How savvy traders avoided all of this carnage, plus what the inevitable bounce will look like

By Jani Ziedins | End of Day Analysis

Jun 13

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Down 1%. Down 2.4%. Down 2.9%. Down 3.9%. In case anyone hasn’t been paying attention, it’s been a very painful several sessions for the S&P 500.

Luckily for readers of this blog, we were pulling the plug not long after this selloff first got started. As I wrote last Tuesday evening when the index closed at 4,160:

The best part about being a nimble trader is we can both stay safe and still be in a position to profit from the upside. As easy as buying back in is, there is no reason to stubbornly hold a dip. For as many times as being stubborn works, there are a dozen times it bites us in the ass. I would much rather sell and buy back in hours later than I would watch the losses pile up as I keep waiting for a bounce that never comes.

Now that the index is back above 4,150, I can spread my stops across the lower 4,100s. If we retest support again this week, there is no coming back from that and lower prices are ahead.

Little did I know that four sessions later, the S&P 500 would close at 3,750 after shedding more than 400 points along the way. But here’s the thing, I didn’t need to know how far this was going to fall in order to know it was a good idea to get out of the way. When the market violated my trailing stops above 4,100, I got out, no questions asked.

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We can pin this weakness on last week’s higher than expected inflation reading. Or bond futures predicting the Fed juicing interest rates 0.75% this week. Or maybe it’s $120/bbl oil and $5/gal gas. Or mortgage lenders quoting 6% interest rates. Or most likely, all of the above.

But as a trader, does it really matter? Stocks are falling and disciplined traders have no choice but to get out. Our trading accounts don’t care about the fundamental reasons.

And for the more aggressive trader, violating 4,100 support was the perfect invitation to throw on a short trade. Falling 10% over four sessions sounds shocking. But catch that wave in a 3x inverse ETF and now other people’s pain is our gain.

But avoiding losses and profiting from big declines takes discipline and a willingness to act. Savvy traders were pulling the plug before anyone realized something was wrong and we were putting our foot on the accelerator when the panic first started setting in. While most people are lying awake at night fearing the selloff will get worse, I’m wondering how much longer I should ride this wave before locking in my short profits. Which side of the coin would you rather be on?

As for what comes next, the selling has been brutal. But as I often write, the market loves symmetry, so the most likely outcome is a rip-your-face-off rebound from grossly oversold levels. Maybe the selloff ends in a dramatic “V” bottom after the Fed “only” raises rates by 0.5%. Or maybe we get another leg lower after they raise rates 0.75%. But either way, this is going to bounce hard and fast when it finally bounces, so be ready.

For the short trader, that means locking in profits quickly because a bounce back to 4k resistance will erase almost all of these really juicy profits. And for the nimble swing trader, buying the next bounce to 4k in a 3x ETF will put another wad of profits in our pocket.

Profiting from volatile markets isn’t hard as long as we have the confidence and discipline to trade proactively.

There is nothing positive to say about Bitcoin after this cryptocurrency plunged nearly 30% over the weekend. The best this can hope for is that it is getting so ugly it’s good. But we’re not there yet.

This cryptocurrency will bounce alongside the equity market, whenever that happens, but expect $30k to be a ceiling and any dip buyers should be locking in profits long before then. As attractive as these prices seem, it will be a long time before Bitcoin is investment-grade again.

Buy the bounce for a quick buck but nothing more.

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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.