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Free After-Hours Analysis:
The S&P 500 finished Tuesday in the green for the sixth time out of the last eight trading sessions and these gains leave us 7% above the intraday lows set barely two weeks ago.
Not bad for a bull market that was supposed to be dead. But this revival was always expected. As I’ve written many times before, the market loves symmetry and the biggest crashes are followed by the biggest bounces.
While no one can predict the exact moment when prices will stop falling and start bouncing, it doesn’t take a Ph.D. in Finance to identify the spot on a stock chart when prices stop falling and start climbing.
Emotional markets are as nimble as freight train trades. Once they get going, they tend to keep going and going and going. When we see that first bounce, all it takes is an hour or two to confirm the bounce and give us the green light to jump aboard. Wait any longer and we risk getting left behind.
And for anyone thinking this is nothing more than a case of hindsight bias, here’s what I wrote on January 24th when the January correction bottomed:
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.
While we cannot go back in time and trade a missed opportunity, we can learn from this experience so we don’t make the same mistake again next time.
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As for where the market is going from here, this is the fourth session in a row the index tested the 200dma and 4,450 support. If this rebound was grossly overbought and vulnerable, it would have collapsed days ago. Instead, every time it challenges support, supply dries up and prices bounce.
And just as important, while volatility remains elevated, these swings are getting smaller and smaller. All of these are signs the market is coming to terms with imminent interest rate hikes and these headlines have largely been priced in. (i.e. Anyone that was afraid of these headlines already abandoned ship.)
While there are no guarantees and emotional selling can return at any moment for any reason, the first thing that needs to happen is for prices to actually start falling. Until that actually happens, this bounce is very much alive and well.
As for how to trade this, the index is buyable/holdable above 4,450. Anything under this level and it is time to get out and wait for the next bounce.
Bitcoin continues holding last week’s $40k breakout. While this is a good start, we will see a lot of crypto-related advertising thrown at the world during this weekend’s Super Bowl. But rather than propping Bitcoin up, this coming-out party could actually turn into a “sell the news” moment for Bitcoin.
The $40k breakout is holdable, but be ready with stops near $40k in case the “sell the news” crowd takes over this weekend.
Bonus: Look for a near-term bounce in FB. Start small, get in early, keep a nearby stop, and take profits quickly. As I said above, oversold moves tend to bounce hard.
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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.
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