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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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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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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Wednesday was a dreadful day for the S&P 500. The index started with a small gain, unfortunately, that was as good as it got. By the close, the market shed 2.4% in the biggest loss since the early September tumble.
Anyone who’s been reading these posts knows I’ve been giving this market the benefit of doubt as it carved out a base near 3,300 support. Even Monday’s tumble under this level wasn’t a big deal because the index spent the rest of the day reclaiming a big chunk of those early losses. As most experienced traders know, it isn’t how the day starts, but how it finishes that matters most. To me, it looked like the market was finding its footing and getting ready for the umpteenth bounce since the March lows. Then today happened…
There is nothing good to say about Wednesday. It was a one-way selloff that never found a bottom. While the optimist might find some solace that it didn’t undercut Monday’s lows, that’s only because the selloff ran out of time. But hey, there’s always tomorrow! Ugh.
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. Today’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.
As for how I traded this abomination, I came into the day long and was sitting on a profit cushion from this week’s early bounce. That gave me a little breathing room when prices started retreating shortly after the open. As I wrote yesterday:
By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.
Little did I know I would be putting my contingency plan to work a few hours later. But that’s why we have them. To protect us from bad things when the market goes the “wrong” way. I started peeling off my positions this morning and I was all the way out by early afternoon. Once it was obvious the index wasn’t finding a bottom, I even put on a short.
I’m not a fan of shorting a bull market, but there was nothing good about today and things could get even worse if we fall under Monday’s lows. Today proved there are still a lot of nervous owners left and it could get even worse tomorrow. That said, I’m happy to be wrong. If prices bounce and reclaim Wednesday’s highs, I’ll be ready to buy that bounce. But something tells me that won’t be happening for a while.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 notched its first gain following four consecutive losses. There wasn’t anything meaningful in the headlines driving Tuesday’s 1% pop. Instead, this strength was mostly a response to a little too much selling over the last week.
Everyone knows markets move in waves and it shouldn’t surprise anyone when the tide reverses after a string of days in the same direction. Is that all this is, a one day pop between two long stretches of down days? The cynics certainly think so. But I’m not sure the evidence supports that outlook.
First, we are in a long rally that goes back more than 6 months. This period includes countless dips that bounced back even higher. If the first dozen dips couldn’t break this rally, what makes this latest attempt any different?
Second, the market finished at the intraday highs the last two sessions. While Monday closed in the red, if you look under the hood, the price-action was actually quite bullish as institutional investors chased prices higher into the close. That wave of dip buying carried over to today and helped put together the first up-day in a week.
Third, if this market is going to crash, the first thing in needs to do is make a lower low. As long as we remain above Monday’s intraday lows, this should be treated as a buying opportunity. If we violate the lows, all bets are off and we can short until our heart’s content. Until then, this bounce deserves the benefit of doubt.
Up or down, there is enough emotion wound up in the market that the next move will be big. Maybe prices bounce decisively. Maybe they collapse. Either way, as long as we follow a thoughtful trading plan that puts us in the right spot at the right time, this will be a great ride.
As for what I’m doing, I bought Monday’s late strength and I added more on Tuesday. By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.
When it comes to the market, I don’t care which way it goes. The only thing that maters to me is I’m riding that next wave.
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By Jani Ziedins | Free CMU
Cracked.Market University:
Spend any time on the internet and it sounds like everyone makes a killing trading stocks because all you ever hear is people bragging about their big scores. But those of us that have been around the block a few times know better. Unsurprisingly, very few people mention their losses. In fact, most people hide from them. And not just from other people, but also from themselves when they refuse to acknowledge a bad trade by either selling it or tallying the true cost after they close it. But as a matter of transparency, I’m willing to let everyone see what the other side of my personal trading looks like.
First, let’s roll the clock back to Friday afternoon. As I wrote in last week’s free post, I liked the way the S&P 500 bounced back above 3,300 after briefly violating the weekly lows earlier in the day. Big money makes their moves late in the day and they were clearly more interested in buying Friday’s dip than selling it. That resilient price action was a buy signal for me. But rather than rush in with everything I’ve got, I start every trade with defense in mind. My trading plan clearly dictates I start small, get in early, keep a nearby stop, and only add to what is working.
What this means in practice is I prefer being aggressive when buying bounces and that means getting in not long after the bounce. I protect myself by testing the market with a smaller 1/3 position. I further back this up by placing a stop nearby, typically under the recent lows. And I only add to a trade that is working. (I never “average down”)
This recipe often leads to nice opening pops like we saw the previous two Mondays, but I wasn’t as lucky this morning. There was a perfect headline storm over the weekend. Ruth Bader Ginsburg’s death and subsequent nomination fight likely ruins any chance for a near-term Covid stimulus. Then China retaliated against Trump’s Tik-Tok ban by threatening to do the same against foreign companies operating inside China. And finally, parts of Europe are considering a second round of economically devastating shutdowns. Put all of this together and it is no surprise stocks tumbled at the open.
That meant I started the day playing defense. But since I only had a partial position, the losses were very manageable. The one exception I have to my otherwise rigid stop-loss policy follows opening gaps. Rather than sell the open when a gap leaps over my stops, I give the market 10 or 20 minutes to find a near-term bottom and bounce. That new low becomes my new stop and I will sell a violation of that no matter what. If I find myself already down 2% at the open, it isn’t that big of a risk to give the market another 0.25% or 0.5% of slack to see if there will be an early bounce. And most of the time, the market does bounce. Whether that bounce sticks or not is less consistent, at least I gave myself the opportunity to ride a rebound higher. If the early bounce fails, no big deal, I get out nearly where the market opened.
This morning the market attempted a modest bounce following the opening gap, but within an hour, it undercut the early lows and I was out. I even took a stab at a small short following my standard trading plan of starting small, getting in early, keeping a nearby stop, and only adding to what is working. That said, betting against a bull market is one of the hardest ways to make money and I enter these shorts with very low expectations. And just as expected, the early weakness bounced and I was out of my short in a matter of hours. No big deal. Most shorts don’t work, but the few times they do work, they make a ton of money, so they are definitely worth trying. Especially when I can enter and exit them without losing any money like I did today.
Just like Friday, I was impressed with Monday’s late surge into the close. While the market still ended down more than 1%, institutions were clearly more interested in buying the dip than selling the weakness. Right or wrong, big-money moves the market and I follow their lead. For the third time, in two days, I started small, got in early, and left a stop nearby.
Will this afternoon’s buy be any more successful? I don’t know. If it works, I will add more Tuesday and ride this wave higher. If it doesn’t, I’ll make the same defensive moves I made today.
This market is on the verge of making a big move. The only thing that matters is I am in the right place at the right time. If I have to take a few small losses along the way, no big deal. As long as I keep buying the bounces and shorting the breakdowns, I know my payday is coming. The worst thing I can do is give up now just because my last trade didn’t work. As long as my losses are small, I can keep doing this for a long, long time.
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By Jani Ziedins | Weekly Analysis
Free Weekly Analysis:
It was a mixed week for the S&P 500. Monday started with a nice pop as the index launched its second rebound attempt from September’s swoon. Unfortunately, stocks could only string together two winning sessions before three successive losses knocked us back to where we started. So much for bounce attempt #2.
Headlines remain dreadful, but they’ve been dreadful for months and in that regard, nothing has changed. Instead, most of this weakness comes from the high-flying tech sector that led this miraculous charge to all-time highs. Live by tech stocks, die by tech stocks. At least that’s how this has played out so far.
There isn’t anything inherently wrong with the tech trade. These companies are still performing at the top of their game and most are insulated from Covid. In fact, many like NFLX and AMZN actually benefited from the lockdowns.
If it isn’t the fundamentals, what is the problem with the tech trade? Simple. Two steps forward, one step back. Cognitively, everyone knows the market moves in waves, unfortunately, most people forget this very basic concept in the heat of battle. Tech stocks raced higher and it only makes sense that at some point, they take a break and cool off. This appears to be that point.
If September’s dip is a normal and healthy thing to do, there is no reason to panic and abandon ship. The world is not ending and the market is not crashing. This is nothing more than stocks taking well deserved a break. These tech companies were the best-of-the-best coming into September and they will still be the best-of-the-best leaving September. All we need to do is put up with a little near-term volatility. No big deal.
Friday’s intraday dip in the S&P 500 undercut both the weekly lows and made fresh monthly lows. Nervous traders often place their stops under recent lows and that leaves us vulnerable to an avalanche of autopilot selling if the market undercuts those widely followed levels. But guess what happened today when we undercut the lows? Nothing. The market slid past the lows and rather than accelerate lower, supply dried up and prices bounced.
This resilience tells us we are running out of nervous sellers and there is very little supply underneath the market. Most owners do not have their finger on the sell button. If they did, we would have seen that avalanche of selling overwhelm the market this afternoon. Instead, most owners shrugged and kept holding. That is a very bullish development.
As I wrote earlier this week, as long as the S&P 500 remains above 3,300, this continues to be a dip-buying opportunity. Only after the market crashes through 3,300 should we consider shorting. If the imminent collapse is as big as the naysayers claim, we can afford to be a little late and still make a boatload of money. Until then, I’m giving this bull market the benefit of doubt. That means buying every bounce attempt, including Friday afternoon.
Obviously, the first and second bounce didn’t work, but that’s to be expected. If we knew which bounce was the real deal, this would be easy and everyone would be rich. Now that we’re on bounce attempt #3, I’m a little more hopeful. Statistically speaking, the 3rd bounce tends to be the most successful.
As long as we start small, get in early, keep a nearby stop, and only add to what is working, any losses from buying the wrong bounce are small. More important is that we put ourselves in the right place at the right time to profit when this thing finally takes off. If I’m wrong and the market collapses next week, no big deal. I’ll close my long and go short. In fact, my trading account actually prefers a bigger selloff because volatile markets are extremely profitable. The bigger the dip, the bigger the payday.
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