What this sideways chop tells us about the bear market

By Jani Ziedins | End of Day Analysis

Jul 05

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If a person only saw Tuesday’s S&P 500 closing print showing a 0.16% gain, it would be easy to assume it was just another boring, meaningless session. Oh, how wrong they would be.

Tuesday was another rollercoaster ride, with the index plunging more than 2% in early trade before a late morning rebound erased all of those losses and then some.

As I wrote last week, the bear market is transitioning from large, multi-day moves to more sideways chop. One day’s down is followed by the next day’s up. But this is pretty standard behavior as a correction matures and people adjust their expectations to our new reality.

There is still a lot of uncertainty causing this back-and-forth, but as emotion leaks out of the market, every violation of support no longer triggers waves of panicked owners selling stocks. In fact, we start getting days like Tuesday where an ugly open is met with buying, not follow-on selling.

What comes next? Well, Tuesday’s close leaves us pretty much in the middle of the 3,600(ish) to 4k(ish) trading range. That means the scales are not skewed more in one direction than another and this could easily go in either way. And in fact, that’s exactly what it’s been doing as it keeps dropping and bouncing from day to day.

As for how to trade this, Tuesday’s strong performance was a clear sign to close any shorts we might have been holding over the weekend. As easy as it is to re-short the market, there is no reason to stubbornly stick to a potion and hope it turns around and starts going our way. Instead, close, move to safety, and reassess. As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.

And an aggressive trader could have even bought Tuesday’s afternoon bounce. But because the market is getting choppy, factor that into your trading decisions by trading smaller and waiting for a trade to start working before adding more.

If prices retreat Wednesday, no big deal, we get out near our entry points and wait for the next trade. Maybe that’s buying the next bounce or shorting the next breakdown. But if Tuesday’s rebound keeps going, add more and see where it goes.

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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.