May 02

What to look for next week and how to trade it

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis:

The S&P 500 finished in the red last week but the 0.2% loss hardly seems noteworthy. The optimist will say a six-point loss is laughable. The pessimist will say the lack of meaningful buying is the early signs demand is drying up. Which side is right? While I’d love to tell you, unfortunately, we will only know after it happens.

Momentum or gravity, which wins next week? While I cannot say what direction we go, we are definitely at a tipping point. If this market doesn’t break this week, it isn’t going to break anytime soon and we can quit worrying about it. But if it breaks, it is going to break in a big way. Either no move or a big move, now that’s something I can plan a trade around.

All we need to do is wait for the market to reveal its hand. If it stumbles, short the weakness with a nearby stop. If that initial wave of selling fizzles and bounces, cover and wait for the next opportunity. Just because the first trade doesn’t work doesn’t mean we give up and go home. Sometimes it is the second or third move that finally works. If we don’t stick around, then we let someone else collect profits that were supposed to come to us.

On the other side, if we get to the back half of the week and the selloff hasn’t started, give up because it ain’t going to happen. There is a fine line between patient and stubborn and we don’t want to step over it.

As usual, start early and start small. Regardless of the opening gap, short any early move that stumbles from the opening levels with a stop just above this level. Only add more money after the trade starts working. If we close near the lows, consider holding the position overnight. If the market rallies into the close, take what profits we have and try again tomorrow. If the first trade doesn’t work, get out and try again. And if the bounce is decisive, admit defeat and go long. There is no room for pride in the market, only making money and losing money.

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

Apr 30

What comes next for $TSLA

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

TSLA exploded higher at the open after first-quarter earnings shocked Wall Street with a healthy sized (paper) profit. Plenty of other contributors are covering the earnings report so I don’t need to rehash the details here. More interesting to me is today’s subsequent price action. After smashing through $800 resistance at the open, that was as good as it got for the stock. The rest of the day was spent giving back all of those gains and eventually skidding into the red.

Since early February, I’ve been saying $800 was a key level for the stock. Back then it was a critical stop-loss for protecting profits following Dec-Jan-Feb’s spectacular surge higher. Then in early March, it became a ceiling for the subsequent rebound and most recently, it was a smart level to be taking swing-trading profits near following the $600 breakout.

After taking profits near $800, the plan was to get back in by either buying the dip to $600 support or a breakout above $800 resistance. With the stock trading in the middle of the $600 to $800 trading range, it could have gone either way. This time it happened to push back to $800 and breaking above $800 yesterday near the close created a buying opportunity.

Everything looked great this morning following the stellar earnings and the market’s initial enthusiasm. But rather than embrace the higher prices, traders started locking-in profits and shorting almost immediately. That’s never a good sign. We want to see follow-on buying, not overpowering waves of profit-taking. That tells us more investors are concerned about these highs than they are excited to chase them. In the “next greater fool” theory of trading, it appears (at least for the time being) we ran out of new fools.

I’m not ready to give up on the stock yet and a rally back above $800 is still buyable. But if prices cannot get back above $800, that tells us demand is a serious problem. If $800 turns into a ceiling, that is a great short entry with a profit target near $600 support.

As usual, no matter which way this goes, start small, get in early with a nearby stop, only add once the trade starts working, and if we get stopped out, consider switching directions and going the other direction. Being wrong is okay as long as we admit defeat early and start preparing for the next trade as soon as we jump out.

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

Apr 29

CMU: Don’t fall victim to binary thinking

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 popped at the open, recovering all of yesterday’s midday fizzle and then some. We closed at the highest levels in nearly two months and the stock market is darn close to pushing this selloff’s losses back under 10%. What a turn of events that would be given how desperate and hopeless the situation appeared only a few weeks ago.

Yesterday’s failed breakout to recent highs was a big red flag (read about it here). That very easily could have been the start of a near-term pullback. But today’s price action decisively beat back all of those concerns (at least for the time being).

While a lot of inexperienced traders love to categorize the market in binary terms. Either you are a bull or a bear. Either you are right or wrong. Either you are successful or you are a failure. And they compound those naive categorizations by making such extreme judgment calls based on a single data point. An inexperienced trader would have called yesterday a top and another inexperienced trader would have ridiculed him for being wrong today.

Unfortunately, few things in the market are binary. If they were, this would be so much easier. There is a ton of nuisance in the market that most novices miss. Yesterday’s dreadful price action wasn’t a “top”, it was a big fat warning flag. If it was followed by similarly disappointing price action today or tomorrow, then we could start positioning for a possible top. But that didn’t happen. Instead, the market exploded higher and when it exceeded yesterday’s early highs, that strength invalidated yesterday’s warning and put the rebound firmly back on track.

That said, just because yesterday’s warning was invalidated doesn’t mean we are racing back to the highs anytime soon. Again, that is thinking in binary terms. Instead, things look good until we get the next warning flag. At which point we start looking for another flag to confirm the first. Maybe we get it and maybe we don’t.

If you want to survive in this game for a long time, get past that binary outlook. And if you need a reason, all of the money is made between those extremes. Bull or bear, right or wrong, who cares as long as we’re making money!

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

Apr 28

Did this rebound finally crack?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 gapped 1.5% higher at the open, reaching the highest levels since early March. Unfortunately, that was as good as it got and prices skidded back to breakeven in the first two hours of trade. And just as concerning, prices eventually finished near day’s lows.

While the market only gave up a seemingly trivial 0.5% and it remains just under recent highs, it is never good to see the market retreat from a push to new highs. Rather than embrace this strength, traders were more inclined to take profits. That’s the first real sign we’ve seen this rally could finally be running out of enthusiastic buyers willing to keep chasing prices even higher.

Anything can happen on any given day and we shouldn’t read too much into a single day’s price action. But this fizzle is definitely enough to give us pause. And the significance increases exponentially with each additional piece of concerning information we get over the next few days. Maybe the market shrugs this off tomorrow and prices continue rallying. But if we see further weakness develop over the next day or two, this could finally be the start of the long-awaited pullback.

Now I want to be clear, I’m most definitely not calling for a big crash. This market is trading really well and at this point we have no reason to doubt the sustainability of this larger rebound. But at the same time, everyone knows even strong markets move in waves and it is only time before this one experiences a perfectly normal and healthy pullback to support. Maybe this is finally that time. Or maybe this turns into something bigger. Lucky for us, both trades start the same.

If we see more intraday rallies fall victim to waves of profit-taking over the next few days, that is the first signs demand is falling off. If prices bounce and close strong, all is forgiven and forgotten. But if prices keep closing weak, that tells us the pullback is finally upon us. Another midday fizzle gives us a short entry and if prices close near the daily lows, it is worth holding a small short position overnight. But as I said earlier, close strong close and all short trades are off. If this turns out to be another false alarm, no big deal. We cover and try again next time.

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

Apr 27

CMU: When to buy and when to wait

By Jani Ziedins | Free CMU

Cracked.Market University

The S&P 500 continues trading incredibly well and is hovering near recent highs. As much as people don’t trust this record-setting rebound, it keeps defying the odds and it deserves our respect.

As I’ve written previously, there are two “safer” ways to trade this rebound. Long-term investors with a holding period measured in years should be happy to buy this dip, the next dip, and the dip after that. What happens between here and three, four, or five years isn’t important. The most important thing is we get in. For example, during the last stock market crash, the S&P 500 bottomed at 666. Do you think anyone minds having bought the dip at 800? 900? Or even 1,200? More important than how close we get to the bottom is the simple fact we get in. Years from now, the Coronavirus will be long behind us and stocks will be much higher. (If for no other reason than runaway inflation!) Maybe prices go lower first, or maybe they don’t. Either way, it doesn’t really matter as long as we buy attractive discounts and hold for better times.

On the other end of the spectrum is our short-term trades. While I’m confident stocks will be higher in three, four, or five years. I’m far less confident about where they will be next week. Stocks are holding up amazingly well and I could easily see this strength persist into next week as governments continue scaling back restrictions. On the other hand, it wouldn’t surprise me to see infection rates edge higher after this relaxation. If our leaders get cold feet and pull the drawbridge again, that will send stocks into another tail-spin.

Which outcome will we see next week or the week after? I have no idea and I don’t even pretend to speculate. Lucky for me, I’m a nimble independent investor and I don’t need to commit to a position weeks ahead of time. I can buy and sell with a few mouse clicks and rather than fall for this bull versus bear argument, I’m simply standing by, waiting to see who wins before I put any money at risk.

Making money is 80% waiting for the right trade and 20% making the right trade. Right now we are in the waiting phase. Stay patient and wait for the trade to come to you. Making money is easy, the hard part is not giving back all of those profits by following it up with a bad trade. Maybe that next great trading opportunity is coming next week. Maybe the week after. And even if it doesn’t come until June, it’s not a big deal. We made a killing last month and there is no reason to follow that success with an unnecessary trade here.

As for the next good trade, an aggressive trader should wait for this strength to breakdown before shorting. For the less courageous, wait for the next wave of weakness to bottom before buying the dip.

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

Apr 24

What to expect from this market next week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead

The S&P 500 lost 1.3% this week and slipped for only the second time in the last five weeks. As bad as the headlines have been, the stock market is holding up amazingly well as it continues ignoring all the critics calling for a pullback.

I will be the first to admit I was among those waiting for a pullback because that’s what markets typically do. Yet, this one is defying the odds. And even that is not that unusual. Markets tend to do the opposite of what the crowd expects. Not because it is spiteful, but because that’s the nature of supply and demand.

When people expect a particular outcome, they naturally trade in anticipation of it. That means all of the people who feared a near-term pullback already sold. Once these cynics abandon ship, there is no one left to sell and supply dries up. Holding true to its contrarian nature, when the crowd calls for a pullback, prices hold up instead.

While I was one of those that expected a pullback three weeks ago, I was also one of the first to change my mind when the market refused to do what it was supposed to do. There are few trading signals more reliable than looking at what a market isn’t doing. A market that refuses to go down is far stronger than most people give it credit for and it deserves our respect. While we don’t have to embrace this market, we definitely shouldn’t be fighting it.

What does next week hold? Most likely more of the same. The market is very comfortable at these levels and it will take something significant to change that. Right now we are in a very bad place but things are improving ever so slightly. Infection rates are starting to slow and some states are starting to relax their restrictions. If we get more of the same next week, expect stocks to continue trading well, which mostly means sideways to slightly higher.

To make a dramatic move higher or lower, we need a significant change in the headlines. Either a huge surge in infections and deaths. Or a cure. Outside of those extremes, expect more of the same, i.e. continuing to defy the cynics.

That said, as nimble individual investors, we shouldn’t be married to our outlook. If the environment changes, change with it. If stocks breakout or breakdown, disregard everything we believed previously and jump aboard the next move. When we disagree with the market, the market is always right.

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

Apr 23

The best way to approach this trading range

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 continues consolidating inside the 2,700 and 2,900 range. We’ve been stuck in this region for two weeks following the mammoth rebound from the March lows. Thus far, the market refused multiple opportunities to breakout/breakdown and no matter what the bulls and bears claim, it continues chugging sideways.

It’s been a fantastic run and obviously the market deserves a break following a historic 20% surge. There are two ways markets rest and reset. The first is a more conventional pullback to support. The proverbial, two steps forward, one step back. That’s what a lot of people, myself included, were expecting. But as resilient as this market’s been over these two weeks, most longer-viewed owners are refusing to sell their favorite stocks at a discount. When owners refuse to sell, it makes no difference what the headlines say or what the experts think prices should do.

That said, supply is only half of the pricing equation. While owners are supporting prices by refusing to sell, our upside momentum has been blunted by prospective buyers refusing to pay ever-increasing prices. Owners not selling and those with cash not buying is the recipe for a sideways grind.

Which side caves first? That’s a good question and unfortunately, I don’t have the answer. Bulls have a good case that many states are already starting to reopen their economies. On the other side, bears point to the sharpest economic contraction in modern history and a stock market that’s only down 15%. There’s something definitely wrong with that calculus. Either stocks are way too high or the economy will bounce back a lot quicker than the headlines portend.

Luckily for us, we don’t need to place our bets just yet. As independent investors, our greatest strength is the nimbleness of our size. Rather than commit to one side or the other, we should wait for the bandwagon to start rolling before we jump aboard. Only the partisans need to be right. The rest of us are satisfied collecting a few bucks jumping aboard this no matter which way it goes.

Until proven otherwise, assume any dip to 2,700 will bounce and rally to 2,900 will stall. Buy the bounce off the lower end and take profits at the upper edge. If the market breaks above the highs or breaks under the lows, close those positions and flip the other direction. By staying nimble, we can profit no matter what the market does next.

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

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