Nov 18

Weekly Scorecard: This flat market was obvious

By Jani Ziedins | Scorecard

Welcome to Cracked.Market’s weekly scorecard:

This post includes a summary of the week’s market developments, links to the free posts I published, and analysis on how accurate each post was since I wrote it. 


Weekly Analysis

This was another do-nothing week for the S&P500. It was the fourth weekly move of less than a quarter percent and the cumulative gain over the last 28-days totaled a measly 0.14%.

A month ago I warned readers the rate of gains could not continue and that is exactly what happened. Everyone knows the market moves in waves, unfortunately most forget this in the heat of battle. Four weeks ago shorts were desperate to get out of the market and those in cash felt pressured to chase. Since then we’ve done a lot of nothing.

Even though the market held up reasonably well, too often traders focus on what happened instead of what could have been. Holding 28-days of risk netted owners less than four S&P500 points. No matter what a person’s risk tolerance, this is an absolutely appalling reward for nearly a month of risk. I only want to own stocks when I’m getting paid and by that measure this was a lousy time to own stocks.

And it’s not just the risk of the unknown we have to worry about. Even though the market was flat, there have been several gyrations along the way. Traders that failed to realize we were in a flat market were tricked into ill-timed trades as they bought strength and sold the subsequent weakness. Flat markets are notorious for seducing reactive traders into buying high and selling low. The market was flat over the last several weeks, unfortunately quite a few traders were fooled into giving money away.

Markets move in waves and the rebound from the August lows has finally paused and started consolidating. This is a normal and healthy part of moving higher. Sometimes we pullback to support, other times we refresh by trading sideways for an extended period of time. If this market was fragile and vulnerable, we would have crashed by now. Confident owners are keeping a floor under prices by refusing to sell every bearish headline and any negative price-action. Holding near the highs is encouraging, but sideways consolidations refresh by boring traders out of the market and is a long, drawn-out process. If we don’t dip, then we are only halfway through a flat basing pattern and we should expect to remain range bound over the near-term. Don’t forget range bound includes dipping and surging to the edges of the trading range. Rather than be fooled into buying the breakout or selling the breakdown, trade against these moves by selling strength a buying weakness.

In the big picture the market continues to hinge on the outcome of Tax Reform. We will be lucky if Congress agrees to something by yearend. Until then expect the market to trade flat. Confident owners refuse to sell and those with cash have no interest in chasing prices higher. Until something changes, expect more of the same.


November 16th: Don’t let this market trick you into poorly timed trades

Unfortunately demand near the highs continues to be a problem. While confident owners don’t care about the headlines, prospective buyers with cash do. Valuations are stretched and most would-be buyers want more clarity before they are willing to chase prices even higher. Little selling and little buying means we will remain range bound over the near-term.

Score 10/10: Thursday’s surge of buying was met with Friday’s dip. There is zero reason to chase this market higher and only reactive traders are scrambling to buy these temporary moves. This is a flat market and we need to treat it as such.


November 14th: What to expect over the near-term

If this market was going to pullback to 2,500 support, it would have happened by now. There have been more than enough reasons for owners to dump stocks. But their stubborn confidence is keeping supply tight and putting a floor under prices. This means the most likely outcome is an extended trading range as the Tax debate drags on.

Score 10/10: The market tried to breakdown in the first half of the week, but only reactive traders sold the weakness. Everyone else held their stocks and prices rebounded on tight supply. In flat markets we trade against the market’s moves to the edges of the range. The best trade was buying this weakness, not selling it.


November 9th: What Thursday’s choppy trade tells us

Previously I was wary of a dip back to support, but the market has held near the highs amazingly well. If we were vulnerable to a pullback, it would have happened by now. That said, this is still a challenging place to own stocks. Volatility will continue to haunt us over the near-term as traders reconcile the flurry of encouraging and disappointing Tax Reform headlines. The rate of gains is definitely slowing down and traders trying to sit through this sideways stretch better buckle in.

Score 10/10: November 9th’s dip was dramatic and no doubt convinced a lot of reactive traders to sell, but like every other recent gyration, prices reversed within hours. This is a flat market and every trader reacting to these moves is getting humiliated.


November 7th: Finding the right risk/reward

Everyone knows the market moves in waves. Unfortunately most forget that just as the latest wave is cresting. While I’m not calling a top here, I know we’ve done a lot of up without much down. The last meaningful dip was nearly three months ago. The next one is coming, the only thing we don’t know is if it will happen this week, next week, or next month. But with each passing day, it is closer than it has ever been.

 

Anyone can get lucky and make money on a single trade. But success over the long-term depends on buying when the risks and rewards are in our favor. Given how small the near-term upside is and how much air there is underneath us, it is hard to claim buying at these levels presents a trader with a good risk/reward. Long-term investors should ignore the noise and stick with their favorite stocks, but short-term traders should wait for a better risk/reward.

Score 10/10: I don’t call tops, but this analysis came within 24-hours of the latest top. Over the next two-weeks we tumbled to the lower end of the trading range. Predicting the market isn’t hard because it keeps doing the same thing over and over.


October 26th: It won’t be pretty and it won’t be fast

Expect the hope of Tax Reform to give way to despair over political infighting. There is a good chance Republicans will pass something…..eventually. But it definitely won’t be as grand as many are hoping for. In the meantime, expect the stock market to give back a chunk of recent gains as it consolidates and allows the 50dma to catch up. This is definitely a better place to be taking profits than adding new money.

Score 10/10: A month ago I said the upside was limited and that is exactly what happened. A trader who took profits last month could have relaxed and enjoyed life from comfort from the sidelines instead of having to worry if every breakdown was the start of something bigger. It is almost always better to sell when we don’t want to than wait for the market scares us out. Trade proactively, not reactively.


Cracked.Market University

Excerpts from my educational series. Click the title to read the full post. Sign-up for Free Email Alerts to be notified when news posts are published.

CMU: Either you sell too early, or you hold too long.

All of us come to the market with unique insights and experiences. These allow us to see opportunities others miss and is the basis for our best trades. But all too often we fail to capitalize on our best ideas because we botch the second half of the trade, taking profits. There are few things more frustrating than selling a large move too early, or holding too long and allowing those hard-earned profits to evaporate.

CMU: Why experienced traders don’t brag

Spend any time on trading social media and a person is bound to come across braggarts. Traders who are so supremely confident in their prowess they feel compelled to harass everyone who disagrees with them. While their partisan views are obnoxious, the thing to keep in mind is almost all of these braggarts are novices. Veteran traders have been humbled by the market far too many times to be so bold about their winning positions.

CMU: Timing is everything

In trading, timeframe is the only thing that matters. Your profit and loss is determined entirely by when you buy and when you sell. End of story. Good timing on a bad idea results in a profitable trade. Bad timing on a great idea ends in tears. If the bull is a swing trader, he could be totally right that the stock is poised for another breakout, but the bear could also be right that the longer-term demand for a company’s products is deteriorating and it will only be time before it shows up in the earnings. In this example the Bull hauls in a nice profit this week and the Bear’s trade reaps big profits next quarter.


Knowing what the market is going to do is the easy part. Getting the timing right is where all the money is made. Have insightful analysis like this delivered to your inbox every day during market hours while there is still time to act on it. Sign up for a free two-week trial.


Have a great weekend and I hope to see you again next week.

Jani

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Nov 16

Don’t let this market trick you into poorly timed trades

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500’s whipsaw continues as Wednesday’s crash turned into Thursday’s rip. Even though prices rebounded decisively, volume was conspicuously absent and Thursday’s turnover was the lowest in nearly a month. The light volume tells us this rebound was driven more by a lack of selling than a surge of buying. This isn’t a surprise given how stubbornly confident owners have been. No matter what the headlines and price-action have been, confident owners don’t care and refuse to sell. No matter what the bears think, when owners don’t sell, headlines stop mattering.

Unfortunately demand near the highs continues to be a problem. While confident owners don’t care about the headlines, prospective buyers with cash do. Valuations are stretched and most would-be buyers want more clarity before they are willing to chase prices even higher. Little selling and little buying means we will remain range bound over the near-term.

This volatility is doing a good job of humiliating reactive traders. Anyone who sold Wednesday’s dip is suffering from regret as they watched Thursday’s rebound from the sidelines. The only people more upset by this strength are the bears who shorted Wednesday’s weakness. Breakout buying and breakdown shorting are great strategies in directional markets. Unfortunately they are costly mistakes in sideways markets like this.

The thing to remember about range-bound markets is that includes moves to the extreme edges of the range. There is still downside left in the recent dip and we will likely test 2,550 and the 50dma before this is all said and done. And not only that, expect us to also poke our head above 2,600. Keep this in mind when planning your next trade. Just like how Wednesday’s weakness was a good buying opportunity, Thursday’s strength is an interesting selling/shorting point. In range bound markets we trade against the price-action and that means buying weakness and selling strength.

Tax Reform continues to dominate financial headlines. On the half-full side, the House passed its version of Tax Reform with several votes to spare. On the half-empty side, a Republican Senator announced his intention to vote against the Senate’s version. That leaves the GOP with only a single vote to spare. But this isn’t unusual. Threatening to blow everything up unless you get your way is a how modern politics works and this is simply a negotiating tactic.

If the market cared about infighting within the Republican Party, it would have shown up in the price-action already. For the time being most owners are giving the GOP the benefit of doubt and are not worried about these interim speed bumps. If the market doesn’t care, then neither should we.

That said, I still think this market hinges on the outcome of Tax Reform. Pass something worthwhile and the rally continues. If Republicans crash and burn again, the market will follow. Until then I expect the market to remain range bound. If I’m not getting paid to hold risk, then I’d rather watch safely from the sidelines. Long-term investors should stick with their favorite positions, but traders are better served waiting for a more attractive opportunity.

Jani

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Nov 15

CMU: Either you sell too early, or you hold too long. 

By Jani Ziedins | Free CMU

Cracked.Market University

Coming up with good trading ideas is easy. The hard part is deciding when to take profits.

All of us come to the market with unique insights and experiences. These allow us to see opportunities others miss and is the basis for our best trades. But all too often we fail to capitalize on our best ideas because we botch the second half of the trade, taking profits. There are few things more frustrating than selling a large move too early, or holding too long and allowing those hard-earned profits to evaporate.

Often it is hard to let go of a big winner because we become emotionally attached to our best trades. The success of a great idea seduces us into thinking there is even more to come. Greed kicks in when good enough is no longer good enough. But a great trade is cannot be great trade until we lock-in our profits. We’re in this to make money and the only way to do that is by selling our winners.

While it would be lovely if there was a consistent way to identify tops, unfortunately only a fool believes this is a realistic goal. Those of us that know better realize every time we take profits we have to make a conscious decision between selling too soon, or holding too long. What strategy a trader chooses large depends on their personality, risk tolerance, and approach to the market. Personally I prefer selling too early, but there is nothing wrong with holding too long if a trader does it in a deliberate and thoughtful way. The least effective approach is leaving the selling decision to undisciplined and impulsive urges.

I’m a proactive trader and that means I prefer making my move before the price-action forces me to react.  Owning stocks involves the risk of holding the unknown and is why I only want to own stocks when I’m getting paid, i.e. they are going up. Holding a sideways consolidation in my trading account doesn’t make sense to me because I’m at risk of losing money if the unexpected happens. I’m okay with that risk if someone is willing to sell me their stocks at a steep discount, or if prices are rallying. But once the profits start slowing down, my preference is to get out and start looking for the next trade. My favorite trade is buying dips and I cannot do that if I’m fully invested during the pullback. But that is not the only way to do this.

The problem with selling proactively is sometimes I get out too early and miss a big portion of a much larger move. Personally I’m okay with that, but other people like maximizing their trades by selling after a move has reached its peak. The most common way to do this is using trailing stops. Every time the stock moves higher, you raise your selling point. If the sell point is far enough away from the current price, the trader will be able to ride through the normal dips and gyrations that occur during every move higher. But if the trailing stop is too far away, a trader gives up too much profit when the rally eventually pulls back.

The advantage of a trailing stop is it is automatic and many brokers let you enter an order that automatically adjust your selling price so it becomes a truly hands-free trade. This is great for people who cannot follow the market every day or have a hard time pulling the trigger when it is time to sell. The disadvantage is markets move, that’s what they do. If you put in a 10% trailing stop under current levels, there is a good chance you will end up selling at that 10% lower price. If the time to sell is getting close, it could be better to sell now and collect 100% instead of 90% later when the trailing-stop is inevitably triggered.

The point of this article isn’t to say whether one approach is better than the other. The reasons to do one or the other depends on each trader’s approach to the market. What matters is that we arrive at this decision thoughtfully and deliberately before it is time to sell. The best time to plan your sale is before you buy the stock. Many books and courses stress the importance of using a stop-loss, but just as important is planning when to take profits. Decide now if you are a sell too early or hold too long type. And then stick to that approach when your trade turns profitable.

In another post I will explain how to tell if there is still upside left in a trade, or if the upside momentum is stalling and it is time to take profits. Sign up for Free Email Alerts so you don’t miss it.

Jani

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