How savvy traders are approaching these market lows. Plus the traders who AAPL is rewarding

Free After-Hours Analysis: 

Thursday was another back-and-forth session for the S&P 500 as early gains gave way to midday selling.

As I often remind readers, it’s not how we start but how we finish that matters most. Opening gaps are easily manipulated in the thin, overnight futures market. But the end of the day? That’s when the heavy hitters come out and there is no manipulating the close.

How we finish tells us what big money is thinking. And since big money drives the market, savvy traders always listen to what big money has to say.

At this point, we’ve had three weak closes in a row where the index retreated from intraday highs. While these late slumps haven’t sent us spiraling out of control yet, it does reveal big money is cautious at these levels and they are not chasing the bounces.

Without follow-on buying, every bounce stalls and retreats. But this isn’t unusual following such a demoralizing correction. Most investors are more worried about keeping what they have in this environment than making a quick buck buying the next bounce.

But the thing to remember about dips is they don’t bounce until the crowd becomes convinced prices are headed lower. And right now, the AAII sentiment survey shows 52% bearishness, putting this stat at the highest levels in five years.

While we’ve hit 50% bearishness a couple of times over the last five years, each time that level turned out to be the capitulation point. Can bearishness get even higher? Sure. But is it the most likely outcome? Definitely not.

So what do we do with all of this data? Big money’s reluctance to buy the dip means prices could retest Monday’s lows, but we are getting close to a near-term capitulation point where we run out of sellers.

Without a doubt, bear markets fall more than the 10%. But larger bear markets take time to develop. The pre-Financial Crisis top occurred in late 2007 and that bear market didn’t bottom until early 2009. Even short bear markets take three months to fully play out.

What I’m getting at is that while stocks could fall further from these levels, we’re not going there in one big jump. And that means we should expect some stability and bounces along the way.

Call them false bottoms, but to a nimble trader, those are buyable bounces. And that’s how I will be trading them.

To be perfectly honest, I don’t know which bounce will be the real bounce. (No one does.) The best way I’ve found to deal with this uncertainty is to assume everything is real until the price action proves otherwise.

That means I will keep buying bounces and selling them when they break down. (Start small, get in early, keep a nearby stop, and only add to a trade that is working.)

Sure, I’ll take it on the chops a few times, but losing a dozen points on a 1/3 position isn’t that big of a deal. Especially when bounces like Monday rack up 200 points of profit within hours.

While it is increasingly looking like Monday’s bounce is a bust, it was still a profitable trade for those of us willing to jump aboard it early and lock in profits when prices started slumping.

If the market wants to undercut Monday’s lows and bounce another 200 points, I’m perfectly willing to do it all over again. Buy the bounces, sell the dips, and keep at it until something better comes along.

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While this market correction has been destroying the FAANG stocks and even mega-caps like AAPL are not immune to the market’s forces, these highfliers did give us an entry point this week after bouncing off of Monday’s lows.

(Important note: we buy bounces not dips!)

While this was a slow trade to get started, AAPL is finally proving its worth, smashing earnings expectations and popping 5% in after-hours trade.

As I wrote earlier this week, people pray for market pullbacks so they can buy more of their favorite stocks, but every time the market answers their prayers, most of them are too chicken act. But for those willing to buy AAPL’s bounce, this is turning into a nice trade. Move stops up and see where this goes.

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