Thursday was the fifth trading session since the S&P 500 collapsed 6% in a single day. As dire as the situation felt last week, the market is doing a remarkable job of holding it together.
In the five sessions since last week’s collapse, the index already reclaimed 2/3s of those losses. If there is one thing we know about larger selloffs, they are breathtakingly fast. Compare this week’s reaction to the five sessions that followed February’s original Coronavirus breakdown. There, indexes fell another 12% during those next five trading sessions.
Without a doubt, we need to stand up and pay attention any time the market sheds 6% in a single day. But what happened last week was definitely different from what started back in February. That means we need to be careful drawing connections between the two events.
Even more important than the initial loss is how traders respond to it over the next few days. February’s first drop telegraphed the impending collapse that would eventually shave 35% off the index. The last few days has seen traders respond by buying the dip, not adding to the weakness.
As paradoxical as this dip buying seems given the widespread headlines proclaiming “a second wave”, it actually makes a lot of sense when you breakdown the supply and demand occurring under the surface.
The last few months have seen a tremendous amount of selling. Anyone scared of the Coronavirus and the ensuing shutdowns abandoned ship a long time ago. And not only that, when these panicked owners were selling, confident dip buyers were snapping up those discounts despite the headlines.
If confident dip buyers didn’t care about the “first wave”, do we really expect them to be scared by a “second wave”? No, of course not. That stubborn confidence is why stocks have been so steady despite predictions of a bigger selloff.
As long as the market remains above 3k support, everything is going according to plan and all-time highs are still in our near-term future. What happens after we get there is still undecided, but for the time being, enjoy this rebound, don’t fight it. Keep your stops near 3k and quit worrying about it.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.