Oct 06

Why smart money keeps buying these bounces

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 tumbled Friday morning after the monthly employment report came in unexpectedly strong. As has been the pattern for a while, the “good is bad” crowd hit the panic button because this increases the odds of another Fed rate hike.

The dumb thing about the “good is bad” trading philosophy is stock prices are based on corporate profits, not the Federal Funds Rate. Strong employment means people have lots of paychecks to throw around, boosting corporate profits. I don’t see how this is a negative for stock prices. And neither do most investors; that’s why those opening losses were quickly erased, and the index finished Friday up a very respectable 1.2%. There are lots of reasons for stocks to fall, but strong employment is most definitely not one of them.

As for trading opportunities, no matter how bad the market felt these last few weeks, these waves of selling presented savvy traders with low-risk entry points. While no one can say if the bottom is in yet, we do know the market always overdoes things, which means at some point, this wave of reflexive selling will go too far, and then it will bounce hard.

I have no idea if 4,200 support will hold up next week, but it is holding right now, and that is good enough for me. I bought this week’s bounce and already lifted my stops up to my entry points, turning this into another low-risk trade.

Maybe I get dumped out again next week, like my previous trades, but buying these bounces early and quickly lifting my stops meant every time I got dumped out, it was a breakeven trade. Being wrong and not losing money isn’t a bad way to trade. But it only comes from having the courage to buy these bounces early and the discipline to move my stops up once the bounce starts working.

I have no idea if Friday’s bounce will stick next week, but by getting in early, this is another low-risk/high-reward trade. If it works, I make a pile of money. If it doesn’t, I get out near my entry point and try again next time.

One of these bounces will stick. There is no reason it can’t be this one.

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Oct 04

Why smart money was buying Wednesday’s bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 bounced 0.8% on Wednesday.

Headlines haven’t changed in a meaningful way, and this rebound is nothing more than the market running out of herd-sellers and dip-buyers jumping on those discounts. Lucky for readers, this bounce is precisely what I wrote about in Tuesday evening’s free post:

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.

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While Wednesday’s gains were not enough to offset Tuesday’s painful losses, not falling is a good first step.

I have no idea if Wednesday’s bounce is the real deal or if it is another false bottom on our way lower. But since this bounce was fairly obvious, savvy money jumped aboard it early and took advantage of the quick profit cushion it gave us.

With a fair bit of room between Wednesday’s close and our entry points, it is time to move our stops up to our entry points, turning this into a low-risk trade. If the rebound continues on Thursday, we allow those profits to come to us. If the selling resumes, we get out nearly our entry points, no harm, no foul.

Only a fool would turn his nose up at a free trade. Even if this isn’t the bottom, this is still a fantastic risk/reward and I will make this trade one thousand times over. Hopefully, you didn’t miss this great opportunity.

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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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