What we learned this week

Free Weekly Analysis: 

It was a dramatic week for the S&P 500 with large swings in both directions. But when the dust settled, the index lost a modest 0.6%. Not bad considering it was down more than 2% percent on multiple occasions this week.

This ended up being the fourth consecutive weekly loss and as discouraging as that sounds, the index actually finished near the weekly highs, largely thanks to Friday’s impressive rebound.

Was it a good week? A bad week? Or a bit of both?

Bears cheered Monday’s violation of 3,300 support and subsequent tumble. But just when the situation looked like it was spiraling out of control, Tuesday’s bounce recovered all of those losses and Bulls were breathing a sigh of relief.

Unfortunately, their relief was short-lived and Wednesday’s one-way selloff sent prices racing back to the lows. Thursday was the least eventful day and ended mostly where it started. And Friday surprised everyone when prices surged, salvaging the week almost entirely by itself.

If that sounds like a lot, that’s because it was.

Before this week, I was giving this market the benefit of doubt. Bull markets rebound countless times but they die only once. On a purely statistical basis, it is always smarter to bet on the rebound. And that is the way I was treading September’s bounce until this week. I was even willing to give Monday’s tumble a pass since we recovered a big chunk of those early losses by the close. As most experienced traders know, it isn’t how you start the day but how you finish that matters most.

Wednesday’s tumble was the one I couldn’t forgive. If the market was truly oversold, prices should have sprung back decisively, not retreated back to the lows. Wednesday told us two things. First, this market is not grossly oversold and ripe for a snapback. And second, there are still a lot of nervous owners barely hanging on.

I’m not bearish by any stretch, but I’m no longer holding out for a big bounce. Markets can only do one of three things, up, down, or sideways. At this point, it looks like this market wants to grind sideways and that means we should expect a lot more choppy trade like this week. There will be big pops and dramatic drops, but expect these moves to fizzle and reverse within days, if not hours.

The best way to trade this chop is to get in early, keep a nearby stop, and just when it feels like things are finally going your way, lock-in profits because the wind is about to change directions. We will see violations of the lows and pops back above support, but rather than chase these directional moves, we should be taking profits and getting ready for the reversal.

And if that sounds like too much work. Don’t worry about it. Sometimes the best trade is to not trade. Better opportunities will be along soon enough. We just have to be disciplined and patient enough to wait for them.

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