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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Dec 20

The more things change, the more they stay the same

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Markets take the stairs up and the elevator down. That phenomenon was in full effect Wednesday when one afternoon of losses wiped out a week’s worth of gains.

Luckily, my regular readers saw this coming. As I wrote in my free analysis two days ago: 

The bulls won again on Monday, but that doesn’t mean smart money was chasing these overbought levels. In fact, smart 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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These things are so predictable, yet every time we find ourselves in the middle of these situations, the average trader cannot help but think, “This time is different.” Well, as Wednesday afternoon proved, the more things change, the more they stay the same.

While I was one of the first in line to buy the November rebound when that kicked off last month, I will fully admit I didn’t anticipate the huge size of this rebound. I was willing to stick through last week’s 4,600 breakout, but late last week was getting a little too rich for my blood, and I couldn’t help but start collecting some very worthwhile 3x ETF profits.

I was fully aware I was collecting profits too early, but since no one can consistently pick tops, that means we are left choosing between selling too early and holding too long.

Wednesday afternoon’s price action shows why I prefer being in cash when the next trade lands. While everyone else was filled with dread watching their profits vanish, I was primed and ready to jump aboard short bandwagon and profit from slow money’s pain.

I fully admit I sold the rally too early, but on days like this, I don’t mind.

As for what happens next, these are rarely one-day events, and it could get bumpy before it gets better. If you are not using trailing stops to protect your profits, this is a good time to start.

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Dec 18

Why smart money was watching Monday’s rally from the sidelines

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 added a half percent Monday, on the first day of what will be a slow, holiday-affected week.

This will probably be the third slowest week of the year, following only Thanksgiving and next week between Christmas and New Year’s. For that reason, I don’t expect a lot of meaningful buying this week. Big money traders who wanted to buy ahead of year-end already bought. These managers have one foot out of the door and are not doing any serious work this week.

As I wrote during Thanksgiving, these holiday-affected sessions are vulnerable to elevated volatility as the retail traders and computers start doing wonky things without big money’s guiding hand.

At this point, I’m content watching this rally from the outside. Seven out of the last eight sessions ending in the green is a lot. The unfortunate thing for anyone buying these highs is the market has a habit of reverting to the mean. A stretch of down days to get us back to more normal levels wouldn’t surprise me at all.

Stocks move in waves, and bits of up are always followed by bits of down. Monday wasn’t that day. But it will be here soon enough, even if the selling does nothing but consign us to a sideways grind into January.

The bulls won again on Monday, but that doesn’t mean smart money was chasing these overbought levels. In fact, smart 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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