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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was another turbulent session for the S&P 500 as the index swung between 50 point gains and losses. Unfortunately, bears won the day and the index closed at the lowest levels since last summer.
The price action appeared encouraging after Biden announced a ban on Russian oil imports and the index surged 120 points from the early lows. That midday resilience went against what most people were expecting and unexpected strength is typically a really good sign. But that contrarian move proved short-lived and the index quickly gave back all of those gains and then some by the close.
While this extreme volatility is unnerving a lot of traders, the market doesn’t need to be scary if we come prepared with a sound trading plan.
As I’ve been saying since the start of the year, sell the dips and buy the bounces. While that sounds blindingly obvious, most people end up doing the exact opposite and that is why so many people struggle to make money.
As I wrote yesterday, I locked in profits last week when the previous bounce hit its head on 4,400 and undercut my trailing stops. That means I’ve been looking for the next buyable bounce ever since.
Tuesday’s midday bounce looked good, really good, and so I pulled the trigger on a partial position. (Start small, get in early, keep a nearby stop, and only add to a trade that is working.) When the rebound kept going, I moved my stops up to my entry point, giving myself, in effect, a free trade. At that point, no matter what happened during the rest of the session, I was covered.
And as luck would have it, the selling resumed and I got dumped out near my entry point. Boooo!
While cynics laugh when people buy bounces that don’t work, I look at this as a free lottery ticket. If it works, I make 200 or 400 points when prices bounce back near recent highs. If the trade doesn’t work, I’m out at my entry point, losing nothing. 400 points of upside with virtually no downside? Only a fool ridicules that trade. (And lucky for us, the market is filled with fools. If it wasn’t, it wouldn’t be nearly this easy to make money.)
While Tuesday’s bounce didn’t work and I’m back in cash, I will be back at it again on Wednesday. And if that doesn’t work, there is always Thursday.
One of these bounces is going to work and I don’t want to miss it.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Monday was a bloody session for the S&P 500 as it shed 3% in the index’s worst performance in nearly a year and a half.
Headlines about inflation and rate hikes have been buried by what’s going on in Ukraine and oil price’s race toward historic highs. That said, there were not really any new developments this weekend and the stock market and oil markets are simply reacting to last week’s events.
Technically, Monday’s tumble leaves the index resting just above 4,200 support. This is the third test of support in recent weeks and unfortunately, while double bottoms are a thing, triple bottoms are not. That means the near-term prognosis for the market is not good. If the latest bounce was going to hold, we wouldn’t be retesting it this soon. So expect more pain over the near term.
That said, don’t expect a huge crash. While another -3%, -5%, or -7% wouldn’t surprise me, any overreaction will bounce hard and fast, returning stocks back near these levels within a week or two. So yes, while the near-term pain will get worse, it will be short-lived.
As long as we know what’s coming, we can plan around it. As nimble traders, there is no reason to hold through even a mild 2% dip and I already bailed out of my latest bounce play last week. Hopefully, you did the same.
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As I have been explaining to readers all year, I buy every bounce and that includes February’s latest bounce off of 4,100. But a nearby stop is ALWAYS part of every purchase, starting under the recent lows and then quickly moved up to my entry point as the bounce continues. And when the bounce keeps going, I keep moving my stops up with it.
While February’s bounce is on the verge of failing, I locked in some worthwhile profits last week and I’m getting ready to buy the next bounce.
Remember, we cannot take advantage of these great trading opportunities if we don’t have cash, and that means selling at higher prices.
Buy the bounce, sell the dip, and repeat as many times as necessary. With big, directional moves like these, making money isn’t hard.
Now that we’re in cash, the firs thing we’re doing is looking for that next bounce. Start small, get in early, keep a nearby stop, and only add to a position that is working. Maybe the bounce comes Tuesday. Maybe it doesn’t happen until Wednesday or even next week, but no matter when it happens, I will be there buying it again with open arms.
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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
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