidence like screens filled with red and Wednesday’s stumble could be nothing more than selling because other people are selling. Lucky for us, selling without a meaningful catalyst tends to exhaust itself fairly quickly.

At this point, either scenario is equally likely. Fortunately, the two possible explanations for Wednesday’s weakness will quickly diverge from each other. If there were high expectations of a red wave priced into the market, the selling will continue for days and even weeks, pushing us all the way back to the October lows near 3,500. But if Wednesday was nothing more than reflexive selling that got a little carried away, supply will dry up and prices will bounce as soon as Thursday.

Buy a bounce Thursday because it means we are headed to 4k and sell/short a further breakdown because it means 3,500 is just around the corner. It really is that easy.

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Nov 08

Why the election doesn’t matter to the stock market

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Tuesday was another wild ride for the S&P 500 as the index bounced between 3,780 and 3,860 before finally settling in the middle of the range, posting a respectable 0.6% gain.

The talk of the day is obviously focused on the election. Republicans are widely expected to take the House while control of the Senate is up in the air and odds are good a runoff or recount could delay the outcome for this chamber for days if not weeks.

But if Republicans gain control of the House, that means a split government and control of the Senate isn’t necessary to grind things to a halt. And while people complain about a dysfunctional government, the stock market loves gridlock because it means no one is changing the rules in the middle of the game. As far as the market is concerned, bad rules that can be counted on and priced in are better than rules in flux where no one is sure how things will turn out.

The market could experience further reflexive knee jerks over the next handful of hours as it frets over “voting irregularities” and such, but as I wrote previously, the stock market really isn’t concerned with politics this time around because it knows the Fed is the one controlling the economy. By Wednesday afternoon, expect the election to be old news for the market and it will go back to what it was doing before, which is obsessing over inflation and rate hikes.

If the market’s attention is going back to what it was doing before the election took over the airwaves, that means October’s rebound is back on and 4k is within reach.

As always, use trailing stops to protect our profits, but at this point, October’s rebound remains holdable with stops above Friday’s lows. Until we fall below that level, the rebound is alive and well.

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Nov 07

How savvy traders are approaching the election

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 continued Friday’s late bounce on Monday as it added another 1%.

Economic headlines remain mostly the same as everyone looks forward to Tuesday’s elections. But for as much coverage as the election is getting, we shouldn’t expect Tuesday’s result to move the markets in a meaningful and lasting way. Partisan politics aside, stocks have rallied and fallen under Republicans just like they have under Democrats. Remember, we trade the market, not politics, so leave that Red and Blue stuff out of this. This economy rests in the Fed’s hands and it doesn’t matter who is in charge of Congress.

If the election were not happening Tuesday, I would be buying Friday’s rebound. But since we have an election on Tuesday, I’m buying Friday’s rebound. See what I did there? I trade the market, not politics, and right now the market is telling me it is time to buy the bounce, so that’s exactly what I doing.

Now, don’t get me wrong, I’m not saying the election will have zero impact on the market. No doubt we will get a knee-jerk bounce Wednesday morning following a “Red Wave” and prices will slip a little if we get a “Blue Wave”, but after that initial reflex of partisan volatility, expect the election to be old news by lunchtime.

I’m buying and adding to Friday’s rebound with stops spread around Friday’s intraday lows. If prices fall under my stops, I’m out. If the rally continues, I’m adding more and lifting my stops. Let other people second-guess the headlines.

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Nov 04

Friday was the bounce we were looking for

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Friday was another wild session for the S&P 500 as the index popped +1.8% in early trade, crashed back to breakeven before lunchtime, and then surged +1.4% into the close.

The economy added another quarter million jobs in October and we haven’t fallen into a meaningful slowdown yet. That’s both good and bad depending on which side of the fence a person is standing on. A strong economy is good for corporate profits, but too strong means even more rate hikes are ahead of us. And that’s what traders spent all day arguing over.

Friday’s midday retreat was a concern because it suggested dip buyers were MIA. But but after that slump failed to trigger an even larger breakdown and the selling stalled near breakeven, buyers finally decided to show up a few hours later. As the saying goes, better late than never.

How we finish is always more important than how we start, so by that measure, Friday was a good session. The midday breakdown couldn’t build momentum and that tells us the ground under our feet is fairly solid. If this really was a house of cards, we would have crashed to fresh lows. The fact we are still standing tells us the market is a lot more resilient than the critics claim.

As I wrote Thursday evening, I expected this week’s Fed-fueled selloff to bounce relatively soon and that’s exactly what we got:

While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as Friday afternoon.

Friday was a good day, but we need to keep this strength up next week because a retest of the lows means the bounce is dead. Friday’s bounce is buyable with stops near 3,700. Add more if the rebound continues next week and pull the plug if we slip back to our stops.

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Nov 03

When to start looking for a bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 shed another 1% Thursday, adding to Wednesday’s Fed-fueled 2.5% losses and leaving the index down 4.6% for the week. Ouch!

As bad as this feels, unfortunately, it appears there are still more losses left in this “pain trade”.

Thursday was one of those tipping points where the market was telling us what it wants to do next. And the uninspiring price action told us dip buyers are not ready to bail us out yet.

The index opened Thursday down 1%, rallied from those early lows, and even spent a portion of the session threatening to turn green. Finishing green would have been a very bullish reversal, but instead, a wave of selling knocked us back from those midday highs. As long-time readers of this blog know, how we finish matters most. Big institutions place their trade at the end of the day and rather than buying these discounts, big money was selling and running for cover.

As I wrote Wednesday evening, even though I came into the Fed decision with a long position, as soon as that midday rally broke down, there was no arguing with the market and it was time to pull the plug. And when trading a binary outcome, if we find ourselves on the wrong side, it only makes sense to change sides. So I shorted Wednesday’s breakdown and held that position through Thursday.

But just as important, as soon as I’m out, I’m always on the lookout for the next bounce. While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as Friday afternoon.

I will continue holding this short as long as the market keeps falling, but I’m already lowering my trailing stops and it won’t take much convincing to get me to lock in these profits.

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Nov 02

Why bulls didn’t need to lose money on Wednesday

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Wednesday was Fed day and it didn’t disappoint.

After spending the morning in the red, the S&P 500 turned positive after the Fed raised interest rates by the widely expected 0.75% and said the rate of future hikes would slow. Unfortunately, the relief proved fleeting and an hour later stocks tumbled from those midday highs, ultimately finishing the day down 2.5%.

As I wrote yesterday, my guess was the index would rally if the Fed did what it said it was going to do, but after a few weeks of up, investors had higher expectations and that left stocks vulnerable to disappointment. When Powell’s comments suggested rates could peak higher than previously expected, investors started pulling the plug and once the wave of selling started, there was no stopping it.

Lucky for me, I’m not a stubborn trader. While I was pleased to see the initial push into the green, when the air started coming out of that rally less than an hour later, that was my signal something was off. And after falling into the red, the market’s disappointment became undeniable and all bets were off.

Buy strength and sell weakness was the plan coming into the day and we knew the odds of a head-fake were high. As it turned out, the initial strength was the head fake and the reversal into the red was our signal to get out and for the most aggressive to short the market.

While that sounds easy in hindsight, nothing in the market is ever easy. During that midday surge, bulls were beating their chest and bears were running for cover. And an hour later, the script flipped. Easy come easy go. But as nimble traders, we are perfectly suited to turn on a dime alongside the market.

When a trade stops working, we pull the plug, no excuses. And in volatile markets like this, a dramatic reversal becomes our invitation to throw on a trade in the opposite direction.

Being flexible enough to switch our outlook midstream is never easy, but it sure is a lot more profitable than sticking with a losing trade. With practice, you will be able to do it too.

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Nov 01

The smart-money trade headed into the Fed’s rate-hike announcement

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 squandered a really nice +1% open Tuesday and finished -0.4% in the red. Ouch.

While this performance would normally give me pause near recent highs because this price action often suggests a near-term top, we can’t read the same into Tuesday’s fizzle simply because everyone is so fixated on Wednesday’s interest rate announcement. Rather than hint at what’s coming next, Tuesday’s fizzle was nothing more than the market entering a holding pattern as we wait for the Fed’s next big move.

A 0.75% rate hike on Wednesday is a virtual lock. What’s less certain is what happens in December with the Fed previously signaling a modest slowdown to more conventional 0.5% rate hikes. If the Fed maintains that outlook, expect stocks to rally in anticipation of rate hikes tapering off in the early part of 2023. On the other hand, if the Fed tells us they need to remain aggressive, ie another 0.75% hike is coming next month, expect stocks to tumble as the light at the end of the tunnel gets extinguished.

My best guess is the Fed will stick to their prior guidance and telegraph a 0.5% hike in December and a gradual slowing of hikes next year. But that’s just a guess. Good thing I’m a nimble trader and will trade the market as it comes at me. Regardless of what I think, I will be buying strength Wednesday afternoon or selling weakness.

From a purely selfish point of view, I’d actually like to see the market disappointed Wednesday because there is a lot more downside at these levels than upside. Shoring a selloff back to the October lows would be far more profitable than buying a continuation up to 4k resistance. But I don’t get to choose, which means I’m taking whatever the market gives me.

The market often throws off a head-fake or two following such a widely anticipated news event, but 30ish minutes after the announcement, the market won’t able to hide its true intentions and that’s when we buy strength or short the weakness. Smart money will be jumping aboard early and enjoying the ride.

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