The S&P 500 undercut 4,200 support Monday afternoon and just when things looked their worst, the index exploded 240 points higher over the next three sessions and is now resting above 4,400 resistance. Funny how that works.
While a lot of people were caught off guard by this “unexpected” strength, it doesn’t surprise savvy traders that have been doing this for a while. As I’ve been explaining to readers since this correction started back in January, this is a volatile market and that means oversized moves in BOTH directions! Oversold turns into overbought in the blink of an eye and if you hesitate, even for a moment, you miss a fantastic trade.
While cynics criticized my testing the waters last week with small buys and nearby stops that kept dumping me out near my entry points, this week shows why smart traders stick to their trading plan no matter what other people say.
I wish I could tell people there is still time to buy this bounce, but unfortunately, that ship sailed and only fools are chasing prices at these levels. Smart money buys bounces off of support, they don’t chase big moves near resistance.
Maybe the index continues up to 4,600, and as someone fully invested in 3x ETFs, I’d love to see that. Unfortunately, this remains a volatile market and that means oversized moves in BOTH directions. (I cannot repeat that often enough!) Adding new money up here is way too risky for my blood. Luckily, I loaded up Tuesday and am already sitting on a pile of profits.
The window for offense closed and this is time to shift to defense. My stops are spread between 4,300 and 4,350. If the index retreats to these levels Friday, no big deal, I collect my profits and get ready to buy the next bounce. But if the rebound continues higher, even better, I move my stops up to 4,400 and let those sweet profits come to me.
Fortune favors the bold and that means buying bounces when everyone else questions your sanity. In reality, the biggest fools were the ones waiting until stocks fell to 6-month lows before finally abandoning ship. (I bailed out back on January 5th, in case you missed that post.)
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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.