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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
If a person only looked at the S&P 500‘s closing print, the 0.3% daily gain completely obscured one of the most shocking trading sessions in nearly two years.
The index crashed 4% in midday trade, easily shoving us into correction territory (a pullback greater than 10%). Last week’s aggressive selling over rising interest rates devolved into a full-on, panicked dash for the exits on Monday.
But just when all hope was lost, an impressive rebound erased every single dollar of those midday losses. As jarring as the crash was, the rebound was even more spectacular.
All told, we covered more than 8% in a single session. You have to go back to the depths of the original Covid crash to find something this wild.
But to be honest, Monday afternoon’s “shocking” rebound wasn’t all that shocking to those of us that have been doing this for a while.
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.
Who could have seen this coming??? Oh yea, that’s right, readers of this blog knew it was coming. As I wrote last Friday:
Emotional sellers panic, get out, and prices bounce hard not long after. This story is as old as trading itself.
Odds are good next week will enjoy a meaningful bounce. Selloffs that go too far in one direction inevitably end with a snapback that goes too far in the other.
Maybe the market bounces Monday. Or maybe it happens Tuesday. Either way, nothing is going to keep me from jumping aboard that next big rebound.
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The best part of using trailing stops means we sold at much higher levels and were sitting on a giant pile of cash coming into Monday. While everyone else was losing their mind over this selloff, we were eagerly eying those huge discounts. Rather than get sucked into the herd’s panicking selling, those of us with cash were waiting for the capitulation bounce. And you better believe I was scooping up those crazy discounts Monday afternoon. (A critical note: Fools buy dips. Savvy traders buy bounces. Don’t be a fool.)
Maybe Monday’s capitulation bottom is the end of this correction. Or maybe it is just another false bottom on our way lower. Either way, it doesn’t really matter to me. I picked up some attractively priced stocks Monday afternoon and those positions are already sitting on a healthy profit cushion. If the correction resumes, no big deal, I get out at or above my entry points and try again next time. But if this is the real bounce, I will be counting my profits while all of Monday’s emotional sellers are left wondering what just ran over them.
I’m not a big fan of Bitcoin, but I know a trade when I see one. Bitcoin has been mirroring the equity indexes lately and if stocks are bouncing, expect that resilience to carry over to cryptocurrency. Bitcoin’s latest buy is buyable as long as it remains above Monday’s intraday lows.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 crashed another 1.9% on Friday, leaving the index down nearly 6% for the week.
It’s hard to believe we were sleepily notching record highs little more than two weeks ago. But that’s the way this usually goes. Few things sour faster than the market’s mood.
This rout in the equity market was initially triggered by an “unexpected” jump in interest rates. (I put unexpected in quotes because seriously, who didn’t see this coming??? Anyway…)
Since the market doesn’t do things in half measures, rather than respond to these changes in the bond market thoughtfully and deliberately, the crowd started impulsively rushing for the exits. Not because they thought a few basis points increase in Treasuries was going to wreck the economy, but because they assumed other people were going to panic. And logically, the only thing to do in those situations is panic first! Or at least that’s what happens when we let our lizard brains take over.
Now we find ourselves down 9% from those highs two weeks ago and the question becomes, what comes next?
Well, if we pull up a weekly chart and look back a little more than a year, we see a similar weekly plunge in the stock market (-5.64%) back in late October 2020.
That was the week leading up to the election and traders were afraid of what a President Biden would do to their taxes and regulations. Given how big the “Trump Rally” was, it makes sense the business environment could swing the other way if a Democrat took over.
Sell first, ask questions later was the name of the game back then, just as it was this week. And you know what happened next? Yeah, the market rallied 7.3%, easily erasing all of those prior losses and adding an extra couple of percent just to further humiliate all of the prior week’s impulsive sellers. Ouch!
But that’s the way this usually works. Emotional sellers panic, get out, and prices bounce hard not long after. This story is as old as trading itself.
With the index already down 9% from recent highs, is that low enough? Probably. While I don’t expect a repeat of 2020’s 7.3% snapback, odds are good next week will enjoy a meaningful bounce. Selloffs that go too far in one direction inevitably end with a snapback that goes too far in the other.
Maybe next week’s bounce isn’t the real bounce and panicked sellers are correct that this couple tenth’s rise in Treasury yields will lay waste to the US economy. But odds are good they overreacted just a tad this week.
Now for how I will trade this. I never, ever buy dips. That’s a fool’s game. But bounces? Yes please!
Maybe the market bounces Monday. Or maybe it happens Tuesday. Either way, nothing is going to keep me from jumping aboard that next big rebound.
And now for a quick rant: anyone selling on Friday is an idiot! There are only two ways to handle these situations. Either we sell early or we hold through it. Only fools wait until they get too scared and then impulsively dump everything near the bottom.
The really isn’t that hard! Back on January 5th, I warned readers that smart money was selling:
Sell and see what happens from the safety of the sidelines is how I’m approaching this. If prices bounce Thursday, great, I’m getting back in. No harm, no foul. But if the selloff continues, even better, I wait for the next bounce and buy at even lower prices. That’s a win-win in my book.
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Well, here we are two weeks later and 350 points lower and I’m sitting on a big pile of cash itching to get back in the market.
I tested the water with a couple of small buys since then, but every time selloff started making new lows, I got out and waited for the next bounce. And the lower we go, the more excited I get. We’re going to make some good money next week. I can’t wait!
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By Jani Ziedins | End of Day Analysis , Free CMU
Free After-Hours Analysis:
Thursday’s session for the S&P 500 was far more dreadful than the day’s 1.1% loss suggests.
The day started off well enough when the index popped nicely at the open and rallied all the way to 4,600 support by late morning. But rather than propping up the market, 4,600 turned into a ceiling and that was as good as it got. By the end of the session, the index shed 120-points from those intraday highs and crashed through recent lows. Ouch!
But if Thursday was such a dreadful session, why were savvy traders buying that morning bounce?
The answer is simple, it gave us a nice, low-risk entry and it would have been foolish to not take it.
All too often novice traders fixate on whether a trade worked or not. But what these rookies fail to realize is a good process is far more critical to long-term success than the result of any individual trade.
For example, if an eccentric trader bought far-out-of-the-money call options based on an astrology chart, just because the trade worked for him that single time doesn’t mean it was a good trading decision.
While people often claim it is better to be lucky than good, the problem with luck is it always runs out.
Stick with a good process and we don’t need luck, we just need to be smart enough to stick with it.
Even something with an incredible 80% win percentage will still fail one time out of every five. Does it make sense to throw out a highly reliable process simply because it didn’t work that one time? Of course not.
And the same goes for buying this Thursday morning’s bounce.
Now, don’t get me wrong, buying bounces doesn’t work 80% of the time. Not even close. In fact, it only works about 30% of the time. But the win percentage isn’t the genius of the trade. It’s the unbelievable risk/reward these setups give us.
Buy the bounce early with a partial position. When prices continue higher, as they usually do, move our stops up to our entry points. Bam, this just turned into nearly free trade.
If Thursday’s bounce returned to the highs, like every other dip has over the last 14-months, that’s 200 points of profit in our pocket. If the bounce stalls and retreats, like it did Thursday, we get out at our entry point for what we paid. No harm no foul.
So a trade with 200 points of upside and close to zero downside? Who cares if it only works 30% of the time, we should be buying it every chance we get.
This is why smart money was buying Thursday’s early bounce.
And you know what? I will do it again Friday if we get the same setup. Except this time there will be 300 points of potential upside if we return to the highs. Bring it on!
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NFLX got hammered after the close following disappointing subscriber growth. While the after-hours losses put the stock back to $400, that’s a long, long way from the $700 autumn highs.
But here’s the thing, savvy traders are not taking tonight’s 20% haircut. This stock has been in free-fall since failing to hold $600 support at the beginning of January. If a person didn’t sell the first $600 violation, there was no excuse to keep holding after it fell under December’s lows.
Big selloffs like this are many months in the making and while it feels like it hits us all of a sudden, anyone caught up in this ignored a lot of very obvious sell signals. I mean seriously, the stock gave us THREE chances to get out at $600!
And while it feels like this cannot possibly get any worse and it has to be close to a bottom, just ask a PTON owner how much lower these things can fall.
I like NFLX. They have a great product. But this is a momentum stock and the momentum is clearly in the wrong direction.
I’m more than happy to buy the next bounce, but it needs to bounce first.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Wednesday turned into another painful session for the S&P 500 as it shed an additional 1%. This leaves us 5% under recent highs of only a couple of weeks ago. Easy come easy go…
But Wednesday’s follow-on selling wasn’t a surprise. As I explained to readers Tuesday evening:
Emotional selloffs rarely kiss support and bounce cleanly. Get this close and a more painful violation is all but inevitable. While there are no guarantees in this business, the risk/reward is definitely stacked against us. As the prudent saying goes, “never try to catch a falling knife.”
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We got a modest bounce Wednesday morning, but the dip-buying barely lasted an hour before another wave of selling knocked us under 4,600 support for the remainder of the session.
While that early bounce was technically buyable, as soon as prices undercut yesterday’s lows, it was time to get out. As easy as it is for independent traders like us to get in and out of the market, there are no valid excuses to continue holding a falling market. That was true two weeks ago when this selloff first started and it remains just as valid today.
Now that most readers are safely in cash, we cannot allow ourselves to sit back and relax. Instead, we are always looking for that next buyable bounce.
Stocks bounce hard and fast from oversold levels. While only fools try to pick bottoms, if we wait more than a few hours after a bounce, we quickly find ourselves getting left behind.
Start small, get in early, keep a nearby stop, and only add to a position that is working. Follow those simple rules and you too will profit from the next big rebound.
And if the next bounce turns into another false start, no big deal. We simply get out at our nearby stop and wait for the next bounce.
By starting with partial positions and having clearly defined exits under recent lows, buying these bounces is a low-risk proposition. Compared to the potential upside of riding this 5% dip back to the highs (15% in a 3x ETF!), I’m more than willing to take a few small and calculated lumps along the way!
This is a numbers game. As long as we stick with our trading plan, we guarantee we will be standing in the right place at the right time when the real bounce finally takes hold.
This will only bounce after most people have given up. That means we need to be more persistent than most.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was another painful session for the S&P 500 as the index shed 1.8% and failed to hold 4,600 support.
Low keeps getting lower and that’s never a good sign. While Tuesday’s selling didn’t spiral out of control after undercutting last week’s intraday lows, that’s a silver lining at best.
Emotional selloffs rarely kiss support and bounce cleanly. Get this close and a more painful violation is all but inevitable. While there are no guarantees in this business, the risk/reward is definitely stacked against us. As the prudent saying goes, “never try to catch a falling knife.”
I came into Tuesday’s session holding a small position I bought following Friday’s late bounce. I liked Friday’s setup and more often than not, those things work. But “most of the time” is not the same as always, so that’s why I only started with a partial position.
When the market gapped lower Tuesday morning, I took my lumps and got out. But doing it with a partial position wasn’t all that bad. Slippage like this is simply the cost of doing business in the market.
While critics will laugh at my “wrong” trade, in this case, being wrong is actually creating an even more profitable trading opportunity. Now that my trading account is 100% in cash, the lower this goes, the more money I make buying the inevitable bounce. So burn the house down for all I care. All I know is I will be there with a pile of cash to pick up the pieces. When the crowd is busy abandoning ship at the bottom of this dip and selling their favorite stocks at deep discounts, their loss will turn into my gain.
If the market bounces Wednesday, I will be there to buy it. If the bounce doesn’t come until next week, no big deal, I can wait.
Start small, get in early, keep a nearby stop, and only add to a position that is working. If the next bounce keeps going, great, I add more. If it turns into another false start, no big deal, I pull the plug at my stops and wait for the next one.
The most important thing is I keep at it. All of these small, partial position losses will be wiped out when I’m standing in the right place at the right time and catch the next big wave.
And the most important thing is you can do it too! Sign up for free email alerts so you can follow along.
A handful of weeks ago GME was challenging $250, now it is barely hanging on to $100.
When moment stocks fall, they fall hard. Unfortunately, there is no indication GME is anywhere near a bottom. It is down 80% from all-time highs and it is acting like it could fall another 80% from here.
If Christmas and NFTs couldn’t save this stock, I don’t know what is left to turn this around.
But remember, as bad as this looks, it can always get worse. There is no rational reason to ride this one all the way into the dirt. And you know what? If it bounces, you can always buy back in. A more nimble approach like that definitely beats hoping and praying for a turnaround.
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By Jani Ziedins | End of Day Analysis , Free CMU
Free After-Hours Analysis:
The S&P 500 went for another wild ride on Friday.
The index gapped lower at the open, but as is often the case with opening gaps, supply dried up within minutes and prices bounced back to breakeven. (I’ll get into the reasons why this happens so often in another post. Sign up for free email alerts so you don’t miss it.)
Unfortunately, the relief was short-lived and prices quickly slumped back near the opening lows when dip buyers failed to show up and support the early buying.
But rather than crash through the lows and trigger another wave of panic selling, supply dried up for a second time and the index actually bounced back to breakeven, even managing to eke out a small, 4-point gain by the end of the day.
Phew, that was a mouthful and it was definitely a topsy-turvy session. But what it wasn’t was another rout. Bears had the perfect setup to launch another big wave of panic selling, but they couldn’t get stock owners to play along. And that’s a pretty good indication bulls are still in control of this market.
As I often remind readers, it’s not how we start but how we finish that matters most. And while it is hard to get excited about a measly 4-point gain, that is actually a respectable win given where the index spent most of the session.
In fact, I was encouraged enough by this price action to start buying back in. If this market was fragile and vulnerable to a larger collapse, it would have happened Friday. The fact we closed well above early lows tells me this market wants to go higher, not lower.
To the untrained eye, it looks like I am chasing my tail these last two weeks because I keep getting in and out of the market. (And it definitely feels like I am chasing my tail!)
I sold the initial dip at my stops in the upper 4,700s. Then I bought the first bounce late last week but ended up getting dumped out during last Friday’s pathetic close. I tried again this Monday, buying that impressive bounce. That trade worked well until Thursday’s interest rate second-guessing told me it was time to get out again. And then as I wrote above, I bought back in Friday afternoon.
I hate buying and selling this often. But that’s what my trading plan tells me to do at each of these junctures and I know better than to question my trading plan. When done right, my trading plan A) keeps me safe and B) makes sure I am in the right place at the right time to take advantage of the next big move.
If that means I have to chase my tail every once in a while, so be it.
While I collected a small profit this week arbitraging these whipsaws, that’s not the reason I’m selling these dips and buying these bounces. I’m doing it to protect myself from a larger selloff.
I will be the first to admit I can’t predict the future and I don’t know if this pullback will bounce at 4,600, 4,400, or 4,200. What I do know is it doesn’t matter if this is a 200 point pullback or a 600 point pullback, I don’t want to hold through either of those pullbacks.
When I move to the safety of the sidelines, I no longer care if it is a 200 point or a 600 point pullback. And as soon as I’m in cash, the first thing I’m doing is looking for the next buying opportunity so I can get back in.
Maybe Friday’s buy will prove to be a mistake. And I’m okay with that. I simply get out and try again. Or maybe the market bounces nicely Tuesday and I add more.
Either way, it doesn’t matter to me as long as I’m standing in the right place at the right time.
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TSLA took a big hit Thursday, but more importantly, the stock held $1k support.
While it is more fun watching a stock go up every single day, we know that’s not realistic.
TSLA is trading well enough to stick with as long as it remains above $1k support. In fact, for those that missed the first bounce, this pullback is giving you a second chance to get in.
Buy the bounce with a stop just under support.
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