How the market’s behavior is going to change over the next few days

Free After-Hours Analysis

The S&P 500 rebounded from yesterday’s Coronavirus tumble following Biden’s decisive comeback performance in Super Tuesday’s primaries. That said, the Biden bounce was actually short-lived and didn’t last much beyond the open. This market continues to live and die based on Coronavirus headlines. And while those headlines didn’t improve overnight, they didn’t get materially worse either, which at this point, is a good thing. Last week’s tumble from the highs priced in a tremendous amount of bad news and most likely took things way too far. So while the Coronavirus headlines continue to be overwhelmingly negative, the market actually rallied from the lows because things haven’t gotten a whole lot worse.

As I’ve been telling readers since last Monday, this is a volatile market and we should expect sharp moves in both directions. Emotional markets always take things too far. That means crashes that go too low are quickly followed by bounces that go too high. Now that we are a few gyrations into this, expect the size and speed of these swings to moderate. Volatility will definitely remain elevated for a while, but we won’t see violent whipsaws like we lived through last week and the first half of this week.

Unfortunately, those oversized moves were a lot easier to trade than the choppy phase we are moving into. That’s because previously, the market would move from one extreme to the other extreme before changing direction. Now that some of the emotion has moderated, these swings don’t drive as far and that means bounces and breakdowns can also occur in the middle of the range. Just like today’s rebound that took hold well above the prior lows. And the same could happen for the next peak. Rather than stretch all the way to the upper limit, we could stub our toe tomorrow morning and tumble back to 3k.

These erratic and choppy moves are harder to trade and require us to be even more nimble. That means we will make more mistakes and our profits will be smaller. And more than ever, we need to take profits early and often. Wait a couple of hours too long and nice profits will turn into disappointing losses. Just ask yesterday’s gleeful shorts.

If a person collected some really nice profits over the last few days getting ahead of these oversized moves, there is no reason to stick around and trade this chop. In fact, quite a few savvy traders could take the next 10 months off and still finish with an outstanding year. But if a person insists on trading this chop, always be on the lookout for the next reversal. We closed strong today and there is a good chance we will open strong tomorrow. But rather than buy that strength, I would be ready to short it at the first signs of weakness. Short early, start small, only add after the trade starts working, and take profits early. Then repeat in the other direction the next day. While these moves won’t be nearly as profitable as the ones already behind us, there are still profits to be had for proactive traders that know how to manage their risk.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM