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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Following seven positive days out of the previous nine sessions, the S&P 500 stumbled hard on days ten and eleven. Luckily, we knew this was coming. As I wrote Wednesday evening:
Expecting this 10% rally to keep going is getting a tad greedy. Markets move in waves and it is worth remembering that at both the bottoms and the tops. It is time to shift to a defensive mindset and protect what we have. Move stops up and see where this goes, but no one should be surprised if this stalls near 4,600 resistance.
Well, here we are, 48 hours later and nearly 200 points lower.
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Some people blame this latest pullback on high inflation and looming rate hikes. Others point to the imminent Russian invasion of Ukraine.
While both of these reasons appear valid, the problem is the market rallied strongly under these same storm clouds two weeks ago. Inflation, rate hikes, and a Russian military build-up are not new. Are we supposed to believe these headlines didn’t matter for weeks and then all of a sudden traders woke up and started freaking out? I don’t think so.
In reality, the market pulled back Thursday and Friday simply because it was time. As I reminded readers two weeks ago near the lows, markets move in waves and we should be ready for a strong bounce. Well, here we are, two weeks later and 300 points higher. Rather than pat ourselves on the back for buying the bounce, smart traders were getting defensive and preparing for the step back.
Markest move in waves. Always have, always will. And now that we’ve fallen 200 points, rather than panic, it is time to start looking for the next bounce.
Buy the bounce, sell the breakdown, and repeat as many times as necessary.
I took profits Thursday morning and now I’m sitting in cash, waiting for the next bounce. Maybe it happens Monday morning. If so, great, I start buying back in and will add more as the rebound progresses. But if the selloff continues, no big deal, I sit on my hands and wait for the next trading opportunity on Tuesday or Wednesday.
Volatile markets like this are actually fairly easy to trade because once a move gets started, it keeps going. As long as we have the courage to jump aboard early, it is a fairly nice ride.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 took us on another wild ride Thursday.
Volatility kicked off when the consumer price index surged at the fastest rate in 40 years. That sent traders scrambling for cover and the index gapped 1.3% lower at the open. But as is often the case, the opening gap reversed within minutes and it wasn’t long before the index found itself back near breakeven.
Unfortunately, that early dip-buying proved fleeting and the index retested the early lows in midday trade. And when a bounce fizzles, the selling rarely stops at breakeven. By the close, the index found itself down nearly 2%. Ouch!
But this wasn’t unexpected. As I wrote Wednesday evening:
Expecting this 10% rally to keep going is getting a tad greedy. Markets move in waves and it is worth remembering that at both the bottoms and the tops.
While I still like this market and will keep holding a trade that is working, it is time to shift to a defensive mindset and protect what we have. Move stops up and see where this goes, but no one should be surprised if this stalls near 4,600 resistance and rests for a bit.
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Thursday’s price action did more than pause and rest, but that’s the way this goes sometimes.
As I wrote Wednesday evening, I can into Thursday holding the latest bounce off the 200dma and had a decent profit cushion. While I obviously wasn’t happy with the opening gap lower, I knew better than to overreact to early weakness. Instead of punching out at the open, I gave the market a few minutes to find its footing and that’s exactly what it did.
That bounce was my signal to keep holding and move my stops up near the early lows. Unfortunately, that early bounce didn’t stick and I got dumped out near 4,450. But that’s the way trading goes sometimes. I collect my profits and get ready for the next trading opportunity.
Maybe prices bounce Friday and I get back in. If that’s the case, no harm, no foul. Or maybe the selling continues Friday. If that happens, I continue sitting on my hands and wait for the next bounce.
At this point, I don’t really care what happens next. The only thing that matters is that I’m standing in the right place at the right time when the next move takes hold.
While bulls and bears argue about whether this market is going a lot higher or a lot lower, I will continue playing both sides of the fence. IMO, there is too much money to be made riding these waves to get hung up on labels and who is right and who is wrong.
Bring on the volatility.
For the first time in a while, Bitcoin is actually outperforming the equity indexes. The breakout above $40k resistance was a buy signal for anyone that missed last month’s bounce off of the lows.
While Bitcoin is trading well for the moment, I am wary of a near-term sell-the-news event following this weekend’s Super Bowl.
There is no reason to sell prematurely based on something that could happen. Instead, we move our stops up and trade what is happening. And for the moment, Bitcoin is trading well.
Just don’t get complacent if we see weakness next week.
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 popped Wednesday, making this the seventh up day out of the last nine trading sessions. Not bad for a market that was written off for dead two weeks ago.
Headlines remain mostly the same, but that’s the point. The economic situation is not deteriorating and we avoided the worst-case scenario, meaning a big portion of January’s panic selling was an overreaction. But that’s the way this usually goes.
Overly pessimistic markets set up to rally on “less bad than feared” and that’s been the story of the last two weeks. As I wrote back then, markets love symmetry and that means the biggest selloffs have the biggest bounces. And what do you know, the index is up nearly 10% from the January lows. Funny how that works.
Buy this bounce in a 3x ETF and now we are talking about real money. Not bad for two weeks of “work”.
But that was then and this is now. Expecting this 10% rally to keep going is getting a tad greedy. Markets move in waves and it is worth remembering that at both the bottoms and the tops.
While I still like this market and will keep holding a trade that is working, it is time to shift to a defensive mindset and protect what we have. Move stops up and see where this goes, but no one should be surprised if this stalls near 4,600 resistance and rests for a bit.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Tuesday in the green for the sixth time out of the last eight trading sessions and these gains leave us 7% above the intraday lows set barely two weeks ago.
Not bad for a bull market that was supposed to be dead. But this revival was always expected. As I’ve written many times before, the market loves symmetry and the biggest crashes are followed by the biggest bounces.
While no one can predict the exact moment when prices will stop falling and start bouncing, it doesn’t take a Ph.D. in Finance to identify the spot on a stock chart when prices stop falling and start climbing.
Emotional markets are as nimble as freight train trades. Once they get going, they tend to keep going and going and going. When we see that first bounce, all it takes is an hour or two to confirm the bounce and give us the green light to jump aboard. Wait any longer and we risk getting left behind.
And for anyone thinking this is nothing more than a case of hindsight bias, here’s what I wrote on January 24th when the January correction bottomed:
Monday’s early 4% crash was far and away the largest losing session of this correction. And during periods like this, the critical thing to keep in mind is emotional, waterfall selloffs typically capitulate on their biggest down days.
And guess, what? This emotional, waterfall selloff capitulated on its biggest down day.
While we cannot go back in time and trade a missed opportunity, we can learn from this experience so we don’t make the same mistake again next time.
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As for where the market is going from here, this is the fourth session in a row the index tested the 200dma and 4,450 support. If this rebound was grossly overbought and vulnerable, it would have collapsed days ago. Instead, every time it challenges support, supply dries up and prices bounce.
And just as important, while volatility remains elevated, these swings are getting smaller and smaller. All of these are signs the market is coming to terms with imminent interest rate hikes and these headlines have largely been priced in. (i.e. Anyone that was afraid of these headlines already abandoned ship.)
While there are no guarantees and emotional selling can return at any moment for any reason, the first thing that needs to happen is for prices to actually start falling. Until that actually happens, this bounce is very much alive and well.
As for how to trade this, the index is buyable/holdable above 4,450. Anything under this level and it is time to get out and wait for the next bounce.
Bitcoin continues holding last week’s $40k breakout. While this is a good start, we will see a lot of crypto-related advertising thrown at the world during this weekend’s Super Bowl. But rather than propping Bitcoin up, this coming-out party could actually turn into a “sell the news” moment for Bitcoin.
The $40k breakout is holdable, but be ready with stops near $40k in case the “sell the news” crowd takes over this weekend.
Bonus: Look for a near-term bounce in FB. Start small, get in early, keep a nearby stop, and take profits quickly. As I said above, oversold moves tend to bounce hard.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Four consecutive up-days was all the S&P 500 could manage before the inevitable down-day came along and took back some of our profits.
But this was expected and only a fool was surprised by Thursday’s step back. -2.4% is definitely on the larger side, but as I wrote previously, the market loves symmetry. January’s spectacular correction was followed by a huge bounce, which ended with this oversized step-back. This is the way the market works. Always has, always will.
But as long as the amplitude of each successive swing is smaller than the one preceding it, we are moving in the right direction and the market is finding its footing.
Will stocks bounce back Friday? Or will we violate the 200dma and retest 4,400 support? Either outcome is likely and that means our trading plan needs to account for both.
Lucky for us, the plan is super easy: buy the bounce and sell the breakdown. It doesn’t need to be any more complicated than that.
This is an emotional market and that means the next move will also be oversized. And lucky for us, those are the easiest to trade because once they get going, they keep going.
As I told readers Wednesday evening, if Thursday’s opening gap bounced, hold the bounce and move our stops up to those early lows. While the mid-morning bounce looked promising, the index fizzled and retreated below the opening levels shortly after lunchtime. And that was our signal to start peeling off this week’s profits.
As easy as it is to buy back in, there is no reason to stick with a falling market. If prices bounce Friday morning, great, we get back in. If Thursday’s selling continues into Friday, no big deal, step aside and wait for the next bounce. Which could come as early as Friday afternoon.
People freak out when the market gets this volatile, but it really is easy to profit from these swings if we keep our heads and are willing to act decisively.
Start small, get in early, keep a nearby stop, and only add to a trade that is working. Follow those simple rules and we don’t have to fear volatility. In fact, with a little bit of practice, you will actually start looking forward to these profit opportunities.
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FB set all kinds of records during Thursday’s -26% implosion. But we already discussed most of this Wednesday evening and it isn’t worth repeating tonight. Instead, FB owners want to know what comes next, and unfortunately, the news isn’t good.
These things are almost never one-day events and that means there is more selling ahead of us. While the stock fell a tremendous amount and this was the highest volume session by miles, we still didn’t get a whole lot of turnover in ownership during Thursday’s session. The bulk of the losses came when the market was closed and by the time it opened, most owners were too shell-shocked to sell. That means there is still a lot of supply left in this stock.
If you want a recent example, check out PTON. That’s what it looks like when a high-growth stock stops growing and investors lose confidence. It isn’t pretty.
Now, it is premature to write off FB as dead. This is still one of the most successful and profitable companies in the world and no doubt the stock will make a comeback at some point. But it needs to get waaaay more oversold before that happens.
But for the optimists in the audience, if this stock breaks convention and actually bounces, that is a buyable opportunity with a stop under recent lows. Just don’t get your hopes up.
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What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, receive actionable analysis and a trading plan every day during market hours
Follow Jani on Twitter @crackedmarket
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