Buyable dip or dead-cat bounce?

Free After-Hours Analysis: 

The S&P 500 notched its first gain following four consecutive losses. There wasn’t anything meaningful in the headlines driving Tuesday’s 1% pop. Instead, this strength was mostly a response to a little too much selling over the last week.

Everyone knows markets move in waves and it shouldn’t surprise anyone when the tide reverses after a string of days in the same direction. Is that all this is, a one day pop between two long stretches of down days? The cynics certainly think so. But I’m not sure the evidence supports that outlook.

First, we are in a long rally that goes back more than 6 months. This period includes countless dips that bounced back even higher. If the first dozen dips couldn’t break this rally, what makes this latest attempt any different?

Second, the market finished at the intraday highs the last two sessions. While Monday closed in the red, if you look under the hood, the price-action was actually quite bullish as institutional investors chased prices higher into the close. That wave of dip buying carried over to today and helped put together the first up-day in a week.

Third, if this market is going to crash, the first thing in needs to do is make a lower low. As long as we remain above Monday’s intraday lows, this should be treated as a buying opportunity. If we violate the lows, all bets are off and we can short until our heart’s content. Until then, this bounce deserves the benefit of doubt.

Up or down, there is enough emotion wound up in the market that the next move will be big. Maybe prices bounce decisively. Maybe they collapse. Either way, as long as we follow a thoughtful trading plan that puts us in the right spot at the right time, this will be a great ride.

As for what I’m doing, I bought Monday’s late strength and I added more on Tuesday. By getting in early, I have a decent profit cushion to protect my backside. I will continue holding as long as we remain above my entry points. If prices retreat, no big deal. I get out and look for the next trade. If prices crash under Monday’s lows, I might even try a short.

When it comes to the market, I don’t care which way it goes. The only thing that maters to me is I’m riding that next wave.

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