Why it was so easy to see the bounce coming

By Jani Ziedins | End of Day Analysis

May 31

Free After-Hours Analysis: 

The S&P 500 experienced only its second down day out of the last seven trading sessions on Tuesday. Not bad for a market that many people had written off as dead.

A 350-point rebound over a handful of sessions is downright impressive, but my readers always knew this was coming. As I wrote in last week’s free post titled, “Why smart money is buying this bounce“:

As bad as every stock chart looks right now, that is exactly why we should be prepared for a near-term bounce. Everyone knows markets move in waves, yet most people forget this simple fact in the heat of battle. While a 70-year losing streak is impressive, savvy traders are anticipating a vicious snapback, not another seven weeks of selling.

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While no one is excited about Tuesday’s 0.6% giveback, everyone knows we cannot go up every single day and down days are part of every move higher.

More important than one day’s plus or minus is how the market responded to the first meaningful bit of selling in a week. And if we look under Tuesday’s hood, the early wave of selling stalled and bounced from those early lows. That is the kind of price action I like to see from down days.

As I wrote last week, I bought the bounce and my stops are already well above my entry points. There is nothing for me to do here other than keep holding for higher prices and lifting my trailing stops.

Maybe bears are right and this bounce fails and heads back to the lows, but at this point, I’m already sitting on a nice pile of profits in my 3x ETF trade and it doesn’t matter to me. Keep going higher and I make even more money. Stumble back to the lows and I lock in some nice profits at my stops and get ready to buy the next bounce.

Buying early means I’m protected no matter what happens next. But at this point, it looks like this market wants to keep heading higher and 4,300 resistance is very much on the menu.

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About the Author

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.