What a difference two days make. The S&P 500 was well on its way to recovering from April’s intermediate step back when the index popped above the 200dma Thursday morning. Unfortunately, that was as good as it got and it was all downhill from there, with the index shedding nearly 250 points by Friday’s close.
To be honest, I really liked Tuesday’s bounce back above 4,400 support and I welcomed that rebound with open arms. Things looked even better Thursday morning following that opening gap higher. It really felt like this trade was firing on all cylinders. Nice!
Then Powell opened his mouth. From that moment on, the index did nothing but skid lower. Aa my dad loved to remind me when I was younger, easy come easy go…
While this late-week reversal sounds painful for a dip buyer like myself, it was actually an easy (and profitable) trade for myself.
By getting in early Tuesday, I was already sitting on a pile of profits by that afternoon and was able to move my stops up to my entry points. Then Thursday’s opening gap allowed me to nudge those stops even higher.
And that’s when the bottom fell out. But that’s not a bad thing. In fact, that’s exactly why we use stops. By that point, my stops were already spread around 4,450.
But the thing to remember is stops are only our last line of defense. There is nothing that says we cannot sell before they get hit. In fact, many trades are obviously broken before our stops get hit. And that was definitely the case with Thursday’s meltdown.
From the moment Powell opened his mouth, the market started skidding and it didn’t stop. That’s not what a good trade looks like. Anyone looking at that chart knew the market was broken and there was no reason to stick around waiting for our stops to get hit. Pull the plug and get out of the way.
Buy the lower 4,400s, sell the upper 4,400s, and watch the carnage from the sidelines. That was the story of my week.
Now that the index crashed through 4,400 support, things get a lot more interesting. Either the selling continues next week or it stalls and bounces.
From the safety of the sidelines, I’m fine with either outcome. If we bounce Monday, great, I’m a buyer. If that bounce doesn’t happen until Tuesday, Wednesday, or Thursday, that’s fine too. In fact, that’s even better because the lower we go now, the more money I make when this bounces back.
Never forget, we cannot buy the bounce if we are fully invested. That means always be willing to pull the plug on trades that are not working.
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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.