The S&P 500 kicked off the week with three dreadful sessions, but things got better in the second half after the index strung together a couple of winners and erased a big chunk of those early losses. By the time it was all said and done, the index only gave up 1.4% this week.
Two steps forward, one step back. Everyone knows this is how markets work, yet they always seem to forget this simple fact during every bout of selling.
The typical pattern for this bull market has been bouncing within a day or two, but this week’s selling turned into the first string of three losses since early March. But just when things felt their most hopeless, the selling capitulated and prices bounced decisively off of Wednesday’s closing lows.
As I reminded readers Thursday:
What is the best way to approach these situations? Well, for nimble traders this is easy, treat every bounce as if it is the real deal. Start small, get in early, keep a nearby stop, and only add to a trade that is working.
Anyone that followed this simple plan is back in the market and already sitting on some tidy profits. And not only that, there is enough margin that they can lift their stops to their entry point, giving themselves a free trade.
Is the dip already over? It sure looks like it. Unsustainable bounces fizzle and retreat quickly, often within hours. Instead, this bounce stretched across two full days and pushed the index back above prior support at 4,1200. Two days of non-stop dip-buying tell me there is a lot of money supporting this rebound.
As is usually the case, if a person waited for confirmation, they missed almost all of the profit opportunity. And not only that, by buying late, they expose themselves to the risk of a near-term dip.
The best way to trade this week was selling the dip early and buying the bounce early. Do that and you are ahead of the game. Unfortunately, most people listen to their gut and end up selling late and getting back in late. Those traders are left wondering why their account acts like it has a hole in the bottom of it. (Because it does!)
Approach the market proactively, not reactively and you will forever be better for 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.