Mar 05

Why Tuesday’s retreat wasn’t a surprise

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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Mar 04

The market gave us another low-risk/high-reward trade

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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Feb 28

While I’m still sticking with my short trade…but keeping it on a short leash

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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Feb 27

Keep sticking with the low-risk/high-reward trade

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 added a modest 0.2% in another mostly irrelevant session as the index continues digesting last week’s big NVDA pop.

As popular as NVDA is as a momentum stock, its success is largely limited to the AI sector, and the company’s success doesn’t tell us much about what Main Street consumers are doing. That means NVDA’s success shouldn’t have a big influence on the board market the way a bellwether stock like AAPL or AMZN would. And no doubt that limited reach is why NVDA’s big results haven’t triggered a multiday rally.

Instead, we are stuck with three largely sideways sessions following last Thursday’s big gains. As I wrote Monday evening, there are two ways to interpret this sideways trade. Either the market is catching its breath before the next leg higher, or this is the last gasp of buying before the inevitable step back.

Both points of view have solid logic behind them, and I could easily see either scenario playing out. So what are we supposed to do as traders, flip a coin?

Nope, savvy traders look at the setup and pick the low-risk/high-reward trade. As I wrote Monday evening, I shorted the market. Not because I’m bearish, but because I could enter that trade with a stop near Friday’s highs. If the index continues slipping, I rake in a pile of profits. If prices bounce back above Friday’s highs, I close my position for a small loss and then change direction, buying the push to fresh highs, this time with a stop under this week’s lows.

As luck would have it, this trade has already worked well enough that I was able to lower my short stops to my entry points, making this nearly a free trade. At that point, it doesn’t really matter if I’m wrong because this is like a free lottery ticket. I make money if it pays out. If it doesn’t, I close my short near breakeven and get ready for the next trade, most likely buying a continued rally past last week’s highs.

Too high or not high enough? I don’t really care because I have a low-risk/high-reward trading plan that works in both directions.

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Feb 26

A low-risk short trade near 5,100

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped 0.4% Monday, following last week’s big run to record highs.

Impressive earnings from market darling NVDA sent the index flying 105 points last Thursday, but so far, the index is struggling to add to those big gains in the follow-up sessions.

Too high, or not high enough? That’s the million-dollar question.

Both sides have compelling arguments. Few things are more powerful than momentum, and this rally is red-hot. But on the other side, all good things must come to an end and this rally is no different.

At this point, I give a very slight near-term edge to the bears. Not because I think this rally is topping but because savvy traders can enter a low-risk/high-reward short trade at current levels.

The market is pausing at 5,100, giving us a low-risk shorting opportunity with a stop near Friday’s intraday highs. If momentum continues higher, we get stopped out for a small loss. On the other hand, a very vanilla pullback to 5k will produce profits of many multiples of that risk.

Low-risk, high-reward trades are what traders dream of, and here’s a good one.

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