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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
The S&P 500 bounced between small gains and losses Monday, ultimately finishing 0.09% in the green.
While 0.09% is ordinarily nothing to write home about, adding to Friday’s flirtation with 4,700 and finally closing above this psychological level is definitely significant.
Such a record close would have been impossible to imagine only a few weeks ago when the index was threatening to crash through 4,300 support. We’ve come a long way since those lows and even more impressive is the incredibly short amount of time it took us to get here.
As scary as these heights feel, the market continues trading well. We’ve been solidly overbought for weeks, yet buyers keep throwing even more money at these record highs.
Monday afternoon saw a small wobble into the red and this counts as test for the market. If this rebound is fragile, all it takes is a small crack to break things wide open. But so far things are holding together. Now, one afternoon doesn’t mean we are in the clear. In fact, what happened Monday is far less important than what’s coming on Tuesday and Wednesday. That said, a good day on Monday is definitely better than a bad day.
If nervous owners start taking profits, that selling could feed on itself and push the index back to 4,600 and even 4,550 is on the table. While a pullback to support is a very normal and healthy thing to do, it would feel jarring given how effortless the climb to these levels has been.
Or buyers could keep throwing money at this market and we’ve only seen the start of the silliness.
At this point, either outcome is likely and trading is simply a matter of waiting for sentiment to tip over. No doubt we are close to the next routine step-back, but the same thing could have been said last week and the week before that.
We trade the market we are given and while this one will eventually consolidate these gains, but it isn’t dipping yet and that’s the way we have to trade it. As scary as this looks, there is nothing to do but keep holding and lifting our stops.
If a person is paranoid, there is nothing wrong with taking some profits off the table. It’s been a great run and we only make money when we sell our winners. Take a portion of your position off the table and let some ride. Sometimes harvesting some profits is all it takes to get a better night’s sleep.
Lift stops to the lower/mid 4,600s and see where this goes.
TSLA tumbled after Twitter told Elon to sell 10% of his TSLA stock. Some owners panicked dumped shares in anticipation of that big overhang of looming supply. That said, the knee-jerk selling was fleeting and prices are quickly bounced above those early lows.
There are lots of reasons to sell this stock, but Elon selling a fraction of his holdings is not one of them. While an academic with his pocket protector and calculator will tell us one thing, given this stock’s absurd valuations, it’s been years since this stock heeded any academic’s advice.
This is a momentum trade and the momentum is still higher. Use this morning’s lows as a stop and anything above this level is holdable/buyable.
If we get dumped out, no big deal. Be happy to lock in those profits and get ready to buy the next bounce, probably somewhere around $1k.
Of course, the stock might not even sell off and that’s why we continue holding until our trailing stops are hit. (Most nervous owners bailed out hundreds of dollars ago.)
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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
Last Wednesday I slammed the S&P 500 for its dreadful close. Then the index proceeded to show me up by setting three record closes in a row. Funny how that works.
This reversal highlights just how nimble we need to be as traders. We cannot allow ourselves to get hung up on opinions. Even reliable trading signals can lead us astray. (An impossibly high accuracy rate of 80% is still wrong one out of five times!)
Now don’t get me wrong, I’m not suggesting taking risk off the table last Wednesday afternoon was a mistake. In fact, it was the only sensible decision to make. But just because we took risk off the table last Wednesday doesn’t preclude us from adding that money back in Thursday morning when the worst failed to materialize and prices bounced back.
I took my lump Thursday morning and I’m better for it. And even though I lost some money in the exchange, I’m more than happy to pay a small price now to avoid a bigger loss later. Remember, this isn’t about getting every trade right. It is about making more money than we lose. Sometimes that means taking small losses and I’m always fine with that as long as it allows me to be in the right spot at the right time when the big moves happen.
This is also a good opportunity to talk about position sizes. While a lot of people think in binary terms and move all-in and all-out of the market, that often is an expensive approach that magnifies mistakes and compounds regret.
I like moving in partial positions. Start with a quarter, third, or even half position. Only add more if that initial trade is working. If you are wrong, you only lost money on a partial position.
And even more advantageous, this risk management strategy allows us to be even more aggressive with our initial trades. We no longer need to wait for confirmation. Instead, we jump on the first hints of a selloff or bounce. I sold 1/3 last Wednesday afternoon and I bought 1/3 back Thursday morning. While my ego was a little bruised, my trading account hardly missed a beat.
TSLA is positively on fire. Good thing readers of this blog have been hanging on since the $600 bounce off of support and have been moving up their stops up ever since.
This price action is getting downright silly but it usually does with these extreme highfliers. Impossibly high gets even higher and that’s definitely the case with TSLA. As I wrote last week:
Now don’t get me wrong, I am most definitely not a TSLA bull and this looks as sustainable as all those dot-com names back in 2000. But I’m a trader and it doesn’t matter to me where this stock will be five years from now. If it is going up today, I want to be aboard and enjoying the ride. We can worry about all of that other stuff when it eventually becomes an issue. Until then, “don’t worry, be happy.”
Well, last week’s $1k breakout turned into $1,200 Monday and who knows what Tuesday holds. No doubt this will get really ugly at some point, but until then, keep holding for higher prices and lifting our stops. Stick to this simple strategy and we will be sitting on a pile of cash when everyone else is wondering what happened to all of their amazing profits. (Remember, we only make money when we sell!)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Wednesday’s session started off innocently enough with the S&P 500 bouncing between small gains and losses. But for those that read this blog regularly, they know how we start doesn’t count for $#!+. The key to figuring out what comes next is always telegraphed in the finish. And unfortunately, Wednesday’s finish was absolutely dreadful.
Now don’t take this the wrong way, this prognosis has nothing to do with the 0.5% loss. Downdays are a very normal and healthy part of every rally higher. And believe it or not, in the right context, even a 0.5% loss can even be a very bullish trading signal. It all comes down to how we arrive at that 0.5% loss. And unfortunately, Wednesday got there in a very, very wrong way.
The last 60-minutes of trade is the most insightful hour of the day because that’s when institutional traders are making their moves. And given Wednesday’s waterfall selloff into the close, those big investors were liquidating shares and locking in profits.
A one-way selloff in the final hour of trade is never a good sign and this late decline was no different. The next challenge facing us is figuring out what comes next.
The most innocent thing would be a modest step back to 4,500 support. Getting above this psychological milestone is where October’s rebound really put it into overdrive. And sometimes all we need is a little near-term give-back to allow everyone to catch their breath. Maybe that’s all this is, a modest exhale.
Or maybe October’s frenzy of dip-buying went waaaaaay too far and this is going to end very badly with a spectacular crash under September’s lows. (Or maybe I’m just reading a bunch of nonsense into a lot of random noise.)
No matter what happens, I’ve been doing this long enough to be wary of this late trading signal and my pockets were overflowing with profits from buying the October bounce, so it made a lot of sense to start peeling off a big portion of my positions. As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.
With a pile of profits in hand and following a really nice run from the October lows, it made sense to take some of those profits off of the table. Remember, we only make money when we sell our winners and this was as good of a time as any.
And you know what? If prices bounce back Thursday, there is nothing that says I cannot buy back in. In fact, buying back in is the exact thing my trading plan will tell me to do tomorrow if the market closes well. If I end up chasing my tail a little in the process, no big deal. I learned a long time ago it is better to be a little cautious than a lot sorry.
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What’s a good trade worth to you?
How about avoiding a loss?
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Follow Jani on Twitter @crackedmarket
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