If stock futures are any indication, Thursday is setting up to be a rough session. As I write this, S&P 500 futures are down more than 1%.
Normally, I don’t put much weight in overnight prices. Most of the time the U.S. leads the world, not the other way around. More often than not, a bad day in Asia will moderate by the time the sun reaches our shores. That said, this time feels different. Over the last three days, the S&P 500 gave back nice gains in disappointing afternoon closes. That tells us big money is not convinced and has been selling the strength, suggesting the market is ripe for a near-term pullback to support.
As I’ve been writing over the last week, I’ve been trading this bounce as if it were the real deal. But the entire time I was always prepared to be wrong. My trading plan has me start small and get in early. This approach leaves me with plenty of margin to be wrong. And in this case, it looks like I am on the verge of being wrong.
A third disappointing afternoon Wednesday convinced me to close a portion of my long position. If this was the real deal, prices should have raced higher, not stalled and retreated. While I’m still net long, my smaller position limits my exposure and I still have a profit cushion by getting in early to blunt any weakness on Thursday.
Trading successfully over the long-term isn’t about always being right, but carefully managing our risks when we are wrong. I got into this trade with a sensible plan if I was wrong and now I’m putting it to work.
While it looks like I will be wrong buying this bounce, it was still the right trade. I still believe in this market, but I don’t know if the first, second, or fifth bounce will be the one that finally takes off. That means I treat all of the bounces as if they are the real bounce. As long as I have a sensible plan for getting in and out, the risks are small and manageable. And more important, buying every dip guarantees I will be in the right place at the right time when this thing finally takes off. Until then, I don’t mind taking a few small and targeted losses along the way.
(While I’m still planning on buying the next bounce, if this turns into another panicked rush for the exits, I’ll be happy to short a break under 3,300 with a nearby stop and a plan to harvest profits quickly.)
If you find these posts useful, please return the favor by liking and sharing them!
Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox every day.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have actionable analysis and a trading plan delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
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.