Nov 04

Friday was the bounce we were looking for

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

Friday was another wild session for the S&P 500 as the index popped +1.8% in early trade, crashed back to breakeven before lunchtime, and then surged +1.4% into the close.

The economy added another quarter million jobs in October and we haven’t fallen into a meaningful slowdown yet. That’s both good and bad depending on which side of the fence a person is standing on. A strong economy is good for corporate profits, but too strong means even more rate hikes are ahead of us. And that’s what traders spent all day arguing over.

Friday’s midday retreat was a concern because it suggested dip buyers were MIA. But but after that slump failed to trigger an even larger breakdown and the selling stalled near breakeven, buyers finally decided to show up a few hours later. As the saying goes, better late than never.

How we finish is always more important than how we start, so by that measure, Friday was a good session. The midday breakdown couldn’t build momentum and that tells us the ground under our feet is fairly solid. If this really was a house of cards, we would have crashed to fresh lows. The fact we are still standing tells us the market is a lot more resilient than the critics claim.

As I wrote Thursday evening, I expected this week’s Fed-fueled selloff to bounce relatively soon and that’s exactly what we got:

While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as Friday afternoon.

Friday was a good day, but we need to keep this strength up next week because a retest of the lows means the bounce is dead. Friday’s bounce is buyable with stops near 3,700. Add more if the rebound continues next week and pull the plug if we slip back to our stops.

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Nov 03

When to start looking for a bounce

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 shed another 1% Thursday, adding to Wednesday’s Fed-fueled 2.5% losses and leaving the index down 4.6% for the week. Ouch!

As bad as this feels, unfortunately, it appears there are still more losses left in this “pain trade”.

Thursday was one of those tipping points where the market was telling us what it wants to do next. And the uninspiring price action told us dip buyers are not ready to bail us out yet.

The index opened Thursday down 1%, rallied from those early lows, and even spent a portion of the session threatening to turn green. Finishing green would have been a very bullish reversal, but instead, a wave of selling knocked us back from those midday highs. As long-time readers of this blog know, how we finish matters most. Big institutions place their trade at the end of the day and rather than buying these discounts, big money was selling and running for cover.

As I wrote Wednesday evening, even though I came into the Fed decision with a long position, as soon as that midday rally broke down, there was no arguing with the market and it was time to pull the plug. And when trading a binary outcome, if we find ourselves on the wrong side, it only makes sense to change sides. So I shorted Wednesday’s breakdown and held that position through Thursday.

But just as important, as soon as I’m out, I’m always on the lookout for the next bounce. While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as Friday afternoon.

I will continue holding this short as long as the market keeps falling, but I’m already lowering my trailing stops and it won’t take much convincing to get me to lock in these profits.

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Nov 02

Why bulls didn’t need to lose money on Wednesday

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Wednesday was Fed day and it didn’t disappoint.

After spending the morning in the red, the S&P 500 turned positive after the Fed raised interest rates by the widely expected 0.75% and said the rate of future hikes would slow. Unfortunately, the relief proved fleeting and an hour later stocks tumbled from those midday highs, ultimately finishing the day down 2.5%.

As I wrote yesterday, my guess was the index would rally if the Fed did what it said it was going to do, but after a few weeks of up, investors had higher expectations and that left stocks vulnerable to disappointment. When Powell’s comments suggested rates could peak higher than previously expected, investors started pulling the plug and once the wave of selling started, there was no stopping it.

Lucky for me, I’m not a stubborn trader. While I was pleased to see the initial push into the green, when the air started coming out of that rally less than an hour later, that was my signal something was off. And after falling into the red, the market’s disappointment became undeniable and all bets were off.

Buy strength and sell weakness was the plan coming into the day and we knew the odds of a head-fake were high. As it turned out, the initial strength was the head fake and the reversal into the red was our signal to get out and for the most aggressive to short the market.

While that sounds easy in hindsight, nothing in the market is ever easy. During that midday surge, bulls were beating their chest and bears were running for cover. And an hour later, the script flipped. Easy come easy go. But as nimble traders, we are perfectly suited to turn on a dime alongside the market.

When a trade stops working, we pull the plug, no excuses. And in volatile markets like this, a dramatic reversal becomes our invitation to throw on a trade in the opposite direction.

Being flexible enough to switch our outlook midstream is never easy, but it sure is a lot more profitable than sticking with a losing trade. With practice, you will be able to do it too.

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Nov 01

The smart-money trade headed into the Fed’s rate-hike announcement

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 squandered a really nice +1% open Tuesday and finished -0.4% in the red. Ouch.

While this performance would normally give me pause near recent highs because this price action often suggests a near-term top, we can’t read the same into Tuesday’s fizzle simply because everyone is so fixated on Wednesday’s interest rate announcement. Rather than hint at what’s coming next, Tuesday’s fizzle was nothing more than the market entering a holding pattern as we wait for the Fed’s next big move.

A 0.75% rate hike on Wednesday is a virtual lock. What’s less certain is what happens in December with the Fed previously signaling a modest slowdown to more conventional 0.5% rate hikes. If the Fed maintains that outlook, expect stocks to rally in anticipation of rate hikes tapering off in the early part of 2023. On the other hand, if the Fed tells us they need to remain aggressive, ie another 0.75% hike is coming next month, expect stocks to tumble as the light at the end of the tunnel gets extinguished.

My best guess is the Fed will stick to their prior guidance and telegraph a 0.5% hike in December and a gradual slowing of hikes next year. But that’s just a guess. Good thing I’m a nimble trader and will trade the market as it comes at me. Regardless of what I think, I will be buying strength Wednesday afternoon or selling weakness.

From a purely selfish point of view, I’d actually like to see the market disappointed Wednesday because there is a lot more downside at these levels than upside. Shoring a selloff back to the October lows would be far more profitable than buying a continuation up to 4k resistance. But I don’t get to choose, which means I’m taking whatever the market gives me.

The market often throws off a head-fake or two following such a widely anticipated news event, but 30ish minutes after the announcement, the market won’t able to hide its true intentions and that’s when we buy strength or short the weakness. Smart money will be jumping aboard early and enjoying the ride.

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Oct 31

The smart way to approach this week’s Fed meeting

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 dropped three-quarters of a percent on Monday, but those losses pale in comparison to Friday’s towering +2.5% gains.

Two steps forward, one step back. As much as people love trying to pick tops by proclaiming every red day is the start of the next big crash, the simple truth is the market spends far more time going up than down. In reality, most red days are little more than filler between up days and odds are good Monday’s losses are nothing more than one of those filler days in the October rebound.

Now, everything could change Tuesday, but as long as we remain above 3,800, the latest rebound is alive and well. At this point, 4k is very much in play and we could be challenging this key level in a few days.

Of course, everyone is looking forward to Wednesday’s Fed meeting and the widely expected 0.75% rate hike. But since everyone has seen this hike coming for weeks, if not months, don’t expect Wednesday’s rate change to move markets. Instead, traders will be focused on what the Fed hints is coming next year.

By this point, most people have given up hope that rates will start coming down next year. But any guidance in how high rates might get in 2023 will go a long way to determining how optimistic or pessimistic investors will be in the final months of 2022.

Lucky for us, we are nimble traders, so we don’t need to be concerned about what’s coming in January, let alone later in 2023 or even 2024. We buy strength, we sell weakness, and we repeat as many times as the market allows us. Let other people worry about what will happen next year. Instead, trade and profit off of what is happening right in front of us.

Expect some volatility surrounding the Fed’s rate announcement, but this one will be less important than the ones that came before it, so expect a little less volatility than we got before. And has been the case for a while, this will trigger a multi-day directional move. Wait 30 minutes for the market to make up its mind, but once the next move starts, grab on and enjoy the ride.

I’m expecting the relief rally to continue, but I don’t mind being wrong if that means I get to make even more money shorting the next big selloff.

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Oct 28

Why bears better get out of the way!

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 surged 2.5% Friday, finishing the week at multi-month highs and easily brushing off bruising earnings reports from GOOGL, META, and AMZN.

With three of the biggest and most important tech stocks deep in the red this week, you’d think the market would have rolled over and be racing toward the 2022 lows. But you’d be wrong.

As much as I don’t always agree with, or even understand, what the market is thinking, the simple truth is the market is far larger than I am and it doesn’t care what I think. Rather than disagree and argue with the market, I tell myself, “Okay, if that’s what it really wants to do, I’m happy to follow along.”

After doing this for decades, one of the most important lessons I’ve learned is to never question the market when it is doing something unexpected. That means the forces acting under the surface are so strong they overpower common sense and conventional wisdom. And if the mysterious phenomenon is that powerful, you better watch out because it will run over anyone that gets in its way.

Two days ago I was preparing to lock in some really nice profits if this rebound stalled and retreated back under 3,800. It’s not that I expected a bigger pullback, just that it’s been a good run and we only make money when we sell our winners. As easy as it is to buy back in, there is no reason to stubbornly hold a position if the rebound was cooling off.

Lucky for me, the market never tested my stops under 3,800, but even if it did, the first thing I do after I get out is to start looking for the next opportunity to get in. And Friday morning’s counterintuitive strength would have been that signal to jump back in.

When something doesn’t make sense, it means there is a lot of power behind the market and we better grab on. At this point, 4k is very much in play. What happens when we get there is still up for debate, but at the very least, we should expect the market to get into the upper 3,900s over the next few days and weeks.

From there, we can judge the market’s price action and figure out its next move. But a nearly 500-point rebound from the October lows and it wouldn’t be a surprise to see a little profit-taking weight on the market after we get near 4k.

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