Tuesday started off well enough for the S&P 500 with the index hovering near Monday’s close. The index bounced back decisively from last week’s tumble and everything looked great. Unfortunately, the situation deteriorated Tuesday afternoon as the index tumbled 0.76% in a waterfall selloff into the close.
While I was quite pleased with how resilient the market was acting all the way up until lunchtime, this late selloff is a big red flag. As I often write, it isn’t how we start but how we finish that matters most. This rebound gave way to second thoughts and maybe last week’s selloff isn’t done.
It all comes down to Wednesday. With emotion and volatility ramping up, the market is going to make a big move, we just don’t know which direction yet.
I’m fine with a gap lower at the open, as long as the selling stalls and prices bounce not long after regular trade starts. Dipping at the open and closing in the green would be another big win for bulls and confirms this is a resilient market, not a weak one.
But no matter where we open (up, down, or flat), if the selling resumes Wednesday morning and continues into the afternoon, last week’s lows are vulnerable and at risk of being undercut.
We cannot count the bull market out just yet, but we need Tuesday’s weak close to bounce on Wednesday. Any continuation of the late selling will quickly spiral out of control.
As for how to trade this:
If a person has cash, a weak open that bounces is buyable.
Any open that devolves into another wave of selling is shortable with a stop just above those early highs.
For a person with existing positions and nearby stops, don’t automatically sell a weak open. Wait 10 to 15 minutes before pulling the plug to see if that early weakness turns around. If the market bounces, those early lows then become our new stops.
Once we get past 15 minutes, any dip that undercuts our stops is a clear signal to get out and reassess.
Remember, it is far easier to buy back in than it is to wish the market higher if we hold too long.
Bitcoin is at a critical juncture. Either prices bounce off of this $40k test of support. Or the selling violates support and this cryptocurrency gets hit by another big wave of selling.
Right or wrong, this is a sentiment trade it doesn’t really matter what the future holds, only what the crowd thinks will happen. Bitcoin is prone to large swings and this 30% tumble from the highs could early turn into 60% in the blink of an eye.
While a lot of people wish they took profits at $60k, there is a good chance people could be wishing they took profits at $40k. Don’t be one of them. Pick a stop-loss and stick to 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.