A savvy index trade, plus GME is showing its true colors

By Jani Ziedins | End of Day Analysis

Dec 01

Free After-Hours Analysis: 

Wednesday started off well enough for the S&P 500 as prices popped more than 1% at the open. And a wave of follow-on dip-buying pushed the index even higher through the morning. By lunchtime, it looked like this was just another example of alternating up and down days.

But the afternoon session had other plans and hit the rebound with a sledgehammer, knocking it down more than 3% from the intraday highs, turning this into the largest bearish intraday reversal we’ve seen in a while.

Was the market spooked by the first confirmed American Omicron case? Or was it an echo of Powell’s Tuesday comments about winding down the Fed’s bond-buying program? Or maybe traders finally started looking down and realized just how high we are above the October lows?

Most likely it was a cocktail of all of these plus a few others that sent a shiver of second thoughts through the market.

No matter the source, the price action was dreadful; a nice bounce turning into a big loss. And not only that, we undercut Tuesday’s lows and closed at the bottom of the intraday range. Who knows how much further this would have gone if the closing bell didn’t stop the bleeding.

But these things are obvious to everyone that watched the day unfold. What readers really want to know is how to trade this.

Hindsight being 20/20, we know buying the bounce this morning was a mistake, but for anyone that bought the bounce, it actually wasn’t a bad trade. Get in not long after the open and the morning rally gave dip buyers a nice profit cushion. And when midday selling started, retreating under the opening levels was a clear signal to get out.

Buying near 4,610 and selling near 4,610 isn’t a bad trade. If this was the real bounce, the upside potential of returning to the highs would have been 90ish points. Ten-ish points of risk for a shot at a 90 point reward? I’ll take that risk/reward every day.

As it turned out, buying the bounce didn’t work and savvy traders move back to cash long before the day’s real selling started.

While insecure critics love to taunt people for making “wrong” trades, buying the bounce this morning was actually a savvy play. While it didn’t work out this time, there is always next time.

Maybe the selling continues Thursday. Or maybe this was the capitulation bottom and the next bounce is the real deal. Often the third time is the charm and it would be a shame to miss a really nice profit opportunity simply because we were too scared or stubborn to buy the next bounce.

I’m buying the next bounce and if that one doesn’t work, no big deal, I get out and try again next time.

GME tumbled under the all-important $200 support level Tuesday and the bloodbath continued Wednesday. If the Christmas shopping season can’t save this physical retailer, I don’t know what will. This is a no-touch under $200 and we could challenge $150 support before Christmas.

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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.