How to prepare when the market is standing on the edge (and it isn’t what you think)

By Jani Ziedins | End of Day Analysis

Sep 30

Free After-Hours Analysis: 

Thursday was an ugly session for the S&P 500 with the index giving up early gains and closing deep in the red.

This bearish intraday reversal tells us dip-buyers are still MIA and that is not a good thing for a selloff struggling to find a bottom.

While it is easy to point these things out AFTER the market has fallen 5%, it is a whole other thing to see it coming while there is still time to act.

Lucky for readers, this is what I wrote back on September 9th when the index closed just under 4,500.

It’s been a rough week for the S&P 500 as Thursday’s 0.5% loss makes this four down days in a row.

Monday was Labor Day, making this unofficial start of the fall trading season. It’s been a nice and easy summer and a trend is far more likely to continue than reverse, but if the market’s mood is going to change, this transition in seasons is a good time for it to happen.

There isn’t a quantifiable reason to claim this rally is running out of gas and this week’s dip is different than all of the other failed dips this year. But just knowing where we are and where we’ve come from, it feels like this time could be different.

As I often write, how we finish is far more important than how we start and by that measure, Thursday’s was an ugly day. Early gains evaporated and the index crashed through 4,510 and 4,500 support on its way to closing near Wednesday’s lows.

I don’t mind red days that finish well above the early lows. In most instances those are bullish signals. But there was nothing bullish about Thursday’s retreat and close at the daily lows.

I had my stops spread across the upper 4,400s and lower 4,500s and Thursday’s pathetic price action squeezed me out. Most likely this week’s stumble will turn out to be nothing more than yet another buyable dip. But for me, it’s been a nice run and that makes this a good time to lock-in some profits.

If the index bounces back above 4,500 on Friday or sometime next week, I’m more than happy to get back in. But as long as it remains under 4,500, I’m more than content watching this from the sidelines.

But that was then and this is now. Those holding stocks are left wondering if there is still time to get out before this gets worse. Unfortunately, a big portion of the selloff has already happened and pondering a sale now is waaay late in the game.

Remember, the best sells tend to be when we don’t want to sell and the best buys tend to be when we don’t want to buy. Following that logic, this is a much better place to be thinking about buying than selling.

Now to be clear, I’m not suggesting people rush out and buy this selloff, but it is definitely time to start looking for that next bounce.

Thursday’s close was dreadful and we should expect the selling to smash through 4,300 resistance Friday or early next week. But after that, be on the lookout a capitulation bottom and bounce. While this might not be the ultimate bottom, we won’t know that until after it is way too late to trade it.

I always treat every dip and bounce as the real deal until proven otherwise. Get in early and get out early and it doesn’t matter if the next bounce is the real deal or not. The most important thing is we are in the right place at the right time when the next big move happens. And the only way to do that is to get in early and see where it goes.

If we start small, get in early, keep a nearby stop, and only add to a trade that is working, the risks are not all that bad. In fact, it is far safer than what most traders are doing here. Just ask anyone that’s been holding since early September.

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About the Author

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.