How smart money knew this bounce was coming. Plus, why tail-chasing in TSLA makes sense

Free After-Hours Analysis: 

Tuesday was another good session for the S&P 500 as it gained 0.7%, making this third up-day in a row.

Not bad given how much fear and uncertainty dominated the market only a handful of sessions ago. But that’s the way this usually goes. Stocks always bottom and bounce when pessimism is off the charts.

As obvious as this is after the fact, it always catches traders off guard in real-time. Humans love to draw trendlines from here to forever and are quick to assume that’s where we’re headed. But that’s not how this works … ever. Cognitively everyone understands markets move in waves, but they always forget this very basic fact in the heat of the moment.

Luckily for readers, I reminded them of this very thing last Thursday evening, hours before this big bounce started:

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.

Want profitable insights like these delivered to your inbox every evening? Sign up for FREE email alerts. 

Even a bear predicting a much bigger collapse should have been expecting a sharp, near-term bounce. That’s just how this game works.

Now that savvy bounce buyers are sitting on a pile of profits, (you are a savvy bounce buyer right?), it’s time to figure out what comes next.

Well, if the market moves in waves and we just experienced three big up-days, should we be planning on another three big up days? Of course not.

The time for buying has long since passed and now it is time to protect our profits. That doesn’t mean we need to pull the plug. But at the very least, we should be moving our trailng stops up to the lower to mid 4,400s.

Maybe January’s selloff is dead. Maybe it is only just getting started. Either way, my trading plan is ready for what comes next. I’m holding the bounce and will keep riding this wave higher if that’s the way it wants to go. But if this bounce fizzles and retreats, I’m happy to lock in my profits and wait for the next bounce.

While bulls and bears are busy arguing over where the market is headed next, I will be over here, quietly making money no matter which way it goes.

TSLA violated the $850 lows last week, triggering our stops. And hours later it bounced nicely off of $800 support.

While selling the $850 dip and buying the $800 bounce feels like an unnecessary exercise, we do what we gotta do because there was no guarantee $800 support was going to hold.

Just ask all of the people that held the momentary dip under $1,200, $1,100, $1k, and $900. Those poor owners are still waiting for their “imminent” bounce.

As an independent trader, my greatest strength is the nimbleness of my size. I would much rather get out too early than hold too long. Buying back in is easy and painless. But hoping and praying for prices to go back to the old highs? Yeah, that’s not so easy or quick.

But now that TSLA is back above $850, move our stops up and see where this goes.

If you find these posts useful, please return the favor by liking and sharing them!

Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox every evening.

What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, receive actionable analysis and a trading plan every day during market hours

Follow Jani on Twitter @crackedmarket