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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 crashed more than 100 points Thursday morning after someone yelled “Fire” and impulsive traders climbed over each other trying to get out.
What was the catalyst for Thursday’s selling? Easy, there wasn’t one. This panic was nothing more than impulsive traders getting spooked by their own shadows and then the herd following them out the door.
But this isn’t a surprise. This was the second to last trading session before the Christmas holiday and institutional investors are already at their vacation chalets. Without big money’s guiding hand, there was no one to keep impulsive retail traders in check, and like irresponsible teenagers given too much responsibility, these retail traders made poor decisions.
Lucky for us, these retail traders have small accounts and quickly ran out of things to sell. By early afternoon, supply dried up and the index rebounded 60 points from those oversold levels, easily reclaiming 3,800 support.
As Forest Gump famously said, “Stupid is as stupid does.” And on Thursday, retail traders proved why they have such a poor reputation.
As for how I traded this, I came into Thursday holding long positions that I bought earlier in the week. Lucky for me, I already had a nice profit cushion and moved my stops above my entry points Wednesday, making this a low-risk trade for me.
As much as I wanted to see Wednesday’s rally continue, it didn’t turn out that way and I got dumped out at my trailing stops. To the cynics, that makes me wrong, but if my mistakes end in modestly profitable trades, I can live with that.
And in fact, after pulling the plug at my stops above 3,800 support, the waves of impulsive selling actually allowed me to rebuy those positions under 3,800 when the market bounced a few hours later. So not only did I get out of my previous trade for a small profit, I was able to get back in at even better prices.
If that’s what being wrong looks like, I don’t mind being wrong.
As for what comes next, a big wave of impulsive traders bailed Thursday morning and are no longer a risk to the market. I really liked Thursday afternoon’s bounce and that means I’m already a buyer.
If the selling resumes Friday, no big deal, I get out at my stops and try again next week. And if I’m really lucky, prices crash hard Friday and I get to buy even lower prices.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 surged 1.5% Wednesday, adding an exclamation point on Tuesday’s modest bounce off of 3,800 support.
While a lot of people were caught off guard by Wednesday’s unexpected strength, especially shorts that got run over by this reversal, it really wasn’t that hard to see it coming. As I wrote Tuesday evening:
The S&P 500 finished Tuesday up a measly 0.1% after bouncing off of 3,800 support earlier in the session…
[S]uch a marginal gain would normally be easy to brush off in the face of the more than 200 points of selling since last week’s intraday highs. But Tuesday’s 0.1% gain was anything but normal.
Few trading signals are more powerful than a market that doesn’t do what it is supposed to do [after the Bank of Japan’s suprise move]. Now, we can’t read too much into a few hours of unexpected resilience, but so far the bounce off of 3,800 looks really good…
Well, here we are a day later and instead of crashing through 3,800 support, we are challenging 3,900 resistance. Blink and you missed a really nice trade.
But it was more than just Tuesday’s uncanny resilience that set this trade up. As I wrote last Friday evening:
As for what comes next, if prices bounce Monday morning, I’m closing the remainder of my shorts and even going long if those early gains persist for an hour or two. Starting small and putting a stop under the early lows would be a great, low-risk entry.
While bears were pressing their shorts on Monday and Tuesday, I was taking profits and buying the bounce. Amazing what happens when a trader views this market through an agnostic lens and doesn’t get trapped by bullish and bearish biases.
As for what happens next, the much-delayed Santa Clause rally is finally upon us. Don’t expect a big move, but a modest drift higher through the final week of the year wouldn’t be a surprise, especially if bearish selling capitulated Tuesday morning.
For those playing along, keep holding what we have and lift our stops to at least our entry points if not a little higher, turning this into a low-risk, high-reward trade.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Tuesday up a measly 0.1% after bouncing off of 3,800 support earlier in the session.
That small gain was enough to snap a four-session losing streak, but such a marginal gain would normally be easy to brush off in the face of the more than 200 points of selling since last week’s intraday highs. But Tuesday’s 0.1% gain was anything but normal.
S&P 500 overnight futures crashed Monday night after the Bank of Japan surprised investors by taking a more hawkish stance and allowing bonds to move to a higher interest rate. That sent Japanese stocks down 2.5%, and it looked like Tuesday was going to be another rough session for U.S. equities.
But not long after the U.S. open, the S&P 500 bounced into the green. Funny how that works. Bad news and stocks actually rally. What’s up with that?
First, it’s been nearly a decade since anything in Japan brought down U.S. stock prices. And even more recently, U.S. equities have been immune to problems in China and Europe, so why should Japan be any different?
U.S. stocks are trading based on U.S. inflation, the U.S. economy, and U.S. Fed rate hikes. Nothing else matters to domestic stocks and it is no surprise headlines out of Japan failed to register once the main trading session opened Tuesday morning.
And Second, if 3,800 support was fragile and stocks were prone to a much larger selloff, the Japanese headlines were more than enough to break this camel’s back. Yet, instead of mirroring the international indexes, U.S. owners shrugged at the bearish headlines and kept holding.
While it is hard to get excited by a 0.1% gain, it sure beats where we were headed when Tuesday’s session opened.
Few trading signals are more powerful than a market that doesn’t do what it is supposed to do. Now, we can’t read too much into a few hours of unexpected resilience, but so far the bounce off of 3,800 looks really good and that won’t change until we fall under Tuesday’s intraday lows.
As I wrote Monday night, I closed my short positions for a very tidy profit and started to go long when the index found support at 3,800 late Monday. I added to those initial long positions when prices bounced Tuesday morning and I will add even more Wednesday if this counter-intuitive strength holds up.
I love trades where the market doesn’t do what it is supposed to be because that means the supply and demand dynamics under the surface are stronger than anything the headlines can throw at it. If the Bank of Japan can’t break this market, imagine what will happen if some good news comes along.
My stops are under Tuesday’s lows and if prices rally Wednesday, I will quickly move my stops up to my entry points, turning this into a low-risk/high-reward trade. And if this one doesn’t work, no big deal, I sell at my stops and try again the next time the market bounces.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 fell 0.9% Monday as last week’s post-Fed selloff continues.
Headlines haven’t changed in a meaningful way and that includes last week’s inflation report and the Fed’s rate hikes. Inflation is moderating modestly and the Fed is slowing the pace of rate hikes. Both of these results fall in line with most investors’ expectations and we are not seeing any significant deviations in the fundamental data.
This remains a sentiment-driven trade and the October and November waves of optimism have given way to this latest bout of second thoughts. 3,800 is the next obvious support level and now we get to see if it holds. Either it does or it doesn’t and that binary outcome is the basis for our next trade.
Monday’s late test of 3,800 support held. That was our signal to lock in some very juicy profits on our short positions. And for the most adventurous, test the waters with a small buy and a stop under Monday’s intraday lows.
Odds are good closing our short positions Monday afternoon could be premature, but with over 200 points of profit in this trade, the risks of holding too long far outweigh the reward of squeezing a few more bucks out of this trade.
Remember, we only make money when we sell our winners and this has been a great trade. No reason to get greedy and keep pressing our luck. As easy as it is to buy back in, there is no reason to get stubborn here. Take those profits and get ready for the next trade.
Adding more to a long position Tuesday morning if the bounce off of 3,800 sticks, or switching direction and shorting a break under 3,800. This is as easy as it gets.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 fell another 1% on Friday, making this the third down day since Wednesday’s Fed meeting. But as dire as that sounds, the index only lost 2% this week. While not great, this is hardly free-fall material.
Powell did his best to rain on the market’s parade, but it is unlikely his comments changed many peoples’ minds. Those that were bearish Wednesday morning are just as bearish today and those that were bullish are just as bullish.
Obviously, the bulls didn’t get that warm and fuzzy feeling from Powell’s press conference, but that lack of comfort hasn’t translated into a panic on the streets yet.
Inflation is moderating, the labor market remains tight, the economy is chugging along, and the Fed promises to fight inflation to the end. So pretty much everything that we knew last week. And if this is what we were thinking last week, there is no reason for stock prices to deviate in a significant way from where they were last week. Find support near 3,800 and this week’s selloff is nothing more than a routine bit of down following a nice bit of up.
Having shorted the post-Fed crash on Wednesday, I’m sitting on a nice pile of profits. At this point, I’m far more paranoid about losing those profits than interested in pushing my luck to make a few more bucks. I took some partial profits Friday afternoon and I will sell even more Monday if prices bounce.
Maybe the reflexive selling extends into next week and I’m selling these partial positions too soon. But that’s okay because taking worthwhile profits is never a mistake. I know I can’t pick the bottom, so I’m not even going to try. If the selling continues, I will profit from the partial positions I’m still holding, so it really is a no-lose situation for me.
As for what comes next, if prices bounce Monday morning, I’m closing the remainder of my shorts and even going long if those early gains persist for an hour or two. Starting small and putting a stop under the early lows would be a great, low-risk entry.
But my perfect setup would be a sharp selloff Monday morning that falls over three percent before bouncing hard in a capitulation bottom. I don’t think we will be that lucky, but that is what I’m hoping for.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 extended Wednesday’s post-Fed selloff by crashing another 2.5% on Thursday.
The Fed did what everyone expected when it raised rates another 0.5%. What unnerved investors was the hard-line Powell took when answering questions about how high rates will eventually get and how long they will stay there. Long gone is the affable Uncle Jerome and he’s been replaced by the hard-edged Sergeant Powell.
But this isn’t totally unexpected since the bubbling relief felt in the market over the last few months is threatening to undo all the hard work the Fed has been doing by raising rates. If investors return to the punchbowl too soon, the Fed will have no choice but to raise rates even higher to break inflation. The Fed needs to keep a lid on the market’s optimism, and the last two sessions had the desired effect.
While I still count myself as one of the soft-landing optimists, I know better than to trade my opinion. As I wrote Tuesday night before the Fed’s policy statement:
Give the market a few minutes to process the news and be careful because the initial knee-jerk is often in the wrong direction, but after a handful of minutes, the market will no longer be able to hide its true intention and it will be a big move. Whether that is up or down is anyone’s guess, but as nimble traders, there is no need to guess. Follow the market’s lead and let the profits come to us.
Well, here we are down more than 4% from the Fed announcement. While my optimistic inclination was misplaced, my agnostic trading plan was spot on the money. No one likes being wrong, but a big pile of profits definitely cushions the ego blow. In fact, if I can make this much money being wrong, here’s to hoping I’m wrong a lot more often.
As for what comes next, shorting stocks is one of the hardest ways to make money because the windows of opportunity are so small and the inevitable bounce comes hard and fast.
Closing Thursday near the intraday lows means we can continue holding Wednesday’s short positions, but be sure to lower our trailing stops. By this point they should be even lower than our entry points, making this a very low-risk trade. But we’re not looking for low-risk, we are looking for profits and that means keeping a close eye on this one.
Maybe prices bounce Friday, but more likely the next bounce comes early next week. Lock in profits when it arrives and then get ready for the next trade.
As much as bears want to believe stocks are headed back to October’s lows, this will bounce long before then. Don’t get greedy and be sure to lock in worthwhile profits. Remember, we only make money when we cash in our winners.
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