What to expect from the indexes Thursday morning and the best way for FB owners to handle this massacre

Free After-Hours Analysis: 

The S&P 500 added nearly 1% Wednesday, making this the fourth up day in a row. These gains left the index just shy of 4,600 and miles above last week’s panicked test of 4,200 support.

But everything changed after the close when Meta (aka FB) announced mediocre earnings. While mediocre works for banks and utility stocks, when it comes to highflyers, mediocre is a cardinal sin. And as such, the stock got murdered in after-hours trade, falling more than 20%. Yikes!

And when one of the pillars of tech goes boom, the reverberations are felt throughout the market and the S&P 500 has already given up all of Wednesday’s gains in extended trading.

The market giveth and the market taketh away.

But we knew something like this was bound to happen. If not this, it would have been something else. As I reminded readers last week near the lows, markets move in waves. It also bears remembering this same principle applies following a sharp run-up. Stocks move in waves at both the lows and the highs.

Now, I have no idea what Thursday holds for the market. Maybe FB’s after-hours crash is a severe overreaction and the selling won’t be nearly this bad Thursday during regular hours. Or maybe FB is the spark that launches the next big wave of panicked selling. At this point, either outcome is likely and our trading plan needs to be prepared for both.

Hopefully, most of my readers bought this bounce at much lower levels and are sitting on a big profit cushion. That gives us a lot of flexibility when it comes to responding to a big opening gap Thursday morning.

As for trading large opening gaps, I like to give the market 15-ish minutes to find its footing. Even if the market jumps my stops, this is the one and only exception to selling at my stops “no matter what”.  Since I already took most of the hit during the overnight gap, waiting a few extra minutes doesn’t add a lot of additional risk to see if we get a quick bounce. If we bounce, great, I keep holding and move my stops to the early lows. If the selling continues, no big deal, I get out and wait for the next bounce.

But even with the index’s after-hours slump, given the size of my profit cushion from buying Monday’s bounce early, I’m not worried and will be sleeping like a baby tonight. If things get ugly Thursday, no big deal, I get out and start looking for the next trading opportunity. In fact, the bigger the selloff, the more money I make buying the bounce, so bring it on!

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Ummm yeah, in case you hadn’t heard, FB was murdered after the close. And that’s unfortunate. The stock was bouncing nicely off of $300 support this week and was very much buyable. But this 20% haircut reminds us that even good trades can fail spectacularly.

Now, even with this week’s modest profit margin, Thursday morning is going to be very, very painful for FB owners. But as I explained above, it is worth holding the stock for a few minutes after the open to see if prices bounce. Which they almost certainly will.

From there, it becomes a game of damage limitation. Don’t delude yourself into thinking there are rainbows and unicorns hiding behind these storm clouds. There will be a nice bounce over the next few hours and days. But rather than temp us into complacency, that is our opportunity to get out and limit our losses.

Without a doubt, this stock will be buyable again, but it has to go through some healing first. And I’d rather watch that from the sidelines.

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