Is the index standing on a trapdoor?

By Jani Ziedins | End of Day Analysis

Sep 10

Free After-Hours Analysis: 

Friday makes it five down days in a row for the S&P 500.

That’s the longest stretch of down days since February. And for those that care about these things, the last time the index fell five days in a row, it ended up falling another 4% before finally finding a bottom. If history repeats itself, we could see the index fall another 200 points over the next week or two. As I said, this only matters to people that care about these things, so please feel free to disregard this if it isn’t relevant to you.

As I warned readers on Thursday:

There isn’t a quantifiable reason to claim this rally is running out of gas and that this week’s dip is different from 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.

Well, Friday’s pathetic price action confirmed this time is different and that means we haven’t seen the worst of this dip yet.

Unfortunately in trading, we have to make our moves before we have all of the information. Often that means pulling the plug days before something is obvious. Anyone still waiting for confirmation on Monday or Tuesday will be selling long after the damage has been done. By that point, why bother selling at all?

Smart traders buy early and they sell early. Suckers buy late and sell late. Please don’t be a sucker.

For those that have been paying attention, we moved to cash Thursday and waiting for that next buyable entry point. Odds are good stocks will bounce on Monday. But most likely that will be a fool’s bounce and lower lows are still ahead of us.

There is nothing wrong with buying Monday’s bounce if we are smart about it (start small, get in early, keep a nearby stop, and only add to a trade that is working). But odds are good Monday’s bounce will turn out to be a false bottom and we need to be nimble if we buy it. Most likely the selling will resume later next week before we finally carving out a more painful capitulation bottom.

But if we are savvy and nimble, we buy all of the bounces because we know we can get out when those false bottoms fizzle and start making fresh lows.

I have no idea if the first, second, third, or fourth bounce will turn out to be the real bounce. That’s why I buy all of them and then I don’t have to worry about it. (again, start small, get in early, keep a nearby stop, and only add to a trade that is working)

While some people hate volatility, I love it because that’s the fastest and easiest way to make money.

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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.