Is smart money buying or selling this dip?

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The S&P 500 tumbled Tuesday for the second session in a row. While two material down days isn’t much fun for stock owners, so far the selling has been contained and the index bounced nicely off of 4,600 support.

During events like this, most people are asking themselves, sell the dip or keep holding?

But the better question is, why not do a little bit of both?

All too often people think of trading as a binary decision. Good or bad. Up or down. All-in or all-out. But that’s not the way savvy traders approach the market. They don’t even restrict themselves to these black and white terms. Instead, they focus on the gray of managing risk.

Is this a good time to be fully invested or does it make sense to peel off some risk? That’s a much different question than should I sell or should I keep holding.

I’m pretty confident this dip will bounce. Because you know what, every dip over the last 10 years has bounced. In fact, every dip in the history of the stock market has bounced back even higher.

The question is if I want to wait that long. And as a trader, the answer is always, “Of course not.”

I started peeling off risk when this starts falling and I start getting edging back in when prices bounce.

Sometimes this approach leads to riding through some whipsaws, like this week. But riding whipsaws sure beats holding something that is falling.

I peeled off some risk Monday afternoon and sold more when the index undercut the opening lows Tuesday morning. But prices bounced nicely off of 4,600 support in midday trade and that was our signal to start buying back in.

Sure, I could have held through this dip. The problem is I never know which dip will turn out to be the real dip and I’m not willing to bet my trading account on always being right.

The simple answer is I treat all of the dips as the real deal and I treat all of the bounces the same way. That way I always ensure I will be standing in the right spot at the right time when the market makes its next big move. And if I have to chase my tail every once in a while, it really isn’t that big of a deal.

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