Oct 03

Why bears should be taking profits and what to expect next

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Tuesday’s session sharply lower as the bond market’s outlook dims.

This isn’t the trade I’ve been waiting for. Luckily, my trading plan is keeping me on the right side of the market. As I wrote Monday evening:

I am not a bear by any stretch of the imagination, but if this market is going to bounce, it needs to happen soon. I will buy back in if prices bounce on Tuesday, but I need to see constructive price action first. Until then, I’m sitting on my hands and watching this from the safety of the sidelines. (Aggressive traders can short another breakdown.)

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As readers know, I tried buying a couple of bounces over the last few weeks, and with hindsight being 20/20, obviously, those trades didn’t work as expected. Fortunately, those failed trades didn’t cost me any money because I bought the bounces early and was able to quickly move my stops up to my entry points. As I’ve written countless times, low-risk/high-reward trades are always worth trying, even when they don’t pay off.

I suppose I could have been bearish and profited more from this decline, but optimists amass far more money than pessimists because the market spends significantly more time going up than going down. If I’m going to error, it will always be buying the bounce because those work far more often than betting on a bigger breakdown that only occurs once every couple of years. As much as bears are boasting right now, they’ve been wrong all year. When it comes to trading, I’d much rather be right for 11 months instead of just one.

All of that said, stocks are only down 8% from their 52-week highs, so this still qualifies as a pretty vanilla step-back and something that happens once every year or two. Of course, the alternative interpretation is stocks have “only” fallen 8%, meaning there is a lot more downside if we are truly falling into a bear market.

Are we close to the bottom, or not even halfway? That’s the million-dollar question. But as nimble and savvy traders, it doesn’t matter. We get out of the way when prices fall, and we buy back in when prices bounce. In fact, the lower prices go now, the more money we make riding the next wave higher, so bring on more selling!

The S&P 500 is quickly approaching 4,200 support and the 200 dma. No matter what the future holds, we should expect at least a modest bounce at these widely followed technical levels. Maybe we violate these levels a few days later, but over the next day or two, the odds are good prices will bounce, making this the wrong place to be aggressively pressing shorts.

Wait for the bounce, then follow the market’s lead. Either the bounce will stick, or it won’t. Savvy traders will be basing their next trade on what happens after 4,200.

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Oct 02

Why Monday’s strange price action didn’t surprise savvy traders

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session unchanged. This isn’t the price action most investors would have expected if they knew a last-second deal would avert the October 1st gov’t shutdown. But the market has a nasty habit of not doing what most people think. (Hence why so many inexperienced traders complain, “the market is fixed.”)

There are a few reasons this weekend’s budget deal didn’t move markets. First, this is nothing more than a patch job that, at best, delays the budget fight for a few more weeks. Second, if the disgruntled Republicans depose McArthy, then the next round of negotiations could end up being even more contentious. And lastly, a gov’t shutdown happens every few years. It isn’t a big deal, and the market wasn’t really worried about it. If stocks don’t fall much on a headline, they don’t have much room to rebound after everything gets solved.

As readers know, I bought last week’s bounce:

Thursday’s price action played out as expected, and everyone with the courage to buy Wednesday afternoon’s bounce is sitting on a nice profit cushion. Move stops above our entry points and this is practically a free trade. If the rebound continues, we make a pile of profits. If the selling resumes, we get out near our entry points for a breakeven trade. That’s a phenomenal risk/reward, and only a fool would criticize it.

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As it turned out, I got stopped out for a small gain Friday afternoon after lifting my stops above my entry points. While this wasn’t the trade I was looking for, being wrong about the bounce and still making money isn’t a bad thing. Give me a free trade and I will take it a million times over.

As for what comes next, not falling on Monday is always better than falling, especially given what September looked like. Unfortunately, the longer we hang out near recent lows, the more likely it becomes that we make new lows.

I am not a bear by any stretch of the imagination, but if this market is going to bounce, it needs to happen soon. I will buy back in if prices bounce on Tuesday, but I need to see constructive price action first. Until then, I’m sitting on my hands and watching this from the safety of the sidelines. (Aggressive traders can short another breakdown.)

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Sep 28

Why Wednesday’s dumb trade looks genius on Thursday

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 popped 0.6% Thursday, adding to Wednesday’s late rebound.

Lucky for readers, this is the exact setup I was waiting for. As I wrote in Wednesday evening’s free analysis:

I don’t know if Wednesday was the true capitulation bottom I’ve been waiting for, but I do know that buying the bounce is the best trade a person could make here.

By getting in early, a savvy trader is already sitting on a profit cushion and moving their stop up to their entry points, making this a low-risk trade. If the selloff resumes Thursday, no big deal, we get out near our stops, no harm, no foul. But if the bounce continues, a wave of profits will come rolling in hard and fast. Low-risk, high-reward trades are what dreams are made of.

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Thursday’s price action played out as expected, and everyone with the courage to buy Wednesday afternoon’s bounce is sitting on a nice profit cushion. Move stops above our entry points and this is practically a free trade. If the rebound continues, we make a pile of profits. If the selling resumes, we get out near our entry points for a breakeven trade. That’s a phenomenal risk/reward, and only a fool would criticize it.

As for what comes next, nothing meaningful changed in the headlines, and all of the problems that triggered the September selloff haven’t been resolved. But as I’ve written before, this is a sentiment trade, and sentiment frequently swings back and forth without rhyme or reason.

Between the Fed keeping interest rates higher for longer and the Federal gov’t on the verge of shutting down, there really isn’t a lot of good news going around right now, but that’s the point. When all of the headlines are bad, they can only get better. As I’ve written before, stocks will bounce long before the good news hits the presses. That means we must be brave enough to buy when everyone else is still in a foul mood. Anyone waiting for the news to become official will be way late to the party.

Is the worst of the September selloff already behind us? I have no idea. But I like this bounce, and it is giving us a ton of headroom to lift our stops, making this trade worthwhile even if it doesn’t work out in the end.

Maybe bears are right, and we’re wasting our time buying this bounce, but if we can do it in a low-risk way, why not give it a shot? One of these bounces will stick, and this could easily be it.

At this point, keep doing what is working and move our stops up to at least our entry points, turning this into a low-risk trade. If it works, great. If not, we get out and try again next time.

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Sep 27

Why the safe trade is buying Wednesday’s bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

It looked like Wednesday would be another ugly session for the S&P 500 as the index skidded another -0.8% in midday trade. But just when all hope was lost, the index bounced hard, erasing all those losses over a handful of minutes.

While it is definitely premature to claim September’s selloff is over, when it ends, this is what it will look like.

As I wrote Tuesday evening, I was looking for a bounce, and Wednesday afternoon’s pop definitely qualifies:

Maybe prices bounce in the second half of the week, or maybe it doesn’t happen until next week. But as long as I wait for capitulation and the inevitable bounce (and keep a nearby stop), any false bottoms won’t be a problem. More importantly, I stay alert and ready to go because the market loves symmetry and the inevitable bounce will come hard and fast. Wait a few hours too long, and you will miss a big pile easy and fast profits.

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I don’t know if Wednesday was the true capitulation bottom I’ve been waiting for, but I do know that buying the bounce is the best trade a person could make here.

By getting in early, a savvy trader is already sitting on a profit cushion and moving their stop up to their entry points, making this a low-risk trade. If the selloff resumes Thursday, no big deal, we get out near our stops, no harm, no foul. But if the bounce continues, a wave of profits will come rolling in hard and fast. Low-risk, high-reward trades are what dreams are made of.

As I said above, it is way too early to claim the selloff is over, but this is the best buying opportunity we’ve had in a while. And if this bounce doesn’t work, no big deal, we get out and try again next time. One of these is going to work spectacularly well, and we don’t want to miss it.

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Sep 26

Why an optimist loves this week’s selloff

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 shed another -1.5% Tuesday as last week’s fear trade comes roaring back.

Last week, it was the Fed telling us they will keep interest rates higher for longer than most investors were hoping for. This week, fear of a U.S. gov’t shutdown/default is adding to the pessimism. Of course, none of these headlines are new or unexpected, and this weakness simply reflects the never-ending swing of sentiment.

While it is hard to watch these losses pile up over the near-term, most investors knew these things were coming, so we shouldn’t expect a significant repricing of stocks based on widely known and expected headlines.

Sure, the US could actually default on its debt this time, sending the global economy into a tailspin. But we’ve been down this path so often that very few investors actually believe this will happen. Number one, this latest round of equity selling won’t turn into anything significant because the consequences of default are too dire and a budget deal is coming. But number two, if the unthinkable actually happens, the consequences are so dire a 20% crash in stock prices wouldn’t be enough.

That turns this into the infamous black swan trade. It most likely won’t happen, but if it does, it will be bad!

Lucky for us, we are nimble, independent traders, and we can pull the ripcord long before markets fall 20%. In fact, I pulled the rip cord last week and have been watching this week’s carnage from the safety of the sidelines.

As much as I want to buy these discounts, savvy traders don’t buy the dip, they wait for the bounce.

If history repeats itself, as it almost certainly will, Republicans and Democrats will eventually come together and save us from themselves at the eleventh hour. And more than waiting for this bipartisan agreement, stocks will rebound days, even weeks, before a deal is reached, so savvy traders are following the market’s price-action and not waiting on the headlines.

The market is in a bad mood, but like all bad moods, it will eventually improve. The only question is when.

We didn’t get a bounce last week, and we’re not getting one in the first half of this week, but that doesn’t mean it isn’t going to happen. While my inclination is to buy this oversold tumble, I need to see the selling capitulate and bounce first. That simple requirement is saving me a truckload of money this week.

Maybe prices bounce in the second half of the week, or maybe it doesn’t happen until next week. But as long as I wait for capitulation and the inevitable bounce (and keep a nearby stop), any false buttons won’t be a problem. More importantly, I stay alert and ready to go because the market loves symmetry and the inevitable bounce will come hard and fast. Wait a few hours too long, and you will miss a big pile easy and fast profits.

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Sep 22

Why buying Friday’s early bounce was NOT a mistake

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 started Friday’s session off well enough, bouncing back from Wednesday’s and Thursday’s bloodbath. Unfortunately, those feelings of optimism didn’t last long, and the index fell into the red by the end of the day.

Knowing what we know now, most people would think buying Friday morning’s bounce was a mistake. But I actually think it was a brilliant move, especially since I did it!

After two days of hard selling, the market was ripe for a bounce. Even the most brutal selloffs have up hours and even up days, so Friday’s early bounce shouldn’t surprise anyone.

But what we do with those bounces is where amateur and savvy traders separate themselves. As I wrote Thursday evening, I was angling to buy the next bounce:

Without a doubt, this could be the start of the next major bear market, and we need to protect our backside because there is no excuse to ride a losing position all the way into the dirt, but until I see something more compelling, I will keep waiting for the bounce. Even if this is the start of a bear market, a bounce is still headed our way because bear markets bounce too. In fact, some of the easiest and fastest money is made trading bear market rallies.

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And buying Friday morning’s bounce is exactly what I did. But I’m not an idiot, I was smart and strategic in buying. I waited for the bounce, I started small, I got in early, and I kept a nearby stop. Within hours, prices had risen enough that I could lift my stops to my entry points, and that’s when the magic happened.

Now, I’m sitting on a free trade. If the bounce takes off, I rake in piles of profits in a 3x ETF. If the index retreats, I get out at my entry point, no harm, no foul. Only a fool would pass up on a free trade, regardless of how it turned out.

Sure, the index could have retreated before I was able to lift my stops to my entry points, but since that was on a partial position with a nearby stop, it wouldn’t have hurt much. Even that was a worthwhile trade with a low risk and a high reward, especially when the market was ripe for a bounce after two days of brutal selling.

Critics will claim buying Friday morning’s bounce was a mistake, but it was a mistake I will happily make every chance I get. Bring on those free trades. While this one didn’t work, one of them will, and that’s when I will collect a mountain of free profits.

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