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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Friday was another bloodbath for the S&P 500 and the index plunged 3% in early trade. The market attempted a rebound shortly after the open, but once that fizzled and undercut Thursday’s lows, the flood gates opened and a tsunami of selling overwhelmed the market. That said, by the end of the day, the index managed to recover a big chunk of those losses.
What’s more important, a second wave of defensive selling and finishing in the red? Or the impressive bounce off the midday lows?
No doubt there are a lot of bears that will disagree with me, but I was impressed with Friday afternoon’s strength. Just when things appeared their bleakest, supply dried up and dip buyers came rushing in. This is especially noteworthy ahead of a long holiday weekend. Investors typically prefer conservative positions when they cannot trade for three days, but this time the discounts were just too attractive for dip buyers to resist.
While it is naive to believe this tumble will be forgotten next week, if the index remains above Friday’s low on Tuesday, there is a good chance this won’t get much worse and this is just another dip-buying opportunity on our way higher.
Without a doubt, volatility will remain elevated and we could even retest Friday’s lows at some point later next week, but we should continue giving this rally the benefit of doubt. Crash under Friday’s lows on accelerating volume and we will be forced to reconsider our outlook, but anything short of that and we should be treating this dip as a buying opportunity.
Hopefully, everyone used their trailing stops to lock-in healthy profits somewhere between 3,500 and 3,450. That means we are sitting on a pile of cash and eagerly looking for the next trading opportunity. Friday’s midday bounce was a good entry point for an initial position and closing well above the lows gave us a second entry point.
Tuesday morning our stops should be near Friday’s lows and if the market trades well Tuesday, we can add more. If we locked-in some profits near 3,500 and are buying back in near 3,400, that’s not a bad trade even if it means sitting through some near-term volatility and whipsaws.
At this point, the only thing that would give me second thoughts is a quick retreat under Friday’s lows. If Friday’s midday bounce fails that quickly, the selling isn’t done and the most aggressive trader can short the index when we fall under Friday’s lows with a stop just above this level.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Well, that was dramatic. The S&P 500 shed 3.5% Thursday in the second-largest decline since the depths of the Coronavirus crash. Only June 11th’s 6% crash was worse.
As awful as this tumble felt, it helps to keep things in perspective. This afternoon the S&P 500 closed at 3,455 after plunging 125 points. This same 3,455 was an all-time high last week. That’s right, up until a few days ago, the market has never been this high. It doesn’t seem so bad when we put it that way.
As with all things in the market, there are two ways to look at this situation. 3,455 is still a very high number and the vast majority of stock owners are still sitting on a mountain of profits. If they shrug this off like they did on June 12th, the worst could already be behind us. On the other hand, the pessimist will point out just how much clear air remains underneath us. The next major support level is all the way back at 3k and falling another 400-points would hurt…a lot.
What’s a trader to do in a station like this? Lucky for regular readers of this blog, I told everyone exactly what to do last night:
I sure a heck didn’t expect today’s bloodbath, but I already had a plan in place to deal with it.
I don’t mention this as often as I should, but I like keeping my stops spread out. Today I had multiple stops between 3,500 and 3,450. This strategy helps me mitigate the inevitable whipsaws. If my first level gets hit and the market bounces, no big deal. Most of my position is still intact and I only miss a little bit before buying back in. If on the other hand, the selloff accelerates, I lock in some of my profits higher up and can actually make money buying back in at lower levels. Anyway, this is what works well for me and helps mitigate the frustration when the market undercuts my stops by 10 cents before bouncing.
As I wrote yesterday, I like this market and paradoxically, today’s dip actually makes me feel better about it. I was growing concerned about this relentless climb and the lack of a meaningful down day. Healthy and sustainable rallies take a step back for every two steps forward they take. If prices bottom and bounce soon, that is an incredibly bullish indication that confirms these prices are legitimate there is more life left in this rally. On the other hand, if prices continue falling, no big deal, my stops were already triggered and I am sitting on a mountain of cash. When the next trading opportunity presents itself, I will be ready for it.
At this point, I don’t see a reason to give up on this market and I will be looking for the next entry point to buy back in. But if the selling accelerates Friday and into next week, I have no problem switching my outlook and following the market’s lead. That’s the best part of being a nimble and flexible trader, I often make more money when I’m wrong.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
This market is on fire. The S&P 500 has been up 9 out of the last 10 sessions. Today’s 1.5% pop is the biggest gain in more than two months, meaning the rate of gains is accelerating, not slowing down. But the real star of the show is tech and momentum stocks with double-digit gains becoming the norm.
While a lot of people are nervous because it feels like this market is getting frothy, and I’m one of them, the thing to remember is bubbles last longer and go further than even the most bullish cheerleaders thought possible. I wouldn’t feel comfortable buying stocks at these ridiculously extended levels, but I sure am glad I’m holding positions with huge profits and I continuing to participate in this runup. And for the time being, I have no interest in selling. I’m following this rally higher with a trailing stop. I have no idea how much further it will go, but I definitely want to be apart of it.
The greatest strength we have as independent traders is the nimbleness of our size. We do in seconds what it takes institutions weeks and months to accomplish. This market is getting absurdly expensive, but we are nimble enough to ride this wave higher and be able to get out right after it rolls over. We don’t need to predict the future if we are fast enough (and disciplined enough!) to react to the market in real-time.
The great thing about euphoric accelerations is they tend to be one-way moves, meaning we can easily follow this rally higher with a trailing stop. Keep it 50-100 points behind the market and we should safely navigate any near-term whipsaws. And you know what? If we get stopped out prematurely, there is no rule prohibiting us from getting back in. If a false alarm squeezes us out, no problem, just jump back in when prices recover.
Stick to the above plan and see how much further this frothiness takes us. No doubt the top is still a good distance above us.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
August was the sixth month since March Covid lows and it certainly feels like the rebound should be running out of momentum. But is it?
Out of the 21 trading days in August, the S&P 500 finished green 16 times. Of those five red days, most were less than a quarter percent loss. Add it all together and August finished a very impressive 7% higher. Trade that with a 3x ETF and August was a 20% month! Not bad, not bad at all.
Sometimes it feels like we are too late. Other times we worry the market is already too high. But as I often write, things that are high tend to get even higher. And that has definitely been the case with this Covid rebound. Last month’s irrational highs got even more irrational this month. Anyone still waiting for the “inevitable” pullback is still waiting.
What does September have in store for us? Most likely more of the same. A trend is far more likely to continue than reverse. While the next step-back is just around the corner (it could start at any moment), we don’t trade that outlook until the stepback is actually upon us. Until then, keep giving this market the benefit of doubt.
At this point, there is nothing to do other than keep following this rally higher with trailing stops near 3,440. While I am concerned about last week’s acceleration, if this is the start of a climax top, these things usually get far more frenzied before the collapse.
I don’t love the market at these elevated levels, but at the moment, it is doing everything it needs to do to keep me in it. As long as this keeps going higher, I will continue holding and following it higher with a trailing stop. But if this fizzles, I will be happy to lock-in 50% profits since the June lows (3x ETF). All good trades eventually come to an end and so will this one.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Wednesday was a good day for the S&P 500 as it pushed toward 3,500 for the first time in history. As bad as the real world is around us, no one in the stock market seems to care. Investors are far more concerned about missing this latest runup than they are about what could go wrong this fall. And who can blame them? Anyone that bought June’s dip using a 3x ETF is up more than 50% in only two months.
While anyone can point out great trades after they happen, it if far more useful (and profitable) to see these trades coming before they make their big move. Lucky for regular readers of this blog, this is exactly what I told them June 11th when the market collapsed 6% in a single session:
Two months later, here we are, standing at those all-time highs. Trading isn’t hard if we know what to look for. While that post helped readers two months ago, it is old news and now everyone wants to know what comes next.
While I loved riding this wave higher, it’s gotten a little too easy and obvious. Buying June’s dip was hard and that’s why it worked. On the other hand, buying this breakout to record highs is far too obvious. In fact, most people are more afraid of missing the next leg higher than they fear the next dip lower. And that’s exactly what makes me so nervous right now.
Everyone cognitively knows stocks go up and stocks go down, but all too often people forget these simplest ideas in the moment. As great as things feel right now, this is not the time to fear being left behind. It is the time to fear holding something that could go down.
I’m not ready to pull the plug on this breakout just yet, but I keep moving my trailing stops up. With profits this big, it would be foolish to let greed wipe all of those away. I don’t mind riding this higher for a few more days or weeks, but I’m definitely itching to lock-in my profits and get ready for the next trade.
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