What today’s dreadful close means for the market

Free After-Hours Analysis: 

Wednesday’s session started off innocently enough with the S&P 500 bouncing between small gains and losses. But for those that read this blog regularly, they know how we start doesn’t count for $#!+. The key to figuring out what comes next is always telegraphed in the finish. And unfortunately, Wednesday’s finish was absolutely dreadful.

Now don’t take this the wrong way, this prognosis has nothing to do with the 0.5% loss. Downdays are a very normal and healthy part of every rally higher. And believe it or not, in the right context, even a 0.5% loss can even be a very bullish trading signal. It all comes down to how we arrive at that 0.5% loss. And unfortunately, Wednesday got there in a very, very wrong way.

The last 60-minutes of trade is the most insightful hour of the day because that’s when institutional traders are making their moves. And given Wednesday’s waterfall selloff into the close, those big investors were liquidating shares and locking in profits.

A one-way selloff in the final hour of trade is never a good sign and this late decline was no different. The next challenge facing us is figuring out what comes next.

The most innocent thing would be a modest step back to 4,500 support. Getting above this psychological milestone is where October’s rebound really put it into overdrive. And sometimes all we need is a little near-term give-back to allow everyone to catch their breath. Maybe that’s all this is, a modest exhale.

Or maybe October’s frenzy of dip-buying went waaaaaay too far and this is going to end very badly with a spectacular crash under September’s lows. (Or maybe I’m just reading a bunch of nonsense into a lot of random noise.)

No matter what happens, I’ve been doing this long enough to be wary of this late trading signal and my pockets were overflowing with profits from buying the October bounce, so it made a lot of sense to start peeling off a big portion of my positions. As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.

With a pile of profits in hand and following a really nice run from the October lows, it made sense to take some of those profits off of the table. Remember, we only make money when we sell our winners and this was as good of a time as any.

And you know what? If prices bounce back Thursday, there is nothing that says I cannot buy back in. In fact, buying back in is the exact thing my trading plan will tell me to do tomorrow if the market closes well. If I end up chasing my tail a little in the process, no big deal. I learned a long time ago it is better to be a little cautious than a lot sorry.

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