Why savvy traders knew Monday was going to end in a sharp bounce. Plus the next trading opportunity in Bitcoin

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If a person only looked at the S&P 500‘s closing print, the 0.3% daily gain completely obscured one of the most shocking trading sessions in nearly two years.

The index crashed 4% in midday trade, easily shoving us into correction territory (a pullback greater than 10%). Last week’s aggressive selling over rising interest rates devolved into a full-on, panicked dash for the exits on Monday.

But just when all hope was lost, an impressive rebound erased every single dollar of those midday losses. As jarring as the crash was, the rebound was even more spectacular.

All told, we covered more than 8% in a single session. You have to go back to the depths of the original Covid crash to find something this wild.

But to be honest, Monday afternoon’s “shocking” rebound wasn’t all that shocking to those of us that have been doing this for a while.

Monday’s early 4% crash was far and away the largest losing session of this correction. And during periods like this, the critical thing to keep in mind is emotional, waterfall selloffs typically capitulate on their biggest down days.

And guess, what? This emotional, waterfall selloff capitulated on its biggest down day.

Who could have seen this coming??? Oh yea, that’s right, readers of this blog knew it was coming. As I wrote last Friday:

Emotional sellers panic, get out, and prices bounce hard not long after. This story is as old as trading itself.

Odds are good next week will enjoy a meaningful bounce. Selloffs that go too far in one direction inevitably end with a snapback that goes too far in the other.

Maybe the market bounces Monday. Or maybe it happens Tuesday. Either way, nothing is going to keep me from jumping aboard that next big rebound.

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The best part of using trailing stops means we sold at much higher levels and were sitting on a giant pile of cash coming into Monday. While everyone else was losing their mind over this selloff, we were eagerly eying those huge discounts. Rather than get sucked into the herd’s panicking selling, those of us with cash were waiting for the capitulation bounce. And you better believe I was scooping up those crazy discounts Monday afternoon. (A critical note: Fools buy dips. Savvy traders buy bounces. Don’t be a fool.)

Maybe Monday’s capitulation bottom is the end of this correction. Or maybe it is just another false bottom on our way lower. Either way, it doesn’t really matter to me. I picked up some attractively priced stocks Monday afternoon and those positions are already sitting on a healthy profit cushion. If the correction resumes, no big deal, I get out at or above my entry points and try again next time. But if this is the real bounce, I will be counting my profits while all of Monday’s emotional sellers are left wondering what just ran over them.

I’m not a big fan of Bitcoin, but I know a trade when I see one. Bitcoin has been mirroring the equity indexes lately and if stocks are bouncing, expect that resilience to carry over to cryptocurrency. Bitcoin’s latest buy is buyable as long as it remains above Monday’s intraday lows.

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