Oof, that was an ugly week. The S&P 500 shed 5% over the last five sessions, with most of that coming during Thursday and Friday’s multi-percent bloodbaths.
The week started off well enough with the index challenging multi-month highs on Tuesday. But that turned out to be the high point of the week and it was all downhill from there. That said, the mad dash for the exits didn’t really begin until Thursday afternoon when 4,100 support failed. And as fast as things got moving, 4k didn’t stand a chance and that fell before the market even opened Friday morning.
With Friday’s close leaving us directly on top of 3,900 support, does anyone actually think this level stands a better chance of holding? I sure don’t…
As regular readers know, I’ve been a big proponent of buying and holding May’s bounce the last few weeks. And it was a great trade, with the index rallying nearly 10% from May’s intraday lows. (Catch that wave in a 3x ETF and we’re talking real money!)
The rebound was acting well and 4,300 seemed within reach. But every seasoned trader always shows up to battle with an escape plan. No one is ever right all the time. In fact, most of us are wrong far more often than we care to admit. But if we want to succeed at this game, we always have a plan for being wrong.
For me, that safety net was my trailing stops near 4,100. I was confidently holding for higher prices but my trading plan wouldn’t allow me to get caught flatfooted under 4,100. By now, everyone knows all too well just how costly holding a little too long can get.
I locked in profits near 4,100 and when things really started falling apart, I flipped around and went short. It’s not the trade I was looking for, but it’s the trade the market gave me and I’m not one to look a gift horse in the mouth.
As for what comes next, this has been an emotional selloff and that means oversized moves…in both directions. This week’s tumble will most likely keep falling early next week, but once the selling capitulates, the bounce from oversold levels will be hard and fast.
Shorts need to be nimble and take profits quickly because the bounce will lop off a big chunk of their profits if they hold even a few hours too long. For those in cash, wait for the bounce, start small, get in early, and keep a stop under the lows. Pull the plug if the bounce fizzles and add more if it keeps working.
Monday will most likely be ugly. And Tuesday too. But a sharp bounce from oversold levels is coming, make sure your trading plan keeps you on the right side of it.
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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.