What smart money will be doing Monday morning

By Jani Ziedins | End of Day Analysis

Feb 11

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Following seven positive days out of the previous nine sessions, the S&P 500 stumbled hard on days ten and eleven. Luckily, we knew this was coming. As I wrote Wednesday evening:

Expecting this 10% rally to keep going is getting a tad greedy. Markets move in waves and it is worth remembering that at both the bottoms and the tops. It is time to shift to a defensive mindset and protect what we have. Move stops up and see where this goes, but no one should be surprised if this stalls near 4,600 resistance.

Well, here we are, 48 hours later and nearly 200 points lower.

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Some people blame this latest pullback on high inflation and looming rate hikes. Others point to the imminent Russian invasion of Ukraine.

While both of these reasons appear valid, the problem is the market rallied strongly under these same storm clouds two weeks ago. Inflation, rate hikes, and a Russian military build-up are not new. Are we supposed to believe these headlines didn’t matter for weeks and then all of a sudden traders woke up and started freaking out? I don’t think so.

In reality, the market pulled back Thursday and Friday simply because it was time. As I reminded readers two weeks ago near the lows, markets move in waves and we should be ready for a strong bounce. Well, here we are, two weeks later and 300 points higher. Rather than pat ourselves on the back for buying the bounce, smart traders were getting defensive and preparing for the step back.

Markest move in waves. Always have, always will. And now that we’ve fallen 200 points, rather than panic, it is time to start looking for the next bounce.

Buy the bounce, sell the breakdown, and repeat as many times as necessary.

I took profits Thursday morning and now I’m sitting in cash, waiting for the next bounce. Maybe it happens Monday morning. If so, great, I start buying back in and will add more as the rebound progresses. But if the selloff continues, no big deal, I sit on my hands and wait for the next trading opportunity on Tuesday or Wednesday.

Volatile markets like this are actually fairly easy to trade because once a move gets started, it keeps going. As long as we have the courage to jump aboard early, it is a fairly nice ride.

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About the Author

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.