Following two days of selling, the S&P 500 came roaring back Wednesday and added 0.9%.
Not bad, not bad at all. As overpriced as this market seems, dip buyers cannot help themselves.
As I wrote Tuesday, there were two ways to trade Wednesday based on the resulting price action:
Bounce and close well [on Wednesday], that is a buy signal with a stop under the intraday lows. If Wednesday’s selling cannot find a bottom, lock-in profits in our existing positions and agressive traders can short a violation of 4,100 with a stop just above this level.
Dip buyers took control not long after the open and this pullback disappeared even quicker than it came. But that’s the way this usually goes. Either dips bounce shockingly quickly or the selloff goes a whole lot further than anyone expected.
At this point, this looks like just another shockingly quick bounce.
As I described on Tuesday, Wednesday’s bounce was buyable with a stop under the dip’s lows. As long as the index remains above this level, the bounce is alive and well.
But if prices fall under 4,120, the selling isn’t done yet and an aggressive trader can even try their hand at a quick short.
While the index trade worked nicely, NFLX did the one thing I least expected, hold steady following a large gap lower.
Normally, big moves either accelerate or they reverse. Almost never does the pre-market get it exactly right and put the stock right where it should be. That’s like flipping a quarter and having it land on the edge. But almost never is not the same as impossible and occasionally these things happen.
That said, I don’t expect this stability to last for long. Either the selling picks up steam or the dip buyers come rushing in. It didn’t happen Wednesday, but the same trade is still valid for Thursday.
Buy the bounce in NFLX or short the breakdown. This stock is going to make a big move in one direction or the other, we just need to wait for the market to tell us which way it wants to go. (Not bouncing Wednesday suggests dip buyers are scarce and that gives the edge to NFLX bears.)
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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.