Tuesday’s powerful clue that told us Wednesday’s 1.5% pop was coming

Free After-Hours Analysis: 

The S&P 500 surged 1.5% Wednesday, adding an exclamation point on Tuesday’s modest bounce off of 3,800 support.

While a lot of people were caught off guard by Wednesday’s unexpected strength, especially shorts that got run over by this reversal, it really wasn’t that hard to see it coming. As I wrote Tuesday evening:

The S&P 500 finished Tuesday up a measly 0.1% after bouncing off of 3,800 support earlier in the session…

[S]uch a marginal gain would normally be easy to brush off in the face of the more than 200 points of selling since last week’s intraday highs. But Tuesday’s 0.1% gain was anything but normal.

Few trading signals are more powerful than a market that doesn’t do what it is supposed to do [after the Bank of Japan’s suprise move]. Now, we can’t read too much into a few hours of unexpected resilience, but so far the bounce off of 3,800 looks really good…

Well, here we are a day later and instead of crashing through 3,800 support, we are challenging 3,900 resistance. Blink and you missed a really nice trade.

But it was more than just Tuesday’s uncanny resilience that set this trade up. As I wrote last Friday evening:

As for what comes next, if prices bounce Monday morning, I’m closing the remainder of my shorts and even going long if those early gains persist for an hour or two. Starting small and putting a stop under the early lows would be a great, low-risk entry.

While bears were pressing their shorts on Monday and Tuesday, I was taking profits and buying the bounce. Amazing what happens when a trader views this market through an agnostic lens and doesn’t get trapped by bullish and bearish biases.

As for what happens next, the much-delayed Santa Clause rally is finally upon us. Don’t expect a big move, but a modest drift higher through the final week of the year wouldn’t be a surprise, especially if bearish selling capitulated Tuesday morning.

For those playing along, keep holding what we have and lift our stops to at least our entry points if not a little higher, turning this into a low-risk, high-reward trade.

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