Category Archives for "Free Content"

How to get ready for what comes next

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Thursday modestly higher and remained above 3,300 for the fourth consecutive session.

It’s been a good seven days for the index as it reclaimed 180-points from last Thursday’s lows. But these gains leave us near overhead resistance and the rate of buying has slowed down. That’s not a surprise. This remains a volatile period for stocks and every bit of up is typically followed by a bit of down.

Given the headline environment and downward price pressure, trading sideways is actually constructive. It’s only been a few days, but the longer we hold recent gains without retreating, the less likely another major fall becomes.

That said, a big chunk of recent buying came from short-squeezes forcing bears to buy against their will. While short-squeezes trigger some of the most impressive surges, they are not sustainable by themselves because A) most investors don’t short and B) these people are not buying because they want to buy. To keep going higher, we need to recruit an entirely new class of buyers, i.e. those with cash that have been avoiding this market to this point. That is a much harder sell.

If we hold these levels for a few more days, previously nervous owners regain their confidence and those with cash start having more faith in these levels. With the temporary short-squeeze and dip-buying already behind us, we need voluntary buyers to take over and keep pushing prices higher.

As for how to trade this, it’s pretty straight forward. Any breakout must cross 3,400 and any retreat will fall under 3,320. Those are our tripwires. Buy the breakout and short the breakdown. Start small, get in early, keep a nearby stop, and only add to what is working. If we stick to that plan, it doesn’t matter which way this goes next. Be prepared for a head-fake or two along the way but as long as we get in early and get out early, the risks are pretty low.

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How to trade this chop

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It was an incredibly choppy 24-hours for the S&P 500.

It started with last night’s train-wreck of a debate. Stock futures swung wildly between 1% gains and 1% losses depending on who was saying what, but by the time the market opened this morning, prices returned to mostly unchanged.

So much for all the headline hype, but that’s not a surprise. Last night I told readers to ignore the noise coming from the debate because no matter what happened, it wouldn’t change anyone’s mind. And this morning, the market agreed with me.

That said, things got spicy after the open. Moments after it looked like it could be another ho-hum day, bulls took control and started squeezing the bears for the third time in a week. That one-way panic buying sent the index 50-points higher in just a few hours.

While bulls were congratulating busy themselves over their latest conquest, the thing we cannot forget is there is a huge difference between buying because people have to (shorts getting squeezed) and buying because people want to (compelling value).

Short-squeezes exhaust the supply of desperate bears very quickly. Combine that midday exhaustion with the Fed extending restrictions on big banks because of potential liquidy concerns and the stage was set for an afternoon retreat back to breakeven. Easy come easy go.

But this also isn’t a surprise. Last week I warned readers to expect extreme volatility in both directions for a while. Big moves in one direction are followed by big moves in the other direction.

If a person wants to trade this chop, make sure you get in early and take profits often. Missing entries and exits by a few hours is the difference between nice profits and humbling losses.

Every morning set tripwires in both directions that will trigger automatic purchases or sales. The thing about extreme volatility is it leads to strong intraday moves that are easy to profit from if we have the courage to jump aboard. Leave your bias at the door and be ready to ride this in whatever direction it wants to go.

And if that sounds like too much work or stress, don’t sweat it. There is nothing wrong with waiting for more sane trade to return. Often the best trade is waiting for the next trade.

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Do the debates matter to the market?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It was a very mediocre day for the S&P 500 with prices slipping 0.5%. That said, 0.5% isn’t a big deal given the elevated volatility we’ve been living under since the beginning of September. Considering the widespread nervousness, “only” falling 0.5% could even be called a good day. That said, we need to see a few more resilient days like this to feel more comfortable about the floor under our feet. Overbought markets tumble quickly. If we are still at these levels by Friday, we can start to put a little more faith in these prices.

The big bogie between now and Friday is tonight’s presidential debate. How will this affect the market? The simplest answer is, it won’t. There are a couple of reasons why.

Let’s start with the fact this is a very polarized election. Most peoples’ minds are already made up and nothing that happens tonight will change who they vote for. Crash or soar, it won’t really make a difference for Biden or Trump. The people that loved them yesterday will love them tomorrow and those that hated them yesterday will still hate them tomorrow.

Second, the few people that haven’t made up their minds are clearly not paying attention to politics. If they don’t care enough to have an option, they almost certainly won’t care enough to be watching tonight’s debate (and most likely won’t even vote). I wouldn’t pay much attention to this group.

And finally, the market doesn’t really care about these intermediate points. A good debate by one or the other won’t create a lasting impact on the market because the market doesn’t care about debate performances, only who wins in November. As I already stated, very little can happen tonight to change the course of the election and it won’t affect the market in a meaningful way tomorrow.

That said, maybe we get a knee-jerk Wednesday morning if one candidate screws up badly. But expect that early move to fizzle and be forgotten by tomorrow afternoon. Unless someone commits the unforgivable gaffe of all gaffes, ignore the debate. Expect investors to go back to obsessing over their fear of heights a few hours after the open.

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Is the worst finally behind us?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

On Monday the S&P 500 extended Friday’s bounce and now finds itself 3.2% above Thursday’s close. Not bad for two days of work.

If you assumed there was some huge breakthrough that triggered this buying frenzy, you’d be wrong. The headlines this week are no different than the headlines last week when we were carving out fresh lows. But that’s the way emotional markets work. We didn’t need a reason to crash and we don’t need a reason to bounce.

Even though it feels great to put 150 points of breathing room between us and the recent lows, we should be careful about reading too much into this bounce. If this market can bounce for no reason, then it certainly can fall just as easily for no reason (again).

This remains a volatile market and that means large moves in both directions. As I wrote last week, things will look better once we reclaim and hold 3,320. So far that’s what we’ve done, but we still need to be wary of any dip under 3,300. I don’t expect a big crash, but this will be a choppy market for awhile. Trading this well means getting in early and taking profits early. Wait a few hours too long and those profits will evaporate.

If a person doesn’t feel like dealing with this volatility, there is no need to rush in now. Even if prices rally higher this week, no doubt the next dip will knock us back to these levels, if not even lower. Don’t feel pressured to chase. Just wait for the market to come to you. Often the best trade is waiting for the next trade.

And if a person really wants to short, wait for the next breakdown. No doubt it will be a multi-percent move. Just make sure you are ready to take profits quickly because the next bounce isn’t far away.

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What we learned this week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis: 

It was a dramatic week for the S&P 500 with large swings in both directions. But when the dust settled, the index lost a modest 0.6%. Not bad considering it was down more than 2% percent on multiple occasions this week.

This ended up being the fourth consecutive weekly loss and as discouraging as that sounds, the index actually finished near the weekly highs, largely thanks to Friday’s impressive rebound.

Was it a good week? A bad week? Or a bit of both?

Bears cheered Monday’s violation of 3,300 support and subsequent tumble. But just when the situation looked like it was spiraling out of control, Tuesday’s bounce recovered all of those losses and Bulls were breathing a sigh of relief.

Unfortunately, their relief was short-lived and Wednesday’s one-way selloff sent prices racing back to the lows. Thursday was the least eventful day and ended mostly where it started. And Friday surprised everyone when prices surged, salvaging the week almost entirely by itself.

If that sounds like a lot, that’s because it was.

Before this week, I was giving this market the benefit of doubt. Bull markets rebound countless times but they die only once. On a purely statistical basis, it is always smarter to bet on the rebound. And that is the way I was treading September’s bounce until this week. I was even willing to give Monday’s tumble a pass since we recovered a big chunk of those early losses by the close. As most experienced traders know, it isn’t how you start the day but how you finish that matters most.

Wednesday’s tumble was the one I couldn’t forgive. If the market was truly oversold, prices should have sprung back decisively, not retreated back to the lows. Wednesday told us two things. First, this market is not grossly oversold and ripe for a snapback. And second, there are still a lot of nervous owners barely hanging on.

I’m not bearish by any stretch, but I’m no longer holding out for a big bounce. Markets can only do one of three things, up, down, or sideways. At this point, it looks like this market wants to grind sideways and that means we should expect a lot more choppy trade like this week. There will be big pops and dramatic drops, but expect these moves to fizzle and reverse within days, if not hours.

The best way to trade this chop is to get in early, keep a nearby stop, and just when it feels like things are finally going your way, lock-in profits because the wind is about to change directions. We will see violations of the lows and pops back above support, but rather than chase these directional moves, we should be taking profits and getting ready for the reversal.

And if that sounds like too much work. Don’t worry about it. Sometimes the best trade is to not trade. Better opportunities will be along soon enough. We just have to be disciplined and patient enough to wait for them.

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Is it time to give up on the bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It was another tumultuous session for the S&P 500. The index opened in the red, but not to be deterred, dip-buyers came rushing in and prices recovered nearly half of Wednesday’s tumble. Unfortunately, the buyers couldn’t sustain that momentum and the index slumped back near breakeven by the close.

Under different circumstances, I would have been encouraged by the market’s early refusal to breakdown. But Wednesday’s dreadful reversal forces me to take a more critical view.

Previously, I was giving the bounce the benefit of doubt because every dip this summer bounced within days. Anyone who’s been doing this for a while knows a trend is far more likely to continue than reverse. I was even willing to accept Monday’s tumble under 3,300 support because the market finished well above the intraday lows. (How a day finishes is always far more important than how it starts.)

And then there was Wednesday. The day started well enough but those first few minutes were as good as it got and it was all downhill from there. Oversold markets bounce decisively, they don’t tumble in oneway selloffs. Meaning, this market isn’t oversold yet.

The morning’s bounce was a valiant effort but ultimately doomed to fail. There are still far too many nervous owners praying for a bounce and the supply of sellers is still too deep.

As I wrote yesterday:

I often say we cannot read too much into a single day’s price action. And that’s still true. But I am no longer giving this market the benefit of doubt. [Wednesday’s] dreadful price-action turned this into a show-me trade. Until we recover Wednesday’s highs, I will remain leery of this base. And if we fall under Monday’s lows, look out below.

Nothing happened on Thursday that changed my mind. This continues to be a show-me trade. Until the index gets back above 3,320, I will continue to treat any bounce with suspicion.

That doesn’t mean stocks are standing on the edge of a cliff and we will find ourselves down 20% percent next week. What we are seeing is a normal and healthy part of the basing process. I was originally looking for a quick bounce because that’s how the market has been acting all summer. But this time it looks like it will take longer to process recent gains.

If this market was a coiled spring and ready to pop, it would have happened by now. That tells me we should expect the choppy trade to continue. That means more fizzled bounces and failed breakdowns.

The best way to trade choppy markets is to always be prepared for the reversal. Get in early and take profits quickly. Anyone waiting for a bigger move in either direction will soon watch a nice profit turn into a big loser a few hours later.

If a person doesn’t have the time or risk tolerance to trade around this chop, there is nothing wrong with sitting this one out. Better trades are coming, we just need to be patient and wait for them. (That said, I would be leery of any slip under 3,200. We could still see another stumble or two before we find the real bottom. Remember, it is always better to be out of the market wishing you were in than in the market wishing you were out.)

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When potential turns rotten

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Wednesday was a dreadful day for the S&P 500. The index started with a small gain, unfortunately, that was as good as it got. By the close, the market shed 2.4% in the biggest loss since the early September tumble.

Anyone who’s been reading these posts knows I’ve been giving this market the benefit of doubt as it carved out a base near 3,300 support. Even Monday’s tumble under this level wasn’t a big deal because the index spent the rest of the day reclaiming a big chunk of those early losses. As most experienced traders know, it isn’t how the day starts, but how it finishes that matters most. To me, it looked like the market was finding its footing and getting ready for the umpteenth bounce since the March lows. Then today happened…

There is nothing good to say about Wednesday. It was a one-way selloff that never found a bottom. While the optimist might find some solace that it didn’t undercut Monday’s lows, that’s only because the selloff ran out of time. But hey, there’s always tomorrow! Ugh.

I often say we cannot read too much into a single day’s price action. And that’s still true. But I am no longer giving this market the benefit of doubt. Today’s dreadful price-action turned this into a show-me trade. Until we recover Wednesday’s highs, I will remain leery of this base. And if we fall under Monday’s lows, look out below.

As for how I traded this abomination, I came into the day long and was sitting on a profit cushion from this week’s early bounce. That gave me a little breathing room when prices started retreating shortly after the open. As I wrote yesterday:

By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.

Little did I know I would be putting my contingency plan to work a few hours later. But that’s why we have them. To protect us from bad things when the market goes the “wrong” way. I started peeling off my positions this morning and I was all the way out by early afternoon. Once it was obvious the index wasn’t finding a bottom, I even put on a short.

I’m not a fan of shorting a bull market, but there was nothing good about today and things could get even worse if we fall under Monday’s lows. Today proved there are still a lot of nervous owners left and it could get even worse tomorrow. That said, I’m happy to be wrong. If prices bounce and reclaim Wednesday’s highs, I’ll be ready to buy that bounce. But something tells me that won’t be happening for a while.

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Buyable dip or dead-cat bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 notched its first gain following four consecutive losses. There wasn’t anything meaningful in the headlines driving Tuesday’s 1% pop. Instead, this strength was mostly a response to a little too much selling over the last week.

Everyone knows markets move in waves and it shouldn’t surprise anyone when the tide reverses after a string of days in the same direction. Is that all this is, a one day pop between two long stretches of down days? The cynics certainly think so. But I’m not sure the evidence supports that outlook.

First, we are in a long rally that goes back more than 6 months. This period includes countless dips that bounced back even higher. If the first dozen dips couldn’t break this rally, what makes this latest attempt any different?

Second, the market finished at the intraday highs the last two sessions. While Monday closed in the red, if you look under the hood, the price-action was actually quite bullish as institutional investors chased prices higher into the close. That wave of dip buying carried over to today and helped put together the first up-day in a week.

Third, if this market is going to crash, the first thing in needs to do is make a lower low. As long as we remain above Monday’s intraday lows, this should be treated as a buying opportunity. If we violate the lows, all bets are off and we can short until our heart’s content. Until then, this bounce deserves the benefit of doubt.

Up or down, there is enough emotion wound up in the market that the next move will be big. Maybe prices bounce decisively. Maybe they collapse. Either way, as long as we follow a thoughtful trading plan that puts us in the right spot at the right time, this will be a great ride.

As for what I’m doing, I bought Monday’s late strength and I added more on Tuesday. By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.

When it comes to the market, I don’t care which way it goes. The only thing that maters to me is I’m riding that next wave.

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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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After retreating back to the lows, what comes next

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis:

It was a mixed week for the S&P 500. Monday started with a nice pop as the index launched its second rebound attempt from September’s swoon. Unfortunately, stocks could only string together two winning sessions before three successive losses knocked us back to where we started. So much for bounce attempt #2.

Headlines remain dreadful, but they’ve been dreadful for months and in that regard, nothing has changed. Instead, most of this weakness comes from the high-flying tech sector that led this miraculous charge to all-time highs. Live by tech stocks, die by tech stocks. At least that’s how this has played out so far.

There isn’t anything inherently wrong with the tech trade. These companies are still performing at the top of their game and most are insulated from Covid. In fact, many like NFLX and AMZN actually benefited from the lockdowns.

If it isn’t the fundamentals, what is the problem with the tech trade? Simple. Two steps forward, one step back. Cognitively, everyone knows the market moves in waves, unfortunately, most people forget this very basic concept in the heat of battle. Tech stocks raced higher and it only makes sense that at some point, they take a break and cool off. This appears to be that point.

If September’s dip is a normal and healthy thing to do, there is no reason to panic and abandon ship. The world is not ending and the market is not crashing. This is nothing more than stocks taking well deserved a break. These tech companies were the best-of-the-best coming into September and they will still be the best-of-the-best leaving September. All we need to do is put up with a little near-term volatility. No big deal.

Friday’s intraday dip in the S&P 500 undercut both the weekly lows and made fresh monthly lows. Nervous traders often place their stops under recent lows and that leaves us vulnerable to an avalanche of autopilot selling if the market undercuts those widely followed levels. But guess what happened today when we undercut the lows? Nothing. The market slid past the lows and rather than accelerate lower, supply dried up and prices bounced.

This resilience tells us we are running out of nervous sellers and there is very little supply underneath the market. Most owners do not have their finger on the sell button. If they did, we would have seen that avalanche of selling overwhelm the market this afternoon. Instead, most owners shrugged and kept holding. That is a very bullish development.

As I wrote earlier this week, as long as the S&P 500 remains above 3,300, this continues to be a dip-buying opportunity. Only after the market crashes through 3,300 should we consider shorting. If the imminent collapse is as big as the naysayers claim, we can afford to be a little late and still make a boatload of money. Until then, I’m giving this bull market the benefit of doubt. That means buying every bounce attempt, including Friday afternoon.

Obviously, the first and second bounce didn’t work, but that’s to be expected. If we knew which bounce was the real deal, this would be easy and everyone would be rich. Now that we’re on bounce attempt #3, I’m a little more hopeful. Statistically speaking, the 3rd bounce tends to be the most successful.

As long as we start small, get in early, keep a nearby stop, and only add to what is working, any losses from buying the wrong bounce are small. More important is that we put ourselves in the right place at the right time to profit when this thing finally takes off. If I’m wrong and the market collapses next week, no big deal. I’ll close my long and go short. In fact, my trading account actually prefers a bigger selloff because volatile markets are extremely profitable. The bigger the dip, the bigger the payday.

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The rebound attempt is dead; what to do next

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 hit a rough patch Thursday, retreating nearly 1% and giving back a big chunk of this week’s gains. As bad as it felt, more importantly, the index remains above recent lows and 3,300 support.

At times, it felt like the market was in the middle of a spectacular collapse, especially when prices were down 1.5% and threatening to undercut recent lows. Fortunately, bears couldn’t deliver on those threats. I’m not saying they can’t finish the job tomorrow, but it is worth noting they couldn’t get it done today.

There were not any meaningful headlines driving this selling. Instead, this is simply a natural and periodic shift in sentiment. The market went up for a few months and now it is digesting those gains. Two-steps forward, one-step back. It doesn’t need to be any more complicated than that.

Today’s tumble kills the market’s second rebound attempt in as many weeks, but this isn’t a surprise. The probability of any individual bounce succeeding is relatively small. Sometimes the first bounce sticks. Other times it is the second, third, or fourth try that takes us higher.

If we knew which bounce was the real deal, this would be easy. Unfortunately, we only know what happens after it happens. In this case, the only thing we can conclusively say the first two bounces didn’t work. Will the third, fourth, or fifth attempt be any more successful? Only time will tell.

Up next is bounce number three. Will this one be the real deal? Maybe…maybe not. But statistically speaking, the third bounce tends to be the most successful. Just because the last two didn’t work doesn’t mean we should give up and quit. Unfortunately, that’s what a lot of dip buyers do. They get whipsawed a couple of times, become discouraged, and miss the real bounce.

As long as prices remain above 3,300, the market is grinding its way through the supply nervous sellers and the real bounce is just around the corner. Hold above 3,300 and I will continue giving this market the benefit of doubt. On the other hand, if prices crash under 3,300, all bets are off. But until then, I will keep looking for the next bounce. As I said, often the third time is the charm.

(It appears there was a glitch with my email delivery service and yesterday’s free analysis failed to send. If you missed it, check out: “What it looks like when I’m wrong“.)

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What it looks like when I’m wrong

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

If stock futures are any indication, Thursday is setting up to be a rough session. As I write this, S&P 500 futures are down more than 1%.

Normally, I don’t put much weight in overnight prices. Most of the time the U.S. leads the world, not the other way around. More often than not, a bad day in Asia will moderate by the time the sun reaches our shores. That said, this time feels different. Over the last three days, the S&P 500 gave back nice gains in disappointing afternoon closes. That tells us big money is not convinced and has been selling the strength, suggesting the market is ripe for a near-term pullback to support.

As I’ve been writing over the last week, I’ve been trading this bounce as if it were the real deal. But the entire time I was always prepared to be wrong. My trading plan has me start small and get in early. This approach leaves me with plenty of margin to be wrong. And in this case, it looks like I am on the verge of being wrong.

A third disappointing afternoon Wednesday convinced me to close a portion of my long position. If this was the real deal, prices should have raced higher, not stalled and retreated. While I’m still net long, my smaller position limits my exposure and I still have a profit cushion by getting in early to blunt any weakness on Thursday.

Trading successfully over the long-term isn’t about always being right, but carefully managing our risks when we are wrong. I got into this trade with a sensible plan if I was wrong and now I’m putting it to work.

While it looks like I will be wrong buying this bounce, it was still the right trade. I still believe in this market, but I don’t know if the first, second, or fifth bounce will be the one that finally takes off. That means I treat all of the bounces as if they are the real bounce. As long as I have a sensible plan for getting in and out, the risks are small and manageable. And more important, buying every dip guarantees I will be in the right place at the right time when this thing finally takes off. Until then, I don’t mind taking a few small and targeted losses along the way.

(While I’m still planning on buying the next bounce, if this turns into another panicked rush for the exits, I’ll be happy to short a break under 3,300 with a nearby stop and a plan to harvest profits quickly.)

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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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Should we trust this bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 attempted its second rebound off of 3,300 support on Monday. Will this one be any more successful than last week’s fizzle?

Critics will jump on the declining volume, but personally, with as much volume as has moved to dark pools and is no longer counted, I don’t find volume to be anywhere nearly as useful as it was 10 or 20 years ago. In fact, it’s gotten to the point where I don’t even pay attention to volume. Light volume rallies pay just as well as heavy volume ones, so who am I to discriminate?

As I wrote in Friday’s free blog post, I was far more impressed with Friday’s resilient price action:

While the market remains 7% under last week’s highs and bears are the most confident they’ve been in months, their inability to extend the selloff on Friday is definitely noteworthy. We undercut the weekly lows and instead of triggering another avalanche of defensive selling, supply dried up and prices bounce back to breakeven. If this market really was fragile and vulnerable, these little cracks spiral into gaping holes, they don’t bounce back within hours.

I followed that up with:

It all comes down to Monday. A strong open is buyable with a stop near 3,310. If that strength fizzles and prices retreat, no big deal, we pull the plug and wait for the next bounce. But most likely, that strength will stick and even accelerate. Wait too long and there is a good chance you will miss the move.

So far so good. The index gapped higher at the open and it held those gains through the close. For the time being, we have no choice but to continue giving this market the benefit of doubt and that means buying this strength. Start small, get in early, keep a nearby stop, and only add to what is working.

Will the market trade well on Tuesday? If it does, keep adding to Monday’s positions. If it retreats under Monday’s open, no big deal, jump out and wait for the next bounce.

Social media is overflowing with opinions about whether this market will surge or crash. Personally, I don’t care what it does as long as it does something. Right now, it is acting like it wants to bounce and that means I’m buying it. If the sentiment reverses tomorrow and the index crashes under last week’s lows, I have no problem switching directions and following its lead.

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The breakdown that wasn’t

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis: 

The S&P 500 started the holiday-shortened week the same way it ended the previous week, deep in the red. That said, Tuesday’s lows were about as bad as it got. The market attempted a rebound Wednesday. Thursday it gave back those gains. And Friday finished flat.

It’s hard to call this week good, but six days into a selloff and it definitely feels like the tidal wave of selling lost a lot of its early momentum.

While the market remains 7% under last week’s highs and bears are the most confident they’ve been in months, their inability to extend the selloff on Friday is definitely noteworthy. We undercut the weekly lows and instead of triggering another avalanche of defensive selling, supply dried up and prices bounce back to breakeven. If this market really was fragile and vulnerable, these little cracks spiral into gaping holes, they don’t bounce back within hours.

If we focus on the last few days, it seems like the market is settling into a stalemate. While this could still break either way, I give the edge to the bulls. Everyone knows market crashes are breathtakingly quick. Sell first and ask questions later is the name of the game. On the other hand, holding steady for three days gives nervous owners time to regain their composure and it suggests fearful supply is drying up. If we hold current levels into next week, bulls will even start getting their confidence back.

It all comes down to Monday. A strong open is buyable with a stop near 3,310. If that strength fizzles and prices retreat, no big deal, we pull the plug and wait for the next bounce. But most likely, that strength will stick and even accelerate. Wait too long and there is a good chance you will miss the move.

The only thing to be wary of is a crash under 3,300. Few things shatter confidence like screens filled with red and if we crash under recent lows, all bets are off and the most aggressive can try shorting. But as long as we remain above 3,310, this is a buyable dip. Remember, start small, get in early, keep a nearby stop, and only add to what is working. If prices crash next week, no big deal, it just gives us more profit potential when the market finally bounces.

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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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Is this bounce the real deal?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

After weeks of nothing but a boring grind higher, I finally have something interesting to write about. In fact, there is more going on than I have time for!

There are some spectacular things going on with TSLA, but I will save that discussion for another day. In the meantime, it looks like TSLA could claw its way back to $400 over the next few days, especially if the broad market bounces back from last week’s dip.

That segues me nicely to tonight’s main topic, the S&P 500’s impressive bounce this morning. There were not any meaningful headlines driving this strength, but that makes sense since there weren’t any meaningful headlines driving last week’s tumble. As I often say, the market loves symmetry and if we didn’t need news to fall, then we don’t need news to bounce. The herd got spooked last week and this week they realized that might have been an overreaction. Or so it seems.

One day’s price action is not enough to make a definitive proclamation, but it is enough for us to take notice. More important will be how traders respond Thursday. Do they keep buying the dip or does today’s strength fizzle and retreat back under Tuesday’s lows? In one scenario and the dip is already over. The other and lower prices are ahead.

This is an emotional market and that means both outcomes are likely. While I cannot say for sure what’s coming, that doesn’t mean we cannot create an intelligent trading plan that accounts for both outcomes.

Hopefully, regular readers of this blog recognized this morning’s bounce was our signal to put on an initial position. Starting small allows us to be more aggressive while also controlling our risk. If the initial position works, great, we add more. If the second addition works, even better and we add even more.

On the other hand, if the bounce fizzles and retreats Thursday, we have a profit cushion from today to absorb some of the fall and we get out at our stops. No big deal. And rather than give up, if we get squeezed out, that just means we were early and we need to try again. If this isn’t the real bounce, it will be the next one, or the one after that. Buy smart, limit our losses, and always be in a position to profit from the next big move. That’s the way savvy traders profit from these opportunities.

I bought Wednesday’s bounce as if it were the real deal. If I’m right, I keep adding to what is working and enjoy the ride higher. If I’m wrong, I take a small loss and try again. No big deal. Some people need to be right. Me, I’m only looking to make money.

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CMU: How a savvy trader buys the dip.

By Jani Ziedins | Free CMU

Cracked.Market University: 

The S&P 500 fell for the third session in a row, retreating 7% from last week’s all-time highs. The spectacular implosion of the tech trade has many wondering if the Covid rally’s best days are now behind us.

First, this is one of the most hated rallies in recent memory. And to be honest, there is a lot to dislike about this market, namely hitting all-time highs in the middle of the biggest economic collapse since the Great Depression. But let’s not allow these minor details to cloud our judgment. This market has been ignoring fundamentals for six months and there is little reason to believe anything changed now. If the headlines didn’t matter then, they probably don’t matter now. And if the market doesn’t care about these things, then neither should we.

Second, arguing with this rally has become a national pastime. Since the earliest days in April, critics have been bashing this strength. As you can see from the above chart, there have been at least 9 different times this market allegedly died. Is there a reason to believe this time will turn out any different?

Without a doubt, this rally will die like all the others that came before it. But if I’m a betting man and there are 10 chances one thing will happen while only 1 chance something else will happen, I’m sure as heck putting my money on the thing that happens 10x more often. This is just a simple numbers game.

While this dip will most likely bounce, that doesn’t mean we can be reckless with our trades. First, I will assume everyone who reads this free blog already locked-in profits when the market first retreated under 3,500. This is where our trailing stops should have been and those would have gotten us out.

Now that we’re in cash, the challenge is knowing when to get back in. Is three days of selling enough? Or will it be five? Or seven? I have no idea and that’s why the savvy dip buyer assumes every bounce is real. While that leads to premature entries, those are not a big deal if we manage our risk properly.

First, we start small. That means entering with a quarter, third, or half of a normal-sized position. That way if we’re wrong, our mistake doesn’t hurt very much.

Second, we buy the bounce early so we can place a nearby stop just under the lows. If the bounce fizzles and retreats, no big deal, we get out and try again. While this often leads to a hand full of small losses, those will easily be overcome when we catch the next big leg higher.

And third, we only add to what is working. The real bounce will take off and it won’t look back. As long as we start early, keep a nearby stop, and only add to something that is working, our risks will be small and our eventual rewards will be large.

This isn’t hard when we approach the market with a thoughtful and sensible plan.

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A straight forward trading plan for next week

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Friday was another bloodbath for the S&P 500 and the index plunged 3% in early trade. The market attempted a rebound shortly after the open, but once that fizzled and undercut Thursday’s lows, the flood gates opened and a tsunami of selling overwhelmed the market. That said, by the end of the day, the index managed to recover a big chunk of those losses.

What’s more important, a second wave of defensive selling and finishing in the red? Or the impressive bounce off the midday lows?

No doubt there are a lot of bears that will disagree with me, but I was impressed with Friday afternoon’s strength. Just when things appeared their bleakest, supply dried up and dip buyers came rushing in. This is especially noteworthy ahead of a long holiday weekend. Investors typically prefer conservative positions when they cannot trade for three days, but this time the discounts were just too attractive for dip buyers to resist.

While it is naive to believe this tumble will be forgotten next week, if the index remains above Friday’s low on Tuesday, there is a good chance this won’t get much worse and this is just another dip-buying opportunity on our way higher.

Without a doubt, volatility will remain elevated and we could even retest Friday’s lows at some point later next week, but we should continue giving this rally the benefit of doubt. Crash under Friday’s lows on accelerating volume and we will be forced to reconsider our outlook, but anything short of that and we should be treating this dip as a buying opportunity.

Hopefully, everyone used their trailing stops to lock-in healthy profits somewhere between 3,500 and 3,450. That means we are sitting on a pile of cash and eagerly looking for the next trading opportunity. Friday’s midday bounce was a good entry point for an initial position and closing well above the lows gave us a second entry point.

Tuesday morning our stops should be near Friday’s lows and if the market trades well Tuesday, we can add more. If we locked-in some profits near 3,500 and are buying back in near 3,400, that’s not a bad trade even if it means sitting through some near-term volatility and whipsaws.

At this point, the only thing that would give me second thoughts is a quick retreat under Friday’s lows. If Friday’s midday bounce fails that quickly, the selling isn’t done and the most aggressive trader can short the index when we fall under Friday’s lows with a stop just above this level.

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Ouch, that hurt! What this means and how to trade it

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Well, that was dramatic. The S&P 500 shed 3.5% Thursday in the second-largest decline since the depths of the Coronavirus crash. Only June 11th’s 6% crash was worse.

As awful as this tumble felt, it helps to keep things in perspective. This afternoon the S&P 500 closed at 3,455 after plunging 125 points. This same 3,455 was an all-time high last week. That’s right, up until a few days ago, the market has never been this high. It doesn’t seem so bad when we put it that way.

As with all things in the market, there are two ways to look at this situation. 3,455 is still a very high number and the vast majority of stock owners are still sitting on a mountain of profits. If they shrug this off like they did on June 12th, the worst could already be behind us. On the other hand, the pessimist will point out just how much clear air remains underneath us. The next major support level is all the way back at 3k and falling another 400-points would hurt…a lot.

What’s a trader to do in a station like this? Lucky for regular readers of this blog, I told everyone exactly what to do last night:

The great thing about euphoric accelerations is they tend to be one-way moves, meaning we can easily follow this rally higher with a trailing stop. Keep it 50-100 points behind the market and we should safely navigate any near-term whipsaws. And you know what? If we get stopped out prematurely, there is no rule prohibiting us from getting back in. If a false alarm squeezes us out, no problem, just jump back in when prices recover.

I sure a heck didn’t expect today’s bloodbath, but I already had a plan in place to deal with it.

I don’t mention this as often as I should, but I like keeping my stops spread out. Today I had multiple stops between 3,500 and 3,450. This strategy helps me mitigate the inevitable whipsaws. If my first level gets hit and the market bounces, no big deal. Most of my position is still intact and I only miss a little bit before buying back in. If on the other hand, the selloff accelerates, I lock in some of my profits higher up and can actually make money buying back in at lower levels. Anyway, this is what works well for me and helps mitigate the frustration when the market undercuts my stops by 10 cents before bouncing.

As I wrote yesterday, I like this market and paradoxically, today’s dip actually makes me feel better about it. I was growing concerned about this relentless climb and the lack of a meaningful down day. Healthy and sustainable rallies take a step back for every two steps forward they take. If prices bottom and bounce soon, that is an incredibly bullish indication that confirms these prices are legitimate there is more life left in this rally. On the other hand, if prices continue falling, no big deal, my stops were already triggered and I am sitting on a mountain of cash. When the next trading opportunity presents itself, I will be ready for it.

At this point, I don’t see a reason to give up on this market and I will be looking for the next entry point to buy back in. But if the selling accelerates Friday and into next week, I have no problem switching my outlook and following the market’s lead. That’s the best part of being a nimble and flexible trader, I often make more money when I’m wrong.

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