Aug 02

Why savvy traders were ready and waiting for Wednesday’s tumble

By Jani Ziedins | End of Day Analysis

Free After-Hours Update: 

The S&P 500 tumbled Wednesday after a rating agency downgraded US debt.

We traveled this road 12 years ago, the last time US debt was downgraded. That 2011 episode launched a meaningful, multi-month selloff in stocks. Are we in store for the same thing this time? No, probably not.

Novel events trigger fear and uncertainty because no one knows what is going to happen and with nothing to go on, people often fear the worst. But since we’ve already been down this downgrade path, there will be far less uncertainty this time.

Less uncertainty = less anxiety = less impulsive selling

But just because we won’t fall into another spiral of impulsive selling doesn’t mean this event cannot drag down equity prices over the near term. The market experienced a whole lot of up lately, and no matter the reason, these lofty prices left us vulnerable to a very routine and even healthy step back.

As I wrote on Monday:

At this point, I’m looking at 4,600 as a tipping point. Either we keep going higher, or we don’t. If the rally resumes later this week or next week, I will buy back in. But if the market is finally ready to take a break and cool off, I’m happy to short the step back to 4,400 support.

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There is no way I could have predicted this debt downgrade, but when stocks are this elevated, the next wave of selling is never far away.

Now that we have a potential catalyst to kick off the next wave of profit-taking, it is finally time to start challenging “too high.” Remember, smart traders never short strength, we wait until that strength starts crumbling.

Savvy traders were shorting Wednesday morning’s weakness. By getting in early, our stops are already adjusted to our entry points, making this a low-risk trade.

By being proactive, we limited our risks. If we are wrong, we won’t lose much. But if we are right, there are a whole lot of profits headed our way. Low risk and big rewards are the trades we dream of.

If the selling continues on Thursday, we can add more to our short position and lower our stops, giving ourselves even more protection. On the other hand, if prices bounce above Wednesday’s intraday highs, it is time to start pulling off our shorts. And if we rally back to Tuesday’s close, the selloff is already over and it is time to start buying the bounce.

I still think this weakness has room to run and 4,200 is a very realistic target. But I’m not married to that outlook and will change my views as soon as the market proves me wrong by bouncing back near recent highs.

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Jul 31

Is 4,600 finally too high?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 is pausing under 4,600 as it continues proving all of the cynics wrong.

Too high or not high enough? That’s the million-dollar question.

As high as stock prices feel at 4,600, people were making the same argument at 4,500, 4,400, 4,300, and even 4,200, and we know how that turned out.

At the same time, while high is more likely to get even higher, all good things eventually come to an end.

As a nimble trader, I don’t have an allegiance to either side in this debate. The run to 4,600 was a good one, but rather than greedily hold for higher prices, I collect worthwhile profits and get ready for the next trade. The market resolved to the upside at 4,200, 4,300, 4,400, and 4,500, and if we see the same thing at 4,600, I’m more than happy to buy the next breakout.

But until this actually starts rallying, I’m content sitting on my pile of profits on the sidelines. At this point, I’m looking at 4,600 as a tipping point. Either we keep going higher, or we don’t. If the rally resumes later this week or next week, I will buy back in. But if the market is finally ready to take a break and cool off, I’m happy to short the step back to 4,400 support.

Rally up to 4,700 or slip back to 4,400; it doesn’t really matter to me what happens next. All I’m doing is waiting for the market to reveal its hand, and then I’m jumping on that trade. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

Get above Friday’s highs, and I’m a buyer. Fall under Monday’s lows, and I’m going short.

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Jul 21

Why Friday’s failed bounce is good news for the half-empty crowd

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 attempted a midday bounce Friday as it tried to recover some of Thursday’s stumble following disappointing earnings from NFLX and TSLA. Unfortunately, the dip buyers failed to show up in meaningful numbers and the index finished Friday’s session flat.

But this lethargic price action was expected. As I wrote in Thursday afternoon’s free post: 

While we can’t read too much into one day’s price action, recent gains across the market leave us vulnerable to some near-term weakness. I’m in no way predicting a top, but it wouldn’t surprise me if the indexes cooled down following this month’s impressive 200-point run to 4,600.

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Friday’s 0.03% session didn’t give us much to go on. The half-full crowd points to the stalled selloff. The half-empty side counters with Friday’s failed midday bounce.

Who is right? At this point, either side could be right. Lucky for us, the market is terrible at keeping secrets won’t be able to hide its cards for long.

If selling is truly over, prices will bounce nicely on Monday. If there is more selling left in this cool-down, expect another wave to hit us instead.

As far as trades go, this one is very straightforward; buy strength and sell weakness.

For those of us who shorted Thursday’s weakness, keep holding that short with nearby stops. If we get blown out of our positions on Monday, it’s no big deal. That’s the way trading goes. Thursday’s short was a low-risk/high-reward trade that was worth taking even if it didn’t work. But if the short keeps working Monday, press it and move our stops down to our entry points, turning this into practically a free trade.

For the long-only crowd, wait for the bounce. If it doesn’t happen on Monday, then expect a few more days of selling and a much better dip buying opportunity later in the week.

Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

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Jul 20

Why taking worthwhile profits is never a mistake

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 finished Thursday down 0.7% as the index digested a poor performance by two of its highest profile components.

NFLX and TSLA tumbled after their earnings disappointed investors. It wasn’t that these companies performed poorly, but the higher prices get, the bigger the expectations become. And both of these companies failed to live up to the hype.

Are these two isolated incidents? Or do they threaten the market’s half-full mood?

While we can’t read too much into one day’s price action, recent gains across the market leave us vulnerable to some near-term weakness. I’m in no way predicting a top, but it wouldn’t surprise me if the indexes cooled down following this month’s impressive 200-point run to 4,600.

Two steps forward, one step back. Rinse and repeat.

While the market acted well Wednesday, sometimes we have to recognize good enough. If we’re not selling early, then we are holding too long.

This is exactly what I told readers in Wednesday afternoon’s free analysis:

Everything looks great, and that’s eactly why smart money is already peeling off some of their profits. As easy as it is to buy back in, we can always buy the next move above 4,600. But until that happens, we need to protect the profits we have now.

I don’t pick tops, but taking worthwhile profits after a good run usually gets me close enough. After a bit of up, the next bit of down is inevitable.

There is no way of knowing if Thursday’s dip will bounce Friday or keep going for a bit. But now that I’m in cash, it doesn’t matter to me what comes next. All I know is I will be ready for whatever profit opportunity arrives next.

Thursday’s weakness was shortable with nearby stops for the most aggressive traders. For everyone else, collect recent profits and get ready to buy the next bounce.

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Jul 19

What savvy traders are doing as we approach 4,600

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

The S&P 500 added a quarter of a percent Wednesday as the good times keep rolling.

Headlines haven’t changed, and we continue coasting higher on recent employment and inflation data. At this point, reality is coming in far closer to the best-case scenario than anyone thought was possible earlier this year.

But for as good as this rally looks, 200 points in two weeks means we need to start watching our backside. The smart time to buy was back near 4,400, not now, as we are approaching 4,600. In fact, this is a far better place to be taking profits than adding new money.

Everything looks great, and that’s eactly why smart money is already peeling off some of their profits. As easy as it is to buy back in, we can always buy the next move above 4,600. But until that happens, we need to protect the profits we have now.

Once we acknowledge we can’t pick tops, the next decision becomes selling too early or holding too long. As a nimble trader, my preference is to sell too early because that means when other people are getting nervous watching their profits disappear, I’m in the perfect situation to take advantage of the next trade.

No doubt I’m peeling off profits too early, but as easy as it is to jump back in, my bigger fear is letting these profits escape. We don’t need to sell everything, but it is amazing how much better we feel after locking in some worthwhile profits and reducing our risk.

Remember, we only make money when we sell our favorite positions…

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