Why no one should have been surprised by Friday’s rebound

By Jani Ziedins | End of Day Analysis

Jan 20

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What a difference a day makes. After falling for three sessions in a row, the S&P 500 came roaring back Friday, adding an impressive 1.9%.

As much as the financial press loves to attribute every zig and zag to some major fundamental catalyst, the truth is the market moved this week for no other reason than it can’t stand still.

The index ran up to 4k last week and that was all the excuse savvy swing traders needed to pull the ripcord and lock in some really nice profits. Their selling triggered reactive waves of follow-on selling as the crowd started to worry that 4k resistance, the 200dma, and 2022’s downtrend line signaled a major top and the market was on the verge of the next big crash.

But as is always the case, when we don’t have a significant and unexpected headline driving the market, the wave of selling exhausted itself and prices bounced.

Lucky for readers of this free blog, this is the exact setup I we were looking for. As I wrote Thursday evening:

[H]eadlines haven’t changed in a meaningful way and this retreat looks like little more than a routine pullback from overhead resistance. While down is down, routine reactions to technical levels rarely lead to big changes in the market’s direction. Think of these as the normal step back that follows every two steps forward…[N]othing has changed and that means this is most likely just another routine buyable dip on our way higher. At least that’s how I’m approaching it until proven otherwise.

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Instead of proving me wrong, the market proved me right in a big way on Friday by rallying nearly straight up. So much for all the fear-mongering and market-bashing going on this week.

But before we pat ourselves on the back too hard, the problem is if this week’s selloff didn’t have the strength to go very far, then we shouldn’t expect Friday’s rebound to carry us very far either. Expect this wave of buying to stall just as quickly as this week’s selling did.

Sometimes we buy the breakout and sell the breakdown. Other times we do the exact opposite. This happens to be one of those opposite times. The market isn’t poised for a big directional move and that means we trade against these breakouts and the breakdowns.

As good as Friday looked, expect the buying to stall over the next few sessions and it wouldn’t be a surprise to see the index retest 3,900 support over the next few weeks.

For savvy traders, this means taking profits when we have them. Everyone that bought Friday morning, move up our trailing stops and even consider locking in some profits proactively because we should be prepared for this choppiness to continue.

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About the Author

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.