Why Tuesday’s ugly turn wasn’t a surprise

Free After-Hours Analysis: 

Tuesday started off well enough with the S&P 500 popping nearly 50 points in early trade. But that opening bounce was as good as it got and it was all downhill from there. And when I say downhill, what I really mean is we fell off a cliff, dropping nearly 130-points from those intraday highs.

Consumer confidence is in the toilet and that was enough to bring the sellers back following last week’s impressive 6.5% bounce.

As I’ve been saying for a while, this is a volatile market and that means oversized moves in both directions. Every bit of up is inevitably followed by a bit of down. And what we got that in spades on Tuesday.

But Tuesday’s volatility shouldn’t surprise regular readers of this blog, as I wrote Monday evening:

Now that stocks are dramatically higher, a big chunk of the upside has been realized and the risks of a near-term pullback have increased. While we can stick with this bounce as long as it remains above our trailing stops, this is the time to be getting defensive and ensuring these nice profits don’t escape.

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I was hoping the rebound would take us closer to 4k resistance before running out of momentum, but the market’s never once asked what I thought, so I have no choice but to follow its lead. While I came into the day still holding last week’s nice bounce, the selling quickly forced me to lock in some really nice profits in the mid to upper 3,800s. While not as juicy as I wanted, I have no right to complain about the nice profits the market gave me. (Catching a big portion of a 6.5% pop in a 3x ETF pays really well.)

When Tuesday’s midday selling didn’t relent, that was our invitation to initiate a short position. Shorting a bull market is one of the hardest ways to make money in the market, so it’s a good thing we are not in a bull market. But that still means we need to be really careful. Shorting successfully takes impeccable timing, so don’t be afraid of taking profits early and often. Hold a little too long and those short profits will be gone.

As for what to do on Wednesday, easy, buy a bounce and short a breakdown. This is an emotional market and that means oversized moves in both directions. Grab on early and enjoy the ride.

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