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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 rallied for the third day in a row and continues recovering from last week’s devastating 6% tumble.
One large bearish collapse followed by three smaller bullish responses. Which signal is legitimate and which is misleading? That’s the question everyone wants the answer to.
Thursday’s crash was the worst day since the original Coronavirus meltdown. What started as a disappointing open quickly morphed into a mad dash for the exits. But as quickly as the selling started, it exhausted itself and stocks have already recovered a big chunk of those shocking losses.
If there is one thing we know about crashes, they are breathtakingly fast. No one has time to think and if you pause even for a second, you get run over. That’s what occurred Thursday. But rather than extend the panic selling the runaway selling like we saw back in March, the subsequent price action has been far more orderly and thoughtful.
Few things calm nerves like rising prices and the last three days of gains has a lot of people feeling better. Last Thursday’s second thoughts are quickly fading from memory and confidence is returning.
As I wrote previously, until further notice, we give this rebound the benefit of doubt. Trends continue countless times but they reverse only once. Going strictly off the probabilities, last week’s dip was far more likely to bounce than it was to continue. And that’s exactly what we are seeing.
And as long as this market remains above 3k support, we continue giving it the benefit of doubt. Fall under this level and all bets are off.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
It was a dreadful day for the S&P 500. In fact, this nearly 6% loss was the worst day for the index since the depths of the Coronavirus collapse back in March.
There was no definitive headline driving today’s selling. Instead, this was one gigantic tidal wave of second-guessing that hit all at once. Between the struggling economy and signs of a second wave of infections in Asia, many investors slammed on the brakes and those second-thoughts were contagious.
As well as the market has done over the last few months, it is was actually surprising it took this long for stocks to take a meaningful step-back. But as I’ve been writing, investors have largely been ignoring headlines and this remains an emotionally driven market. Those blinders propelled us on the way higher and this group-think contributed to today’s simultaneous, mega-collapse.
But as bad as today felt, did anything change? No. The economy is still in shambles and a second wave of infections is inevitable. All things we knew yesterday and none of this is new to anyone. If these things didn’t matter before, then it probably doesn’t matter now. Stocks made a huge run since the March lows despite these fears and periodic waves of profit-taking like this are inevitable.
But just as important to this market is the nearly unlimited amount of money and resources governments are throwing at this problem. If we learned anything over the last decade, it’s that stocks absolutely love free money and by that metric, the good times are still rolling. The free money is flowing out of control and despite today’s temporary dip, expect those unprecedented flows to keep propping up stock prices.
This pullback was long overdue, but this was just a normal and healthy step-back on our way back to all-time highs. This is not the start of some much bigger collapse. Expect this selloff to bounce like every dip that came before it this spring. If the bounce doesn’t occur Friday, then look for it early next week.
But just because this market will bounce doesn’t mean we should ride this wave lower. Every responsible trader uses stops to protect themselves in case they are wrong. Earlier this week I suggested last Thursday’s close was a good level for a trailing stop. We undercut that level early in the day and that was our signal to get out no matter what we thought was going to happen next.
Now that savvy traders are in cash, it is time to start looking for the next buying opportunity. If prices bounce tomorrow morning, test that opening strength with a small buy and stop under the early lows. (It doesn’t matter if we open red or green, just which direction the market moves after the open.) If prices rally through the day, keep adding more. If prices finish near the daily highs, hold over the weekend.
On the other end of the spectrum, if prices fall from opening levels tomorrow morning, stay in cash and wait for the bounce. (An aggressive trader can short the weakness, just stay nimble and take profits early and often) As bad as today felt, traders should be excited to see this volatility. As much fun as it was riding this spring’s wave higher, we make a lot more money from this back-and-forth.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
TSLA broke through $1,000 for the first time ever and is 250% above its March lows. That’s one heck of a ride for anyone lucky enough to catch it.
I will be the first to admit I’m not a big TSLA bull. It’s an expensive stock and prone to wild swings. But those same wild swings that give bulls and bears so much to argue about are the things swing-traders dream of. Who cares which side is right as long as the stock keeps giving us these huge, tradable swings.
Back in early May, I told readers this stock was buyable if it could get above $800 and hold those gains:
This is a strong sign and breaking through resistance in a sustainable way seems inevitable. That means the most likely next move is higher and if we get through $800, then all-time highs near $1,000 is the next stop.
Well, here we are! Now the big question everyone is asking is what comes next? This is a red-hot stock and there is a very good chance this is another bubble. While that scares some people, what should we be doing when we see a bubble? Why, buying it, of course! What a silly question.
Ride this thing higher with a trailing stop just under $1k and enjoy the profits. Obviously, the safer time to jump aboard this move was back at the $800 breakout. But for the more adventurous, this is still buyable with a stop just under $1k. That said, late buyers should be prepared to get squeezed out a few times by false alarms and whipsaws. But as long as you are committed to buying back in every time the stock pops back above $1k, you will be in the catbird seat for the next leg higher. A few small losses are no big deal if we are there to catch the next big move. $1,200 here we come!
Now that all the hype is out of the way, make sure you keep your head screwed on tight. Just because $1,200 seems likely doesn’t guarantee we will get there. Stay disciplined and always keep a nearby stop just in case we get this one wrong. If we get stopped out prematurely, we can always jump back in when prices recover. But losses, those are forever and we want to avoid them to the best of our abilities.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 experienced its biggest dip in nearly three weeks. As bad as that sounds, the losses were modest and only pushed the index back to levels that were fresh highs two days ago. If we want to find other signs of resilience, the Nasdaq bucked the trend and actually closed at the highest level in its history. Even our bad days are not very bad and that’s been a very good thing for anyone who still believes in stocks.
At this point, the S&P 500 is so close to all-time highs that testing this level seems inevitable. What happens after we get there is still up for debate, but the market tends to go where people are looking and the next big milestone is all-time highs. Stating the obvious, this is a very bad time to be short stocks.
In my previous free posts, I explained why this market is headed higher. As long as prices keep making higher-highs, everything is going according to plan and we have nothing to worry about. But everyone knows all good things eventually come to an end and this strength will be no different. Today I’m going to describe the warning signs we need to be looking for.
Maybe the next dip will be headline-driven. Or maybe demand will dry up as we run out of new buyers willing to pay even higher prices. Either way, hints of the next meaningful dip will first show up in the form of weak closes.
The final hour of trade is when intuitional traders make their moves and where we first see any shifts in their outlook. More than red or green closes, what really matters is how prices moved in the final hour of the day. A good day can finish red or a bad day can still finish green. What we are looking at is which direction and how strongly we moved in the final hour. Are we above the early lows, like today? That is a good day even when we finish red. Did early strength fizzle and close well off the highs? That is a bad day even if we closed in the green.
The other meaningful signal to look for is a series of lower-highs and lower-lows. If every good day is slightly less good than the one before it, that tells us large institutions are taking profits, not adding more money. If big money is selling, then we should be moving out the door too.
Right now we don’t have anything to worry about because the market keeps closing strong and making higher-highs. But the best time to plan what comes next is before it happens. If you are ready and prepared for what is coming, you will never be caught off guard.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
It’s been six days since I wrote the free post titled “Why this market is still buyable“. Back then the S&P 500 was 10% short of all-time highs. Today, we find ourselves only 5% away from that “unthinkable” mark.
As I wrote back then:
This paradox largely comes down to expectations of a quick recovery combined with unprecedented levels of government stimulus. As bad as the economy looks today, when governments are throwing unlimited resources at the problem, that’s enough to placate investors.
Nothing’s changed since then and is why prices keep marching higher. At this point, why argue with what is working? The index is almost certainly headed back toward all-time highs and the only real question is what happens after we get there. But as nimble traders, we can worry about that when we get there. Until then, enjoy this ride higher and keep moving your trailing stops up. Right now, some stops near Thursday’s close and another portion near Friday’s intraday lows look to be be pretty good levels.
Now, maybe this rebound is getting a bit too obvious to everyone and that causes these gains to stall short of all-time highs. But as long as we respect our stops, it won’t be a problem. In fact, for the disciplined and nimble trader, near-term dips are simply another profit opportunity.
As the cliche goes, “plan your trade and trade your plan”. Until something changes, keep giving this market the benefit of doubt.
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What’s a good trade worth to you?
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For less than $1/day, have actionable analysis and a trading plan delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
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