Is this the start of the next big crash?

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The S&P 500 tumbled Monday, extending Friday’s losses and the index now finds itself 5% under last week’s highs.

As my dad always used to remind me when I was a kid, easy come easy go. Luckily for readers of this blog, we were on high alert and ready for this pullback. As I wrote in last week’s free post, “How much higher can this go?“:

While I’m not in the business of picking tops, this is pretty darn high and at the very least, we can say the risk/reward is no longer lined up in our favor.

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Sometimes it is better to be lucky than good and I was definitely lucky when I wrote that post hours before this latest round of selling started. But just because I didn’t know exactly when the next step-back was going to start doesn’t mean we can’t be smart about our positioning when the odds are no longer stacked in our favor.

In this case, that meant taking some profits proactively last week and keeping a trailing stop nearby for the remainder of our position. And now that the market is 170 points lower, while other investors are filled with fear and dread, wondering if they should abandon ship before things get worse, I’m watching this from the sidelines with a pile of profits that I’m getting ready to throw back into the market as soon as this bounces.

Headlines remain largely the same, meaning this latest round of selling is little more than traders waking up to all of the risks they were ignoring last week. And so continues the swinging pendulum of sentiment. One week everything is great. The next week the sky is falling. Funny how that works.

Without a major headline catalyst driving this selling, I don’t expect it to go far. This is the kind of stuff that bounces before support and doesn’t crash through it.

The problem trading this gyration is we don’t know if “bouncing before support” means bounce above 4,100 or bouncing above 4k. But rather than try to guess, as smart traders, we let the market lead the way and we buy after it bounces, not before.

Odds are pretty good we will spend some time in the red Tuesday, but be on the lookout for that next bonce and be ready to jump on it. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

And if Tuesday’s bounce doesn’t stick, no big deal, we pull the plug at our stops and try again Wednesday.

I have no doubt things can and will get worse later this fall, but we are still stuck in the final weeks of summer and that means we shouldn’t expect major moves in either direction while big money is still at their summer cottages.

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