The S&P 500 started Tuesday well enough, opening in the green and extending Monday’s late bounce. But by the end of the session, the index gave back all of those early gains and finished flat.
While flat is clearly better than extending the selloff, it didn’t do anything to end the selloff. And unfortunately, that means the selloff is still alive and well.
As I wrote previously, this decline turned into an emotional selloff and we rarely shake those off within a few days. More often than not, it takes weeks and even months to get back to the old highs. To get these things through our system, most of the time we need to go “too far” before we can bottom and bounce for good. Tuesday’s weak rebound tells me we haven’t reached “too far” yet and we need to prepare ourselves for lower prices over the near term.
The only question is if we minorly violate Monday’s lows or if we smash through them and keep going. At this point, I could see either scenario playing out and that means our trading plan needs to be prepared for both.
Hopefully, everyone reading this blog has their trading account sitting in cash and is ready to pounce on these discounts. If the index falls under 4,300 over the next day or two, bouncing back above this level becomes an excellent entry point with a stop just under this level.
Remember, start small, get in early, keep a nearby stop, and only add to a trade that is working.
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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.