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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday started off well enough with the S&P 500 popping nearly 50 points in early trade. But that opening bounce was as good as it got and it was all downhill from there. And when I say downhill, what I really mean is we fell off a cliff, dropping nearly 130-points from those intraday highs.
Consumer confidence is in the toilet and that was enough to bring the sellers back following last week’s impressive 6.5% bounce.
As I’ve been saying for a while, this is a volatile market and that means oversized moves in both directions. Every bit of up is inevitably followed by a bit of down. And what we got that in spades on Tuesday.
But Tuesday’s volatility shouldn’t surprise regular readers of this blog, as I wrote Monday evening:
Now that stocks are dramatically higher, a big chunk of the upside has been realized and the risks of a near-term pullback have increased. While we can stick with this bounce as long as it remains above our trailing stops, this is the time to be getting defensive and ensuring these nice profits don’t escape.
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I was hoping the rebound would take us closer to 4k resistance before running out of momentum, but the market’s never once asked what I thought, so I have no choice but to follow its lead. While I came into the day still holding last week’s nice bounce, the selling quickly forced me to lock in some really nice profits in the mid to upper 3,800s. While not as juicy as I wanted, I have no right to complain about the nice profits the market gave me. (Catching a big portion of a 6.5% pop in a 3x ETF pays really well.)
When Tuesday’s midday selling didn’t relent, that was our invitation to initiate a short position. Shorting a bull market is one of the hardest ways to make money in the market, so it’s a good thing we are not in a bull market. But that still means we need to be really careful. Shorting successfully takes impeccable timing, so don’t be afraid of taking profits early and often. Hold a little too long and those short profits will be gone.
As for what to do on Wednesday, easy, buy a bounce and short a breakdown. This is an emotional market and that means oversized moves in both directions. Grab on early and enjoy the ride.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Monday ever so slightly in the red. While a 0.3% loss isn’t trivial, it is fairly insignificant compared to last week’s staggering 6.5% gains.
While one day of support isn’t conclusive, the longer we hold last week’s gains, the more real they become. So by that measure, every hour further we get into this Tuesday and Wednesday, the better it looks.
Headlines haven’t changed in a meaningful way, but that’s kind of the point. This year’s 20% retreat from the highs priced in a whole lot of bad news. That means we are not deciding if the economy is good or bad, but if it is bad or really bad. And at least for the time being, our environment seems less bad than investors were fearing two weeks ago when stocks were testing multi-year lows.
But this isn’t a surprise. As I wrote the on the evening of June 16th, hours before last the latest big rebound kicked off:
Maybe we get a little more selling on Friday, but everyone knows markets moves in waves and after falling more than 500 points over a handful of days, the next near-term bounce is just around the corner.
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We don’t need to be psychic to know what the market is going to do because it always does the same things. In this case, emotional selloffs get carried away and go too far. And when that happens, it means an equally impressive rebound is coming up. And that’s exactly what we got.
Predicting the market is easy, the hard part, and where all of the money is made, is getting the timing right. And that’s where it pays to be a nimble trader. We don’t buy dips, we buy bounces. Start small. Get in early. Keep a nearby stop. And only add to a position that is working.
Catch part of last week’s 6.5% rebound in a 3x ETF and now we’re talking real money!
But now that stocks are dramatically higher, a big chunk of the upside has been realized and the risks of a near-term pullback have increased. While we can stick with this bounce as long as it remains above our trailing stops, this is the time to be getting defensive and ensuring these nice profits don’t escape.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday was another back and forth session as the market digested Powell’s second day of testimony before Congress.
At this point, the Fed is no longer counting on a soft landing for the economy and they plan on keeping interest rates elevated until inflation starts coming down in a clear and convincing fashion. That means they could continue applying the brakes even if the economy slips into a recession. Hence, the increased likelihood of a “hard landing”.
Wednesday the market rallied during Powell’s testimony and slipped into the close after he finished. Thursday gave us the mirror image as the market slumped during his testimony and then rallied after he concluded.
One day down, the next day up. And so continues the battle between bulls and bears. The index remains nicely above last week’s lows, but it also seems stalled just under 3,800.
As obvious as this sounds, either the market clears this sideways consolidation under 3,800 or it doesn’t. The nice thing about binary setups is they are very tradable. Either we buy the breakout or we sell the breakdown. And the longer we stay within this range, the more coiled the spring becomes, meaning the resulting breakout/breakdown will be even larger.
At this point, expect the resolution to either run up to 4k resistance or drop under recent lows near 3,600. Maybe there will be a head fake or two along the way, but as long as we start small, get in early, and keep a nearby stop, the costs of being early are small. More important is we make sure we stick with it and are standing in the right spot at the right time when this thing finally makes its next move. (Today’s nice close gives the bulls the edge.)
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Wednesday’s seesaw session threw us for a loop, with a -1.2% opening loss bounced into the green an hour later. The intraday reversal even rallied as high as +1% before settling back near breakeven by the close.
I really, really liked the morning reversal. Selling evaporated moments after the open as buyers rushed in to prop up the market. And everything looked amazing when the intraday rally crested +1%. That was a 2% gain from the open and everything was going swimmingly, that is until a late slump erased all of those midday gains.
In the news, Powell testified to Congress that the Fed is still planning on aggressively raising rates and that risks pushing the economy into a recession. But as bad as those soundbites seem, the market was actually received well and investors were relieved those comments were not even worse.
Sometimes bad news can be good news when it isn’t as bad as feared and that’s the scenario we found ourselves in around lunchtime. Our economic environment is far from great, but at least it is not getting worse. Or at least that’s how the midday logic went.
And with stocks at 52-week lows, the path of least resistance seemed to be higher. At least until a wave of second-guessing overcame the market in the final hour of the day.
As I often remind readers, it’s not how we start but how we finished that matters most. And by that measure, it was both a good day that we bounced off of the early lows and an inconclusive day in that we skidded into the close. I loved how stocks ricocheted off of the opening lows. But the lethargic close showed a real lack of conviction by institutional investors in the final hours of the day.
I started buying the bounce Friday afternoon, added more Tuesday, and was loading up on additional positions Wednesday morning. But that late slump gave me second thoughts. As easy as buying back in is, it made sense to take some risk off the table. If stocks continue higher Thursday, I can always buy back in. But if the market retests last week’s lows, the best place to be is cash.
Since I was sitting on a modest profit, I decided the bigger crime would be allowing that to turn into a loss if the second-guessing continued Thursday. It seemed prudent to take some risk off the table and close some positions proactively.
In trading, defense always comes first, especially when doing something as risky as trying to catch a bounce. When these things work, they tend to really work. And Wednesday afternoon didn’t feel like the bounce was working. That’s all I needed to pull the plug while my trade was still above breakeven. As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.
But as soon as I’m out, I’m already looking to get back in and will happily buy a bounce Thursday morning. And if that bounce doesn’t happen Thursday, then I’ll be waiting for it on Friday or Monday. Just because Wednesday’s close was indecisive doesn’t mean I’m giving up on this trade. I just didn’t like the risk/reward at that particular moment in time. A lot can change in a few hours so I’m already looking forward to what Thursday’s price action will bring us.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 came back from the three-day weekend well-rested and promptly popped 2.5% Tuesday.
Headlines haven’t improved in a meaningful way, but more importantly, they haven’t gotten worse either. Last week’s tumble to fresh lows seems to have reached a near-term capitulation as it ran out of fearful sellers, giving us this nice little bounce.
I’m under no delusion and think lower prices are still ahead over the medium and longer-term. But at the same time, I recognize markets move in waves and I also know bear markets have some of the biggest bounces on their way lower.
As bad as things felt last week, the selling got a bit ahead of itself and a near-term bounce seems appropriate. How long this lasts and how far it goes is anyone’s guess, but 4k resistance is very much on the table if we string together a few more nice up days. (A bounce back to 4k from Friday’s close represents a 9% gain in the index. Catch part of that wave in a 3x ETF and now we’re talking about real money!)
Buy the bounces and sell the breakdowns. Seems easy enough but we must have the courage to actually do it.
Now that the market is bouncing, it is time to close our shorts and start buying the bounce. Start small, get in early, keep a nearby stop, and only add to a trade that’s working. Follow those simple rules and there is money to be made. Or at least, it opens the door to a very attractive, low-risk trade.
Maybe we need to bounce a few times before making our way back up to 4k, but unless someone is psychic, we won’t know which bounce is the real bounce until after it happens. And since I’m not psychic, the best I can do is treat all of the bounces as if they are the real deal until they prove me wrong. But as long as I start small, get in early, and keep nearby stops, any mistakes will be fairly inconsequential, especially when compared to the profits that come from riding the next wave higher.
Trading is a game of risk versus reward and right now the risk/reward is stacked in our favor. Buy the bounce, move our stops up to our entry points as this rebound progresses, and if we get stopped out, no big deal, we step aside and wait for the next bounce.
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If you find these posts useful, please return the favor by liking and sharing them!
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What’s a good trade worth to you?
How about avoiding a loss?
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Follow Jani on Twitter @crackedmarket
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