Jan 17

CMU: You have profits, now what?

By Jani Ziedins | Free CMU

Cracked.Market University:

The indexes are at record highs and anyone not obsessed with fighting this market is sitting on a pile of profits. The question now becomes, “what should we do with these profits?”

The first thing to remember is markets move in waves. Everyone knows this but people often forget this simple idea in the heat of battle. When it feels like all hope is lost and we are on the verge of a far larger crash is the exact moment prices bottom and bounce. The same goes for the upside, the moment this starts feeling is easy is right before it turns hard.

I’ve been doing this far too long to attempt picking tops. And even if I were picking a top, this probably wouldn’t be it. That said, we don’t have to pick tops in order to make decisions that protect our profits. It’s been a good run. Stocks are up more than 100 points since last week’s intraday lows. And we are nearly 20% higher than last fall’s test of 2,800 support. Could we rally another 100 points next week? Absolutely. Could we advance another 20% over the next three months? Sure. But just because we can do something doesn’t mean we will.

We can look back in history and find several instances where the market advanced 40% over 6 months. But when you consider it took 100 years to accumulate that handful of instances, just because something is possible doesn’t mean we should trade using those assumptions. While these things can and have happened, we shouldn’t expect them to happen. Instead, we should treat this market like any other market until it tells us otherwise; two-steps forward, one-step back.

There are two sensible ways of dealing with profits. First, if we are in this to make money, the only way we do that is by selling our winners. No matter how much we like a position, we cannot make money unless we sell it. The problem is selling a position means giving up on further upside and no one wants to do that. But if we remember that most people lose money in the stock market, then we probably don’t want to do what most people do. And most of the time that means selling stocks we don’t want to sell.

Now maybe it is just too hard for us to part with our favorite position. The second alternative is to take this decision out of our hands. Take a moment when everything looks good and the market is not pressuring you in any way. Look at the chart and pick a point where if the market falls to this level, you think you should get out. Write that level down and commit to selling at this price if the market dips back to it. If you are lucky and prices keep moving higher, repeat this exercise every week or two. Keep moving your stops up until that fateful day when the market finally forces you out and you collect your pile of profits.

While this seems like an either/or decision, very few things in the market are binary. Sometimes the best solution is doing a little bit of both. Take some profits proactively and follow the rest of your position higher with a trailing stop. That gives you the best of both worlds. But no matter what you decide, please decide to do something and commit to it. If you wait until the market starts dipping before making a trading decision, chances are emotions will cloud your judgment and you will be moving in lockstep with the masses that lose money.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jan 16

The mistake traders made in TSLA

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

I normally let more time pass before writing about a company again in these free blog posts, but TSLA’s price action has been dramatic enough to warrant a second post. After surging 10% in a single day, I told readers earlier this week, “it would be both foolish and reckless to chase the stock at these levels.” And wouldn’t you know it, in less than three days the stock gave back all of those gains when it opened this morning.

Now I want to be clear, I am in no way a TSLA bear and am most definitely not calling Tuesday a top. But I do know the market and radical surges like TSLA experienced over the last few weeks are most definitely not sustainable. This was a frenzy of breakout buying and short-covering, not systematic, rational, and sustainable buying.

Momentum traders and shorts losing money were jumping over each other trying to buy this stock before it went any higher. But the thing to remember about breakout buying and short-covering is both of these groups are not buying the company for fundamental reasons. They are chasing momentum. And more than just that, both groups of buyers don’t have a lot of money. They quickly move all-in (or all-out in the shorts’ case) and then they’re out of money. Once they trade, their opinion stops mattering and the wave of buying that fueled the explosive breakout evaporates.

This implosion of demand is further compounded by institutional investors’ aversion to chasing prices higher. Even if they like the company, they know these surges fizzle and they will be able to buy at cheaper prices if they are patient. And in a bit of a self-fulfilling prophecy, when institutional investors wait for lower prices, that creates a lack of demand and prices fall.

So if chasing prices higher Monday and Tuesday was a mistake, what was the right way to trade this? If we wanted to buy the breakout or cover our shorts, we should have done this long before the move became obvious to everyone. In this case, when TSLA initially broke through the old highs near $390. Buying at this point allows us to get in early and more than just that, it gives us a sensible stop near current prices that will limit our losses if we are wrong. And rather than recklessly chasing prices higher earlier this week, we would have been cashing in our profits and looking for the next trade.

As for what’s next, I like the way the stock bounced back today, but I need to see more to be sure. Maybe I will write about this stock again in a few days after it gives us more information about its intentions.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $TSLA

Jan 15

The savvy time to buy this market and what to do now

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Two weeks ago I wrote the blog post “Why January’s start is so bullish“. The market reflexively dipped after the U.S. killed an Iranian general and that initially put traders on edge. But rather than extend the selling, most owners shrugged off the headlines and snapped up the discounts. That morning’s dip tested 3,200 support and here we are nine days later, challenging 3,300 record highs.

I will be honest, on January 1st I was skeptical the one-way rally since the October lows could continue, but as soon as I saw the way the market reacted to the general’s killing and the subsequent attacks on U.S. airbases, I knew this was a strong market and prices were still headed higher. We don’t need to be able to predict the future if we know what clues to look for.

But that was then and this is now. The easy buy was two weeks ago when the market bounced decisively off 3,200 support and never looked back. But now that we are nearly 100 points higher, the risk/reward looks far different. Without a doubt, buying now would “feel” a lot easier than buying in the face of an escalating military conflict in the Middle East, but doing what feels good in the market rarely works out. In fact, we should be edging in the opposite direction, rather than buying this surge to the highs, we should be looking for opportunities to take profits. Anyone savvy enough to buy last week’s dip should be moving their stops up and even considering taking some profits proactively. If we are in this to make money, the only way to do that is by selling our winners.

As for what comes next, there are two ways the market approaches 3,300. Either the buying accelerates and we race toward a climax top, or the rate of gains stalls and we consolidate recent gains. If a person wants to hold for further upside, make sure you move your stops up when we cross 3,300 so your profits are protected. As for the most balanced approach, it makes sense to take some profits and let some ride. If the market continues higher, it is always easy enough to jump back in.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Jan 14

How to handle AMZN ahead of earnings

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

AMZN finds itself at an important inflection point. While its FAANG peers AAPL, FB, and GOOGL are busy making record highs and NFLX is constructively digging itself out of the hole it fell into last year, AMZN has kind of been stuck in neutral without a clear sense of direction. We got a really nice pop a few weeks ago when Amazon announced record holiday sales but no further details were given and we have to wait until earnings at the end of the month to learn what “record holiday sales” really means. Since that initial pop, the stock has been mostly holding under $1,900 resistance as traders wait to see what comes next.

I was a big fan of buying NFLX’s dip last fall because after a few months of relentless selling, the stock became oversold the crowd had given up hope and it reached a capitulation bottom. It had finally got “so bad it was good”. But I don’t see the same capitulation in AMZN’s recent consolidation. This is more of a rounding out and it really hasn’t tested investors’ resolve the same way the NFLX dip did.

That said, the stock is still above the far more significant 200dma and that is constructive. Remain above this moving average and the stock is doing well enough to earn the benefit of doubt. But if we fall under this level over the next few weeks, that dramatic capitulation drop could be just around the corner. But just like any good capitulation point, that will be our opportunity to jump in, not bailout.

I won’t pretend to know what AMZN’s earnings will look like when they report at the end of the month, but whichever direction the stock moves in the days after earnings, expect that to be the start of the next big move. Thrill investors and AMZN will return to the highs. Disappoint and new lows are ahead of us. In the meantime, I would be wary of holding too much AMZN. At this point, the risks seem larger than the reward. Wait for that definitive move after earnings and then place your bets. It is better to be a little late on this trade than a lot early.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $NFLX $AMZN

Jan 13

Is it too late to buy TSLA?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

You have to be living under a rock if you haven’t heard how hot TSLA is right now. The buying frenzy got so heated today the stock surged 10% in just a few hours. What triggered today’s excitement? Some no-name analysist raised his price target. (The important thing to remember about analysists is if they could trade, they wouldn’t be analysists. Think about that next time you are tempted to follow their advice.)

If only we could have seen this surge coming before it happened. Oh wait, we did. Back on December 19th, I told readers to expect something big out of TSLA as it challenged resistance that has been holding the stock back for nearly two years. Either the stock was going to smash through resistance, or it was going to get beaten back for the umpteenth time. Either way, this represented a golden trading opportunity. I suggested readers consider buying the stock above $390 and shorting it if it fell under $390. It doesn’t get any more straightforward than that.

That said, this trade turned out even easier than I expected. I figured the stock would stall at resistance for a little while before making its decisive move. Nope, it was in too much of a hurry. It smashed through $390 resistance and never looked back, making a quick 35% for anyone who was paying attention and willing to take the risk.

But now that the stock is 35% higher, would I consider buying it here? No way in hell!!! Risk if a function of height and this stock is freaky scary at these levels. I don’t care about the company’s fundamentals or any of that stuff, but I know trading and crazy surges like this are not sustainable. Expectations have gotten so high, it would be nearly impossible for the company’s earnings report to exceed them and send this stock even higher. We buy when everyone doubts the stock, not when it is making front-page news across the entire internet.

If a person was lucky enough to jump aboard this bandwagon last month, don’t get caught up in the hype. At the very least, form a plan to get out. Whether that is taking profits proactively or following the stock higher with a trailing stop. Or even better, a little bit of both. And even more important, if someone missed this move, it would be both foolish and reckless to chase the stock at these levels. If you missed it, you missed it. Don’t worry about it. Another trade with a far better risk/reward will be along any minute.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $TSLA

Jan 10

Where are bitcoin prices headed next?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

Bitcoin rallied nicely late last week and retook the $8k level. This is the first time since November the cryptocurrency has traded this high. This latest bounce inevitably leads us to the more important question, where are prices headed next?

The most obvious place to start is the attached chart. You don’t need to be a Certified Master Technician to see the problems with Bitcoin’s chart. On multiple timeframes this currency is experiencing a strong downtrend, most evident by the clearly defined pattern of lower-highs. Last year’s bounce to $10k was impressive and I was cheering for it the entire way, but at this point, it looks like that rebound ran out of energy and every subsequent bounce has been lower and lower. The biggest point of concern is in the mid-$6k range. This is where Bitcoin prices collapsed last time. We still have a bit of a buffer, but things could get real ugly if we return to this critical tipping point.

Bitcoin is setting up for a nice trade here. Hold above $8k and everything is great. But if support fails, look out below. The most obvious way to trade this is buying a move above $8k and shorting a dip under it. While this strategy will inevitably lead to a few whipsaws along the way, no doubt the next big move will start from here and it could go in either direction. I don’t mind getting whipsawed a little over the near-term if it means I will be in prime position to catch the next big move. The best way to manage these nuisance whipsaws is to start small and only add to your position after the trade starts working.

All of that said, given this sickly looking chart, if I were forced to choose, the most likely next move is lower and chances are good prices will undercut last year’s $3k lows. The only hope this has over the near-term is if we break through $12k and end this pattern of lower-highs for good.

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Tags: Bitcoin BTC.X

Jan 09

Is NFLX still a buy?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update

NFLX has been struggling for six months to recover from its disappointing earnings report last summer. That said, it looks like the worst is behind it and the stock is well above its September lows. In fact, it doesn’t have far to go before it recovers all of last year’s selloff. Now that things are finally looking constructive for the stock, the bigger question is if it is still a buy at these levels.

I’ve been bullish on NFLX for a while. Last fall’s selloff was clearly overdone and it reached the point of being “so bad it was good.” Risk is a function of height and the lower we go, the less room we have to fall. Granted, this rule only applies to businesses with a bright future, but if we still believe in the fundaments of a company, every dip presents a buying opportunity. While panicked NFLX owners were busy abandoning their stock at steep discounts last summer, savvy investors were presented with a buying opportunity.

Without a doubt, NFLX was overbought last summer and even meeting expectations was going to be difficult. But once that bubble burst, everything turned around. By the time of the next earnings report, expectations were so low it was easy to beat them and that is why the stock popped. The recent tumble and sour sentiment made NFLX feel like an extremely risky buy, but it was actually one of the safest times to buy the stock in years. The thing to remember is the best opportunities come when other traders are nervous, not when everyone feels confident.

A lot can change in three months. Last quarter’s earnings confirmed NFLX isn’t headed out of business and the stock is dramatically higher. Today’s setup definitely nowhere near as attractive as it was three months ago. But an important thing to realize about the last six months, there has been a tremendous amount of selling in the stock. Nervous owners were abandoning ship and selling to confident dip buyers. Even though the stock is a lot higher than it was near the lows, the current ownership group is far more robust than it was when this selloff started.

NFLX is still a buy here, but as I already mentioned, higher prices mean this is a riskier buy. Trade an appropriate size so if the company reports dreadful earnings in two weeks, the loss isn’t unreasonably large. If earnings are bad, abandon ship and even consider shorting the stock. But if they meet expectations, or better yet, beat expectations, this stock will be making new highs in no time. One negative outcome versus two positive outcomes, I like those odds. There are no guarantees in the market, but this setup is attractive.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $NFLX