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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 started Friday’s session with nice gains following a better-than-expected monthly employment report. Unfortunately, those gains were short-lived, and the index finished the session -0.6% in the red.
As I’ve written many times, the market is in a choppy phase, and that means lots of back-and-forth. And so far, the market continues living up to that reputation.
I had no idea Friday afternoon’s fizzle was coming, but I’ve been doing this long enough to know chasing that early strength was a risky trade, so I was happy to let that wave of buying pass me by. And the afternoon selling shows why.
In fact, Friday’s early push to record highs that subsequently tumbled into the red gave us a great shorting opportunity. Rather than buy Friday morning’s good news and keep pushing prices even higher, big investors were taking profits. That intraday reversal is never a good sign, especially when the index starts the session at record highs.
The savvy trade was shorting the dip into the red with a stop above the intraday highs. While shorting an uptrend is a risky trade, keeping a sensible stop nearby limits the risk to a very manageable level. And with all of the air underneath us, the potential upside is multiples greater than the risk. A risk/reward that skewed in our favor is hard not to take.
And now that the market already moved half a percent in our direction, we can lower our stops to our entry points, lowering our risk even further. These are the setups savvy traders dream of.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Well, that didn’t take long. Friday’s break above 5,100 is already history, as the rally stalled and retreated 1% on Tuesday.
Easy come, easy go. As I told readers previously, I bought Friday’s rally above 5,100, not because I thought stocks were going to take off, but because I could enter that trade in a low-risk way:
By acting early and decisively [on Friday], I was able to buy not long after the market retook 5,100, and I could place a stop just under this level. When the rally kept going, I was able to lift my stops to my entry points, creating yet another low-risk/high-reward trade.
Maybe this latest buy gets stopped out at breakeven in a few days. No harm, no foul. But if the buying keeps pushing the index toward 5,200, then I will let those profits roll in. It’s like a free lottery ticket. Only a fool would turn his nose up at it.
Well, as luck would have it, I got stopped out early Tuesday morning for breakeven, and I watched the rest of the day’s carnage from the safety of the sidelines.
While this breakout trade didn’t work, it didn’t cost me anything, so can we really call this trade a mistake? If it worked, I made money, if it didn’t, I got all of my money back. If only all of my bad trades could be this painless.
As for what comes next, this market remains stuck in a choppy, sideways consolidation near 5,100. Until further notice, expect these dips to bounce and for the bounces to dip. One day’s up becomes the next day’s down. Anyone predicting Tuesday is the start of the next big selloff will soon find himself just as disappointed as last week’s breakout buyers.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Monday down 0.1% after spending most of the session bouncing between small gains and losses.
As I wrote previously, I was short the market last week, but I was keeping that trade on a short leash because I was losing faith in it:
While I’m still holding my short position and the market is moving ever so slowly in my direction, I am getting impatient. If the short trade is going to work, it needs to start working soon. If not, I will pull the plug before my stops get hit. When a trade isn’t working, our stops are our last line of defense, not our only defense.
As luck would have it, I bailed out the next day for a small profit, not long before the market took off and started setting new record highs.
Obviously, this isn’t the trade I had in mind when I shorted the market. But as I wrote when I placed that trade, I wasn’t shorting because I was bearsih, but because the market was giving me a low-risk short entry with a nearby stop.
Two weeks ago, the market was stalling at 5,100 resistance, and by acting decisively and early, I was able to short the market with a stop just above those intraday highs.
As expected, the buying cooled off over the next few sessions and prices slipped, allowing me to lower my stops to my entry points, turning this into low-risk/high-reward trade. If the index kept sliding, the profits would roll in. If prices bounce, like they did, I would get stopped out near breakeven.
Even though that trade didn’t work as envisioned, I pulled the plug for a small profit when the follow-on selling failed to materialize.
So yeah, I was wrong, but it didn’t cost me anything I got a free trade out of it.
Luckily, I didn’t have to wait long for the next opportunity to pop up because Friday’s price action presented me with the mirror image.
This time, the market rallied above 5,100, and since I pulled the plug on my previous trade Thursday, I was in cash and perfectly positioned to take advantage of the break above 5,100.
Now, I have no idea if this trade will be any more successful than my previous short, but by acting early and decisively, I was able to buy not long after the market retook 5,100, and I could place a stop just under this level. When the rally kept going, I was able to lift my stops to my entry points, creating yet another low-risk/high-reward trade.
Maybe this latest buy gets stopped out at breakeven in a few days. No harm, no foul. But if the buying keeps pushing the index toward 5,200, then I will let those profits roll in. It’s like a free lottery ticket. Only a fool would turn his nose up at it.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished down 0.2% in Wednesday’s relatively quiet session.
As always, there are two ways to look at this week’s price action. The bulls will point to the index holding the vast majority of last Thursday’s 2% pop. The bear’s counterpoint is the rally stalled and is out of gas because it hasn’t been able to add to that pop.
At this point, both sides are stubbornly dug in, leaving us with this sideways draw just under all-time highs.
Too high? Or, not high enough? That’s the million-dollar question.
While both sides have valid arguments and could easily be right, as I wrote on Monday, my money is on the short side. Not because I think the bears are going to win, but because I could enter that trade in a low-risk way.
The rally stalled Friday afternoon, and that lethargic close gave me a short entry with a nearby stop above the intraday highs. If I was wrong, I would get dumped out for a fractional loss. But if the index falls into a very normal and healthy pullback to 5k support, that represents a 2% profit at even money and as much as 6% in a 3x trade.
Even if this short trade has 50/50 odds of working, the simple fact the reward is so much larger than the risk makes this a great trade.
Now, I have no idea if this trade will pay off in the end, but since putting it on last week, I’ve been able to lower my stops to my entry points, even further lowering my risk. I could very easily be wrong and get stopped out at my entry points, but if it doesn’t cost me anything, who cares? It’s like a free lottery ticket. Just because it didn’t pay off doesn’t mean scratching it off was a mistake.
While I’m still holding my short position and the market is moving ever so slowly in my direction, I am getting impatient. If the short trade is going to work, it needs to start working soon. If not, I will pull the plug before my stops get hit. When a trade isn’t working, our stops are our last line of defense, not our only defense.
If prices rally on Thursday, I will pull the plug and collect some trivial profits. While it’s not the trade I wanted, it is hard to complain about being wrong and still collecting a few bucks for my effort.
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