The S&P 500 crashed more than 4% Tuesday after the monthly inflation report came in higher than expected.
The panic selling wasn’t triggered because inflation continues accelerating. In fact, August’s 8.3% reading was under June’s 9.1%. The problem is the July and August stock market rebound was largely based on hopes inflation was moderating even quicker than this. And August’s stubbornly high inflation report dashed those hopes, sending stocks tumbling.
Now, before we throw the baby out with the bath water, Tuesday’s selling only pushed the index back to levels it was at several days ago. But this is one of those half-full, half-empty things. The half-full person sees an index still holding above 3,900 support. The half-empty person sees all the air underneath us if 3,900 support fails.
Will 3,900 support hold? That’s hard to say. But the thing we know for sure is emotion, and thus volatility, is off the chart. No matter what happens next, the move will be oversized. Either a hard and fast rebound from oversold levels or a spectacular crash through near-term support.
Lucky for us, we are nimble traders, so we don’t have to guess ahead of time. Instead, we wait for the market to make its next move and then we jump aboard.
While there is no way to predict a 4% crash, that doesn’t mean we can’t navigate these gyrations successfully. I am fully willing to admit I came into Tuesday’s session long. Last week’s rebound was acting well and there is no reason to abandon a trade that’s working. But lucky for me, my trading plan kept me safe. I buy bounces early and that extra margin made all the difference on Tuesday.
Tuesday’s open gap jumped my trailing stops and when the early bounce failed to stick, I had no choice but to pull the plug. And since I bought my positions last week, that still meant collecting some profits. Definitely not the profits I had in mind Monday afternoon, but on a day when everyone else is running around with their hair on fire, pulling smaller than expected profits isn’t a bad problem to have.
And it’s a good thing my trading plan pulled the plug early Tuesday because the index fell another 100 points before the session was over. This won’t rank anywhere near this year’s most profitable trades for me, but it will probably be one of my better trades because trading well doesn’t always show up in the P&L. Avoiding a loss is just as important as making money.
(I made some quick money shorting the afternoon swoon, but that was an opportunistic trade and not a strategic move.)
Now it’s time to wait and prepare for the next bounce…
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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.