What smart money is preparing to do at these levels

Free After-Hours Analysis: 

Wednesday was another wild session for the S&P 500 as an early 35-point loss rallied 60 points from those early lows. As good as that felt, the relief was short-lived and the index gave back all of those gains through the afternoon, ultimately finishing near the intraday lows.

But this shouldn’t surprise anyone. This remains a volatile market and that means oversized moves in both directions.

The waves of second-guessing were brought about by disappointing earnings reports from GOOGL and MSFT. While these results didn’t really change anyone’s outlook, it was enough to remind prospective buyers that our problems are a long way from being resolved.

But this exhale was expected. Everyone knows stocks don’t move in straight lines and even the biggest rallies have red days. And let’s be honest, no one is expecting October’s bounce to turn into one of the biggest rallies.

Stocks go up and stocks go down, that’s what they do. But as long as there is more up than down, then everything is still going according to plan.

All of that said, those of us that bought near the October lows are sitting on a large pile of profits in our leveraged ETFs. As nice as it feels to watch those profits grow, they are not real until we sell. This is the point in a trade where we shift our mindset from offense to defense. With profits this large, making sure we protect what we have is far more important than squeezing a little more profit out of the market.

Now, don’t get me wrong, I’m not saying we should panic-sell everything because stocks had one red day. That would be ridiculous. But it helps if we shift from a binary mindset (in or out) to one that allows us to think in shades of gray. Don’t be bearish or bullish. Don’t move all-in to all-out. Instead, look at the market in terms of risk.

Risk is a function of height, meaning buying October’s lows was far safer than what it felt like. And now that we’re at the October highs, things are definitely riskier than they were two weeks ago.

I don’t know what Thursday or Friday has in store for us, but I will be approaching those sessions with a defensive mindset. With this much profit in hand, it is better to start peeling off some profits a little too early than get greedy and watch all of those profits evaporate by holding too long.

I’m willing to keep holding Thursday if the rally continues, but I will be looking for any excuse to start locking in some profits. As easy as it is to buy back in, there is no reason to hold through the next step back no matter how innocently it starts off.

I still think 4k is in the cards and as soon as I sell, the first thing I do is start looking for the next entry point. But if I sell a partial position and the market goes higher without me, that’s fine too. Only fools try to squeeze every last dime out of the market.

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