Jan 08

Why savvy shorts covered their positions Monday morning

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 surged 1.4% Monday, closing comfortably above 4,700 support as last week’s worries faded from memory.

Financial headlines haven’t changed, but the market is enjoying a bit of relief as Congress makes incremental progress toward avoiding a shutdown. Sometimes, that’s all it takes to cure a bout of selling. As the saying goes, buy the rumor, sell the news. And traders were definitely buying the rumor on Monday.

Time will tell if Monday’s strength proves durable, but often, it only takes removing the selling pressure for the market to regain its footing. We will learn more about the market’s mood on Tuesday, but so far, things look promising. One day doesn’t make a trend, but every trend starts with that first day.

As readers will recall, I put on a short position last week. Fortunately, I was prepared for something like Monday’s bounce. As I wrote last week:

At this point, the pullback deserves the benefit of the doubt. Anyone who shorted Tuesday or Wednesday morning is sitting on small but comfortable profits, and they can lower their stops to their entry points, greatly reducing their risk.

[S]horting a rally is one of the hardest ways to make money in the market, so this only applies to the most adventurous traders, but for the moment, this trade is working and we stick with it. The most important thing is respecting our stops. Just ask anyone who shorted “too high” at 4,400, 4,500, and 4,600. Don’t make the same mistake and pull the plug if the short trade stops working.

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With Monday’s buying erasing all of last week’s selloff, that obviously qualifies as the short trade no longer working. Savvy traders pulled the plug at their entry points. As the saying goes, no harm, no foul. This trade didn’t work, but it didn’t cost us anything. Does anyone complain about getting free lottery tickets, even when they don’t pay off? I sure don’t

As for what happens next, Monday’s decisive bounce off of 4,700 support must be respected. At this point, last week’s step back is over, and the rally is resuming. That’s the only way to trade this. For a nimble trader, the bounce off of 4,700 was buyable. The non-stop, nearly straight-up rally through Monday’s session was paid for by tardy shorts getting squeezed out of their positions. Odds are good we will see more pressure applied to bears over the next few sessions.

And if the selling returns, that’s okay, too. I’m willing to ride the next trade in either direction. Start small, get in early, keep a nearby stop, and only add to a position that’s working.

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Jan 04

Our short trade is working, but don’t get greedy

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 shed another 0.3% on Thursday, making this four down sessions in a row.

Financial headlines haven’t changed in a meaningful way since last week’s Santa Clause rally peaked, but no matter how good things seem, there always comes a point when we run out of new money to keep pushing prices even higher. It is starting to feel like October’s massive rebound finally reached that point of diminishing demand.

Now, don’t get me wrong, I’m not one of these cynics predicting a huge crash or anything like that. But I’ve been doing this long enough to know stocks move in waves. Every bit of up is eventually followed by a bit of down. The only question is how much down we get.

As I wrote in my Free After-Hours analysis on Wednesday:

At this point, the pullback deserves the benefit of the doubt. Anyone who shorted Tuesday or Wednesday morning is sitting on small but comfortable profits, and they can lower their stops to somewhere between Tuesday’s intraday highs and their entry points, greatly reducing their risk.

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Given Thursday’s declines, shorts should move their stops down to their entry points, making this a low-risk trade. This close under 4,700 support suggests we have more near-term weakness coming our way.

As I wrote above, I’m not at all bearish. This week’s step back is nothing more than supply and demand rebalancing from last week’s overbought levels. At this point, 4,600 support is very much in play. We might not get all the way back to this level, but my trading account is currently positioned to profit from more near-term weaknesses. This won’t be a straightforward or easy trade because it never is, but expect more down than up and keep giving this short trade the benefit of the doubt.

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Jan 03

How smart money is approaching this shorting opportunity

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped another 0.8% Wednesday, making this three down sessions in a row.

So much for the Santa Claus rally. All of last week’s profits are gone, and then some. As I warned readers in December, anyone who didn’t lock in profits risked giving it all back by holding too long. And that’s exactly what happened:

[S]mart traders are sitting on a big pile of profits they collected last week and are getting ready for the next big trade. Maybe that’s shorting the reversion trade later this week. Maybe that’s sitting in cash until something more interesting happens in January. Either way, anyone expecting these big gains to keep rolling in clearly doesn’t understand how markets work.

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Now that the index is teetering on 4,700 support, the crowd is wondering what comes next. The answer is easy: either stocks bounce…or they don’t.

The index broke the very steep and very straight-up rally from the October lows. Since the market loves symmetry, a rally that goes too far tends to be followed by a pullback that goes too far, too.

Unfortunately, as easy as that sounds, trading successfully is anything but easy. Expect lots of misleading bounces along the way (a sawtooth decline), which could start as early as Thursday. Remember, if this were easy, everyone would be rich.

At this point, the pullback deserves the benefit of the doubt. Anyone who shorted Tuesday or Wednesday morning is sitting on small but comfortable profits, and they can lower their stops to somewhere between Tuesday’s intraday highs and their entry points, greatly reducing their risk.

As I warned readers on Tuesday, shorting a rally is one of the hardest ways to make money in the market, so this only applies to the most adventurous traders, but for the moment, this trade is working and we stick with it. The most important thing is respecting our stops. Just ask anyone who shorted “too high” at 4,400, 4,500, and 4,600. Don’t make the same mistake and pull the plug if the short trade stops working.

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Jan 02

What to do now that Santa left town

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped 0.6% on Tuesday after the good feelings surrounding last week’s Santa Clause rally left town.

Headlines haven’t changed in a meaningful way, but the calendar rolled over, and we find ourselves in a new year and a new quarter. All of the repositioning that took place in the final weeks of 2023 is done, and professional investors are starting with a clean slate. Gone is the pressure to chase prices into year-end, and now these institutional money managers are free to trade the positions they believe in, not what they think investors want to see on their year-end statements. And so far, it seems like big money doesn’t want to chase anymore.

One day doesn’t make a trend, but these are the early hints that changes could be blowing our way.

I was on vacation last week, and as a personal rule, I didn’t trade, but now that I’m back in the office, it’s game on. I’m not ready to jump on the short bandwagon after a few hours of weakness, but if this sticks around, I’m happy to start with a small short and a nearby stop.

As I’ve written before, shorting an uptrend is one of the hardest ways to make money trading because it requires impeccable timing. But if we approach it with a good risk management strategy, we can take a shot relatively safely.

The index bounced off of the afternoon lows in the final minutes of the session, so I didn’t pull the trigger on a short position yet, but I will be watching and ready to short continued weakness on Wednesday.

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