Sep 16

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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Sep 15

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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Sep 14

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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Sep 11

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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Sep 10

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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Sep 09

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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Sep 08

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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