Why savvy traders don’t give up

Free After-Hours Analysis: 

The S&P 500 fell out of bed Thursday morning for the second day in a row. But just like Wednesday, the selling stalled nearly as soon as it arrived. After an hour of reflexive selling, the supply of fearful owners dried up and the index spent the rest of the session climbing nearly 80 points above those early lows.

While Thursday didn’t give me the start I was looking for, as I often remind readers, how we finish is far more important than how we start. And for the second day in a row, I really liked the close.

Inflation remains bad. Same with the war in Ukraine and as expected, consumer sentiment is in the toilet. But everyone already knows these things and that is why the index is down 23% YTD. Recycling the same headlines doesn’t surprise anyone and that’s why this week’s bad news hasn’t sent stocks tumbling under June’s lows. The people who fear these headlines sold months ago and that means there is no one left to sell a retelling of those same headlines.

Without a doubt, things are bad, but the bad is more or less staying the same. Which for the time being, is good enough to keep a floor under stocks. The problem we’ve been running into isn’t happening during regular hours when the market has actually been trading fairly constructively. Our problems have been festering overnight when smaller and more emotional retail traders are throwing their weight around in the futures markets. These little guys send futures tumbling in the middle of the night when big money is sleeping and that leads to these large opening gaps.

But lucky for us, big money doesn’t agree with these impulsive overnight traders and refuses to join the selling when the main session opens. And when that selling fails to show up, prices naturally start drifting higher.

As I wrote Wednesday, I liked the way the market is trading during the regular session despite these opening gaps. This still looks like a fairly resilient market.

Thursday’s early weakness squeezed me out of the trial position I bought Wednesday for a modest loss. But rather than give up on this trade, as soon as I get out of the market, the first thing I do is start looking for the next entry point. And as luck would have it, Thursday’s late morning bounce gave me that buy signal. And when the index kept going higher through the day, that was enough reassurance for me to add more near the close.

It never feels good selling and buying back in hours later, but it sure beats the feeling of holding something while the losses keep piling up. When forced to choose my poison, I will always pick selling unnecessarily over holding too long.

Maybe futures will tumble again in the early hours of Friday morning, but these little guys are going to run out of money eventually. As we saw Wednesday and Thursday afternoons, this market doesn’t want to go down. And the best thing about a market that refuses to go down is it will eventually go up. As long as we are willing to keep at it, we will be in the right place at the right time to ride the next wave higher.

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