Wednesday was the S&P 500’s first meaningful up day in what feels like ages. That said, this 0.95% gain would have felt even better if the index held above 4,400 support instead of slipping back under this key level ahead of the close. But at this point, a 1% up day is a 1% up day and no one is complaining.
Stocks don’t go up in straight lines and they don’t go down in straight lines either. That means every rally has down days and every decline includes up days. The million-dollar question is if the last two-week decline is a little wobble on our way higher? Or if Wednesday’s bounce was simply a bump on our way lower? And the answer is yes!
The latest selloff did a lot of damage and we are unlikely to bounce right back to the highs anytime soon, so that means we have a date with recent lows over the next week or two.
But just because we retest the lows doesn’t mean the stock market is imploding. Pullbacks like this are normal and routine. Last month I warned readers that almost every year has a 5% pullback and we hadn’t had one yet. Well, what do you know, look, a 5% pullback!
Maybe this hits -6% or -7% before it is all said and done. But even pullbacks of this magnitude are a normal and healthy way of consolidating gains and getting ready for the next move higher. I would be far more concerned about the sustainability of this bull market if we didn’t take this step back and instead continued charging higher without resting.
So yes, this is both a small bump on our way lower over the near-term and a very normal pullback on our way higher over the medium-term.
As for how to trade this, a nimble and savvy trader could have bought this week’s bounce off of Monday’s lows for a quick buck, but the all-bets-are-off line is 4,350. There is no valid reason to hold a trading position under this level. But after we get flushed out at 4,350, be ready to buy back in when we reclaim this level. Sell the dip, buy the bounce, and repeat until the real bounce finally takes us back to the highs.
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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.