Jan 22

Why the breakout is already struggling

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 added 0.2% on Monday, notching yet another record close.

As good as that sounds, the intraday price action was fairly disappointing. The index was up over 0.5% in the first hour of trade before a wave of profit-taking knocked it off of those initial highs.

As regular readers know, it’s not how we start but how we finish that matters most. And by that standard, Monday was not a good day. Rather than trigger another short-squeeze and wave of follow-on buying, supply dried up and prices slid from those early highs.

It is way too premature to call Monday morning’s highs a top, but the lack of follow-on buying is a concern. But none of this surprised readers. As I wrote last week, even with Friday’s breakout to new highs, the market was still stuck in a sideways consolidation:

Just because the market broke out of an ultra-tight, 100-point trading range doesn’t mean the recent consolidation is over. Stocks spend 60% of their time chopping sideways, so the odds are good Friday’s breakout was nothing more than a somewhat wider continuation of the recent sideways chop.

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Well, here we are, one session later, and Friday’s breakout is already stumbling.

As I wrote last week, Friday’s breakout was expected and very tradable, but rather than get greedy and hold for more, nimble swing traders are already locking in profits and getting ready for the next trade.

We are only in this to make money, and that means selling our winners before we want to. If we don’t, the temptation to hold too long takes over and we watch all of our profits escape. Who hasn’t done this before? Just ask all of the bears that were sitting on nice short profits less than a week ago.

As for what comes next, I haven’t seen anything that suggests we are breaking out of the recent consolidation. And Monday’s lethargic follow-on buying confirms that muted outlook. I’m not calling for a crash or anything like that, just that we need to keep our expectations in check and take our profits early and often. In markets like this, profits don’t last long.

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Jan 19

Why bulls shouldn’t be getting cocky

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 smashed through 4,800 resistance on Friday, adding 1.2% and sending bears scrambling for cover.

Does this mean the 2024 consolidation is already over? Nope. As I wrote Thursday evening, this breakout was expected, and it doesn’t change anything:

This 4,700/4,800 trading range is too tight to contain for much longer, but that doesn’t mean the next directional move is coming. Instead, the first few times we break out of this range, that move will stall and reverse as the consolidation simply looks for more elbow room between its swings. Continue anticipating reversals until we have a compelling reason to do otherwise.

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Just because the market broke out of an ultra-tight, 100-point trading range doesn’t mean the recent consolidation is over. Stocks spend 60% of their time chopping sideways, so the odds are good Friday’s breakout was nothing more than a somewhat wider continuation of the recent sideways chop.

Friday’s breakout was definitely buyable because it was going to trigger a short squeeze, which is why I bought it, but savvy traders are already planning their exit, not pressing their luck. The odds are very good we are not done with 4,700 support yet, and we will be retesting that level over the next few weeks.

Just as has been the case since early December, anyone holding too long will watch their nice profits evaporate during the next swing. Don’t be that guy. Remember, we only make money when we sell our winners, and it won’t be long before savvy traders are collecting these 4,800 breakout profits.

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Jan 18

Don’t make the costly mistake everyone else is making

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 b0unced back on Thursday, gaining 0.9%, easily erasing this week’s selling.

Last week, bulls were pilling in ahead of their widely predicted 4,800 breakout. This week bears were patting themselves on the back for shorting the next big breakdown. And as luck would have it, both sides got their trades exactly wrong. But what should one expect when making directional trades in a sideways market?

Luckily, readers of this blog saw this sideways meat grinder coming and resisted the urge to overtrade it. As I wrote two weeks ago:

If this market was overbought and vulnerable, [January 9th’s] opening losses were the perfect opportunity for bears to strike by opening the selling floodgates. Instead, most owners saw [January 9th’s] early losses, shrugged, and kept holding. That caused supply to dry up and prices to bounce.

We’ve come a long way from the October lows, and the market deserves a well-earned break. I’m not expecting a surge past 4,800 anytime soon and the market is settling in for a sideways grind under 4,800 resistance.

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Here we are, nearly two weeks later, and that’s exactly what happened. Markets spend 60% of their time trading sideways, yet that doesn’t stop everyone from predicting the next big directional move is just around the corner.

Not much is happening in the financial headlines, and these daily moves are nothing more than the market’s inability to sit still. The market does something every day, but these daily moves don’t mean anything, and the index is simply consolidating last year’s big gains by grinding sideways for a bit.

This will change at some point, but this is not that point, so we need to keep expectations low and anticipate more sideway chop for the foreseeable future. If prices were going to surge higher, they would have surged by now. If they were going to collapse, they would have collapsed. The fact we are doing nothing tells us the market doesn’t want to do anything.

This 4,700/4,800 trading range is too tight to contain for much longer, but that doesn’t mean the next directional move is coming. Instead, the first few times we break out of this range, that move will stall and reverse as the consolidation simply looks for more elbow room between its swings. Continue anticipating reversals until we have a compelling reason to do otherwise.

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Jan 17

The mistake bulls and bears keep making, part 2

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped another half percent on Monday as 4,800 resistance remains an impenetrable barrier.

Days of up followed by days of down sounds like a trading range to me. Luckily for readers, this is exactly what I forecast in last week’s Free Analysis:

Bulls and bears are jumping all over these gyrations that confirm their biases, only to have those trades blow up in their faces a few hours later. This market is entering a consolidation phase, and it will be a while before we get the next big, directional move. Keep that in mind the next time you are planning a trade.

In range-bound markets, we trade the reversals; we don’t bet on the continuations. Until the market decisively breaks out of the 4,700/4,800 trading range, be prepared for a lot more sideways chop.

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Trading ranges look seductively easy to trade in hindsight, but it is impossible to overstate the difficulty of standing your ground when it feels like the market is moving against you. This is one of those times where, if you wait long enough, both Bulls’ and Bears’ trades will show a profit. Unfortunately, it is never that easy. Instead, both sides lose their nerve and bailout for a loss before the profits show up. Buy high, sell low, repeat until broke.

Remember, successful trading isn’t about big winners. Everyone gets those. It is about keeping those profits in the follow-up trades, which is why I’m not anxious to press my luck here. Maybe we get a nice buyable bounce later this week, but with the market switching direction every day or two, it takes impeccable timing to get these trades exactly right, so be careful chasing these nickels and dimes. It would be a shame to allow haste and greed to cause us to give up our big pile of profits by irresponsibly overtrading this sideways chop.

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Jan 11

The mistake both bulls and bears keep making

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Thursday’s session pretty much where it started. But as quaint as that flat finish sounds, getting there was anything but a smooth ride.

Before the open, we got December’s CPI report showing inflation picked up a small amount from November. While not terrible, it leaves inflation above the Fed’s target and hints that rate cuts might not arrive as quickly as some investors hoped.

After opening with small gains, the selling hit hard, and the index shed nearly 60 points over a few hours. But when it looked like another big wave of selling was knocking us back to the January lows, supply dried up, and prices bounced.

Luckily, this sideways chop under 4,800 resistance doesn’t surprise regular readers. As I wrote in my Free Analysis Tuesday:

We’ve come a long way from the October lows, and the market deserves a well-earned break. I’m not expecting a surge past 4,800 anytime soon and the market is settling in for a sideways grind under 4,800 resistance. But as long as we keep getting more up than down, this is a better place to be owning stocks than it is to be shorting them.

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As luck would have it, we hit our head on 4,800 resistance and turned back. But equally expected was another aborted selloff that didn’t go anywhere.

Bulls and bears are jumping all over these gyrations that confirm their biases, only to have those trades blow up in their faces a few hours later. This market is entering a consolidation phase, and it will be a while before we get the next big, directional move. Keep that in mind the next time you are planning a trade.

In range-bound markets, we trade the reversals; we don’t bet on the continuations. Until the market decisively breaks out of the 4,700/4,800 trading range, be prepared for a lot more sideways chop.

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