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.
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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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.