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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
Thursday was the S&P 500’s seventh up-day in a row. Not a bad run from a market that most people, including myself, thought was on the verge of the next lower. But that’s the way this game works. Prices don’t bounce until the crowd has given up on the bounce. And now we are left with a mountain of regretful sellers who are kicking themselves for acting so hastily.
Lucky for regular readers of this free blog, I wrote the following seven sessions ago:
Wednesday’s 0.3% gain counted as a bounce, so I held my nose and bought it. My trading plan told me to add more following Thursday’s strong open, so I bought more. And here I am, holding a nice profit in a trade I didn’t even want to make! This example highlights why we always follow our trading plan, not our gut.
While I didn’t like this bounce initially, I bought it anyway because that is what my trading plan told me to do, and now I’m sitting on a pile of profits. Funny how that works.
I’ve been doing this for a long time and my gut tends to be right more often than not, but every time my gut and trading plan disagree, I always go with my trading plan because it is right far more often than my gut. No surprise an objective, unemotional, thoughtful plan can outperform an emotional, egotistical, and a sometimes irrational bag of meat (i.e. me).
While years ago I would overrule my trading plan, almost every time I did, I came to regret it not long after. Get beat over the head with humbling losses often enough and eventually, I learned my lesson. And now I always follow my plan no matter what my gut thinks. Today I am sitting on a pile of profits in a 3x ETF because of that lesson I learned the hard way all those years ago.
If you messed up this trade, don’t be too hard on yourself. Count this as a learning experience and try to do better next time.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 surged for the fifth day in a row on Tuesday and finds itself less than half a percent from all-time highs.
Does anyone see a correction because I sure don’t?
None of the issues weighing on the market last month have been solved, but obviously, they don’t need to be solved for stocks to bounce back. The selloff was triggered by fear of the worst and when none of these problems spiraled out of control, stocks rallied in relief.
I will be the first to admit [last] Wednesday’s bounce wasn’t all that attractive and I was already suspicious of this market, so my gut told me to ignore the bounce. But I don’t trade my gut, I trade my trading plan and that told me to start with a small position Wednesday afternoon.
Well, it’s a good thing I listened to my trading plan because the index is now 3.5% above Wednesday’s close. Trade that with a 3x ETF and well….you get the idea.
I often remind readers the best trades are often the hardest to pull the trigger on. I didn’t want to buy last week and if I listened to my gut, I would have missed out on all of these nice and easy profits.
But rather than pat myself on my back, it is time to switch from offense to defense. I have nice profits and it would be criminal to let these escape. I moved my stops up to the mid 4,400s in anticipation of stalling at the old highs. But rather than pull the plug on a trade that is working, I’m willing to give this more time and wait to see what happens next. Break the old highs and I keep holding. Stall and retreat, I get out at my stops and wait for the next bounce.
As for anyone that missed last week’s bounce, well, it happens. Rather than force an ill-advised trade here, step back, admit you missed it, and wait for the next good trading opportunity. It will come along sooner than you think.
As for the next entry point, a break above the old highs is buyable with a stop just under this level. Start small, get in early, keep a nearby stop, and only add to a trade that is working. The odds of this breakout trade working are not great, but if you get into at the right time, the risks are very manageable and the potential reward is worth the effort.
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By Jani Ziedins | Free CMU
Free After-Hours Analysis:
The S&P 500 exploded higher Thursday, reclaiming 1.7% of the latest selloff and closing comfortably above 4,400 support. This is a mile from Tuesday’s Chinese drip torture that gave the impression we were on the verge of the next collapse.
And you can count me as one of the fooled. On Tuesday, I wrote a post titled “Why I’m so concerned about a 0.2% loss“.
While most prognosticators quietly sweep their mistakes under the rug, I have no problem admitting my mistakes. In fact, acknowledging our mistakes is the only way we can learn and grow as traders.
But in this particular instance, I wouldn’t say closing my long positions following Monday’s dreadful close was a mistake. While it was ultimately proven to be unnecessary, sound defense is never wrong.
Savvy traders that are successful over the long-term learned early in their career that preservation of capital is far more critical than growing capital. That’s why we only take calculated risks when the risk/reward is stacked in our favor, and even then, we back that up with sensible stops to protect us when things don’t work out in our favor.
To do it all over again, I sill would lock in modest profits on Monday and start looking for the next trade because that is the only sensible move to make in that situation. While it didn’t work this particular time, in a dozen similar setups, it would have been the right call. We play the odds and don’t let the exception to the rule cause us to give up on our well-thought-out rules.
Anyway, enough about that. The next important development is what happened Wednesday afternoon. The inevitable collapse never arrived and an early dip bounced and closed near the intraday highs. While no one is getting rich off of Wednesday’s 0.3% gain, the signal it gave us was compelling and worth acting on.
I always remind subscribers that as soon as we get out, we need to start looking for the next opportunity to get back in. Sometimes the next trade comes along as quickly as a few hours later.
I will be the first to admit Wednesday’s bounce wasn’t all that attractive and I was already suspicious of this market, so my gut told me to ignore the bounce. But I don’t trade my gut, I trade my trading plan and that told me to start with a small position Wednesday afternoon. (Buy every bounce: start small, get in early, keep a nearby stop, and only add to a position that is working)
Wednesday’s 0.3% gain counted as a bounce, so I held my nose and bought it. My trading plan told me to add more following Thursday’s strong open, so I bought more. And here I am, holding a nice profit in a trade I didn’t even want to make! This example highlights why we always follow our trading plan, not our gut.
Now who knows, maybe this is just another false bottom on our way lower. But by jumping aboard this bounce early, I have a nice profit cushion that will more than offset any near-term risk. If this bounce fizzles and retreats Friday or next week, I get out at my stops and try again next time. No big deal. And best of all, by being proactive and getting in early, my stops are already at or above my entry points, so this trade is now nearly free to me. Hard to beat that risk/reward.
If you find these posts useful, please return the favor by liking and sharing them!
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What’s a good trade worth to you?
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was a dreadful session for the S&P 500. While the index only lost 0.24%, the price action leading to that small decline was atrocious. And I’m saying that as a person who typically defends this bull market.
Now, don’t get me wrong, I’m definitely not one of those guys claiming the S&P will collapse back to 1,000. But it will get bumpy over the next few days and weeks. As nimble traders, does it really matter if this retreats to 1,000 or 4,200? Why hold through any losses if we don’t have to?
As I often tell readers, how we finish is far more important than how we start. While Tuesday’s finish doesn’t look bad on a daily chart, how we got there tells us a lot about the market’s mood. TL;DR It isn’t good.
In a mirror of Monday’s lethargic price action, stocks bounced early in the sessions, unfortunately, dip buyers failed to take the bait and prices slumped back to the lows. While dip buyers propped up this bull market all year long, all of a sudden they’ve gone missing and that’s a big problem.
As I wrote to Premium Subscribers earlier Tuesday:
Oversold markets bounce hard and fast and there’s been nothing hard or fast about this latest bounce. While I don’t want to be too negative, it is hard to find anything constructive to say about this price action. Vibrant markets just don’t behave this way.
That said, for those of us paying attention, the market is giving us plenty of warning and we have to be thankful for that. While it feels like stock market crashes are instantaneous, the writing is usually on the walls for days and even weeks ahead of time. Unfortunately, most people don’t react to those early warnings and only move after the pain of regret overcomes them.
The market is giving us a chance to get out and it is best to heed its advice. Maybe this next leg lower only undercuts 4,300 support and bounces off of 4,200. But remember, we can only buy the dip if we have cash and that means selling BEFORE the next leg lower. And later, when everyone else is filled with regret and abandoning ship “before things get worse”, we will be there with a pile of cash, ready to pounce on those juicy discounts.
Remember, savvy traders move proactive, not reactive.
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