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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped 0.3% Thursday, making this the third losing session in a row, and the index opened low enough to have given back all of last week’s impressive gains.
As they say, easy come, easy go. Anyone who got greedy last week and was holding for even higher prices watched all of their profits escape. But this doesn’t surprise those of us that have been doing this for a while. The market rewards those with the courage to buy when others are fearful and sell when everyone else becomes hopeful. The market goes against our innate instincts, which is what makes trading successfully so hard for most people.
Once we recognize these patterns and conquer our impulses, we can make a lot of money from other people’s mistakes. This is what I was telling readers two weeks ago when the crowd was convinced stocks were going crash a lot lower moments before they rebounded 150 points instead.
As I wrote back on August 25th, when the index was probing 4,350 support:
The market’s natural inclination is to go up, and breakdowns are breathtakingly fast. Combine those two concepts, and [August 25th] modest rebound definitely favors the bulls. If we were going to break down, prices should have taken another tumble [today].
Something that refuses to go down will eventually go up, and that’s exactly what happened over the next two weeks. But late last week, when the rebound is obvious to everyone, that’s was when smart money was locking in their 3x ETF profits.
Following that very profitable rebound, on August 30th, I warned:
[T]his is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy…Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down.
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Well, here we are. A big portion of August’s rebound has been wiped out, and the lucky ones have nothing to show for it. Those that couldn’t control their impulses and were chasing prices higher last week, got in right before the fall and are sitting on a humuliating pile of losses. (That said, I do have to thank these tardy buyers for taking my 3x ETFs off my hands and leaving me with a pile of profits!)
As I said above, this isn’t hard once we start following the patterns and conquering our impulses.
As for what comes next, these swings are vanilla sentiment gyurations and nothing more. Going up and down like this is as natural as breathing for the market. Since the latest wave of selling wasn’t propelled by meaningful and unexpected headlines, it won’t go far and we are nearing the bottom.
That means locking in our short 3x ETF profits and getting ready to buy the next bounce. It will probably take one or two more tests of 4,400 support before we bounce for good, but taking profits a little early makes sure we are in the right spot to take advantage of the next trading opportunity, which is most likely buying the bounce Friday or early next week.
And when this dip finally bounces, don’t expect it to go far and take worthwhile profits off the table as soon as we have them because, just like this week, it won’t be long before those profits get away from anyone that gets greedy and holds too long.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 tumbled 0.8% Tuesday as it undercut both the 50dma and 4,450 support in midday trade. While an afternoon bounce reclaimed 4,450, it wasn’t enough to get the index back above the 50dma.
[T]his is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy…Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down.
[E]xpect a little more cooling off over the next few sessions. For the most aggressive, they can short any incremental weakness but keep positions small and profit targets close. Shorting an uptrend is one of the hardest ways to make money in the market, and it requires impeccable timing.
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Well, here we are, three sessions later, and the index is down ~50 points. While 50 points doesn’t sound like a lot, that turns into real money in a 3x ETF.
For the unfortunate masses who held the previous trade too long, they watched a big chunk of their profits escape during Wednesday’s decline. For the nimble traders that collected worthwhile profits last week and then flipped direction, that’s well over 100 points of profit for a few days’ work. Do that a couple of times a month, and now we are talking real money.
As for what comes next, the market loves symmetry. Since we didn’t rally very far from the August lows, we shouldn’t expect this subsequent step-back to be very large. Maybe Wednesday’s test of 4,450 support is all we need to reset the clock. If that’s the case, we should hold above Wednesday’s lows for the remainder of the week.
On the other hand, if we retreat under Wednesday’s lows, look for the selling to push us back near 4,400 support. At this point, I would expect that to be the last gasps of selling before bouncing. (If it’s not, the August lows are under serious threat.)
As I wrote last week, I wasn’t expecting a lot from this week’s retest of support, and that means I was already peeling off my short profits. If the bounce continues on Thursday or Friday, I’m pocketing all of those short profits and going long again. But if we can’t hold Wednesday’s lows, I’m jumping back on the short bandwagon…
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped 0.15% Thursday, ending a four-day winning streak.
After rallying 150 points over a handful of days, it shouldn’t surprise anyone the market wanted to take a breather. And as far as breathers go, -0.15% doesn’t really count, so expect prices to slip a little further over the next few sessions.
Headlines remain benign, but a rebound that didn’t need a headline to kick it off doesn’t need a headline to take a step back. Stocks go up, and stocks go down; that’s all this is.
As I told readers on Wednesday:
[T]his is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy…Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down.
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This isn’t rocket science, but apparently, Wednesday’s tardy buyers missed the memo. But without late money, we’d have no one to sell our stocks to and give us our profits. So thank them for that.
As for what comes next, expect a little more cooling off over the next few sessions. For the most aggressive, they can short any incremental weakness but keep positions small and profit targets close. Shorting an uptrend is one of the hardest ways to make money in the market, and it requires impeccable timing.
For everyone else, wait for the dip back to 4,450 support and see what happens. If prices bounce, buy that bounce with a stop under this level. If the selling continues, wait for a bounce off of 4,400. Rinse and repeat.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 added 0.4% on Wednesday, making it four winning sessions in a row.
Headlines haven’t changed in a meaningful way, and in fact, some weaker-than-expected economic news came out over the last few days, causing many investors to cheer because they assume the Fed is done hiking rates.
Is weaker-than-expected economic news good? I don’t buy into the bad-is-good trading philosophy, but if traders want to buy bad news, no one can stop them.
As for my personal trades, I really liked this market last week when the index was under 4,400. Now that we are above 4,500, the risk/reward flipped against us. A big chunk of the upside has been realized, and there is not a lot left in this move over the near term. On the other side, risk is a function of height, so by that measure, the index is 150 points riskier than it was last week.
Combine these two ideas, and this is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy. No doubt, it won’t take long for many of Wednesday’s tardy buyers to regret that decision.
Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down. Anyone expecting another 150-point rally over the next few sessions doesn’t understand how markets work.
Smart traders buy when they don’t want to buy, and they sell when they don’t want to sell. This beautiful rebound above 4,500 makes it hard to pull the plug on a 3x ETF trade that is working this well. But collecting worthwhile profits is never a mistake. Remember, we only make money when we sell our favorite positions.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 popped 1.5% on Tuesday as the index put the screws to the bears.
There were some minor economic headlines, but certainly nothing worthy of launching the index through the 50dma and 4,450 resistance. Instead, this was a massive short squeeze. Bears spent last week planning all of the things they were going to buy with their profits, and instead, found themselves dumped on their butts with a big pile of losses.
But that’s the way this goes. This is a volatile market, and if we are not taking worthwhile profits when we have them, we will be taking losses a few days later.
Luckily, Tuesday’s pop didn’t surprise readers of this free blog because we’ve been riding this rebound and collecting a big pile of 3x ETF profits along the way. As I wrote Monday evening:
As for what comes next, I like what I see. No one is talking about the Chinese economy anymore. If the market doesn’t care, then we don’t care. Powell’s speech last Friday couldn’t bring out the sellers either. And, we violated 4,400 support multiple times over the last two weeks without triggering another follow-on wave of defensive selling, telling us there is not much supply left under our feet.
A market that refuses to go down will eventually go up, and that’s the way this trade is coming together. Stick with what is working and keep lifting our stops.
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Now that the bears have been squeezed out, who is left to keep buying and pushing stocks higher? That’s a good question.
As good as the market looks right now, this is when smart traders are switching to defense. The market didn’t get surprised by amazing and unexpected news, so we shouldn’t expect a huge repricing of stocks. Instead, bears got their latest trade wrong, and this bounce is correcting that fairly minor mistake. Is there a reason to keep racing higher? No, probably not.
Now, don’t get me wrong. Stocks could easily continue racing back to the highs. But that’s not the most likely outcome, and we shouldn’t base our next trade on hope of the unlikely.
We collect worthwhile profits when we have them because if we hold too long, this volatile market will steal them back. Just ask the bears what that feels like.
We don’t need to dump everything, but we should lift our trailing stops to protect our profits and even consider locking in some worthwhile profits proactively. Remember, we only make money when we sell our favorite positions.
Keep holding, lifting stops, and even taking some profits off the table proactively. And once we are out, start looking for that next trade, which could include buying a continuation higher if that’s what the market wants to do.
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What’s a good trade worth to you?
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