The right way to admit defeat

Free After-Hours Analysis: 

The S&P 500 started the day in the red and threatened to extend the losing streak to a third day. But those early lows were as bad as it got and prices eventually rallied into the green by the close.

There are few things more popular in the market than predicting this rebounds demise. And without a doubt, I was on that side too. Markets move in waves and following such a long and sharp rebound, a pullback is inevitable. But the more people called for it, the more the market resisted.

While I’m still cautious around this market, I know better than to fight a market that isn’t doing what it is supposed to be doing. We have to respect this market’s strength and that means being quick to get out of the way. Last Thursday and Friday gave us an opening to short the rebound, but rather than accelerate lower, the selling stalled this morning and we finished near the day’s highs. That tells us supply remains stubbornly tight. No matter what the headlines say, when owners refuse to sell, stock prices defy gravity.

The next pullback is coming, but we need to be extremely careful trading for it. Trading against a trend is one of the most difficult ways to make money because it requires impeccable timing. This is definitely an “experts only” kind of trade. Most people are better off waiting to buy the dip. But for the more adventurous, recognize early when the trade is not working as planned. Use that as your signal to pull the plug. Do it right and you will often abandon a bad trade while it still has a small profit! Very rarely do we need to wait for our stops to be hit before recognizing the trade isn’t working as designed.

That’s exactly what happened to me today. I shorted Thursday and Friday. But when the market was trading resiliently this morning, I used that as my sign to collect my modest profits and wait for the next trading opportunity. I didn’t need to wait for the losses to pile up before admitting defeat. There are few things better actually collecting a profit after being wrong.

Now, who knows, maybe I should have continued to hold my short position this afternoon. But I’m a nimble trader and if the short trade starts working again tomorrow, I can always jump back in. I always find it better to be out of the market wishing I was in than in the market wishing I was out.

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