Oct 02

Should investors be worried about Trump’s Covid-19

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis:

Global markets were rattled Friday morning after Trump revealed he contracted Covid-19 and the S&P 500 crashed 1.5% at the open. That said, stocks quickly found their footing and spent the rest of the day trading above those early lows, closing down a “less bad” 1%. Most significant for traders is the index continued respecting 3,320 support.

While this wasn’t a great way to end the week, the index still added 1.5% over the last five days in its first positive performance since late August. It is about time!

So far, Trump is only exhibiting minor symptoms and even in his age group, severe complications are highly unlikely (only 1 out of 20). But even if he develops a bad case, this is a human development, not an economic event and it will not affect the equities markets in a lasting way. There is a very clear chain of succession and strict protocols will prevent any significant uncertainty or disruption. Without a doubt, this would affect the country’s psyche and be another historic/tragic event for 2020, but it will not affect the economy in a meaningful and lasting way.

That said, the market’s initial reactions isn’t always based on logic and reason, especially in times of extreme uncertainty. This has been a volatile several weeks for stocks and it doesn’t look like that will change anytime soon. But as long as stocks remain above last week’s lows, the market is trading well enough to earn the benefit of doubt. Until we crash under the lows, approach every dip as if it is on the verge of bouncing. (Only after we crash under recent lows should we consider shorting.)

As I wrote Thursday:

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.

Despite Friday’s dramatic headlines, nothing changed. Short the breakdown and buy the rebound. Start small, get in early, keep a nearby stop, and only add to what is working. If the first trade doesn’t work, pull the plug and try again. When it works, take profits and do it again next time.

Expect this extreme volatility to stick around until after the election and that means every bit of up will be followed by a bit of down. Get in early and take profits quickly. As long as we trade confidently and proactively, this is a target-rich environment.

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Oct 01

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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Sep 30

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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Sep 29

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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Sep 28

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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Sep 25

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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Sep 24

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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