Why smart money was buying Wednesday’s rebound

By Jani Ziedins | End of Day Analysis

Jan 25

 Free After-Hours Analysis: 

Unsurprisingly, the S&P 500 tumbled back under 4k support Wednesday morning.

While the market looked good Tuesday, as I’ve been writing over the last few weeks, the market is currently in a back-and-forth mood and that means every bit of up is followed by a bit of down. That’s why I told readers I was proactively pulling some profits off the table Monday and again on Tuesday:

At points like this, it makes sense to lock in some of our really nice profits because we don’t make money until we sell our winners. But at the same time, the market is still behaving well, so it is equally worth holding on to some of our positions too. With one foot in and one foot out of the market, we will be in good shape no matter what happens next.

If I had known Wednesday’s open would crash through 4k support, I would have sold everything, but tradng is a game of probabilities and the odds of a continuation versus a retest of support were 50/50. In cases like this, it is good to have some money in the market and some profits safely on the sidelines, that way no matter what happens, part of my trade is in the perfect position.

Wednesday morning it turned out that the part I sold was the better half, but it just as easily could have been the part I was still holding.

As for the rest of my trade, Wednesday morning’s givebacks undercut my stops, so I locked in those profits too. But rather than give up on this trade, as soon as I get out, I start looking for the next bounce, which is a good thing because it arrived an hour later.

As it turned out, most owners shrugged at Wednesday morning’s selling and kept holding. That reluctance to sell put a floor under prices and this turned into yet another piece of evidence that this market wants to go higher, not lower.

Red days are a healthy and normal part of every move higher, and so far I don’t see anything in this test of 4k support that says this is anything other than one of those normal and healthy step-backs on our way higher.

While holding through these gyrations would be easier than trying to trade around them, if we don’t pull the plug when prices fall, that means we are trading without a safety net. And while that might turn out okay most of the time, it only takes a few times of getting it wrong to erase all of those profits we made on the way up.

As much as I don’t like darting in and out of the market, it is a small price to pay for the safety of knowing I will never be caught on the wrong side of a big move. And many times it works out like it did on Wednesday where I end up getting back in at lower prices than where I sold on Monday and Tuesday. The difference doesn’t add up to a lot of money, but getting paid to reduce my risk is about as good of a deal as it gets.

I bought Wednesday morning’s bounce with a stop under the mid-morning lows. I added more around lunchtime, and even more when the index got back above 4k.

Act well Thursday and all of my stops will get moved above my entry points, making this a free trade. Not bad for a market that by most accounts should be going down. Good thing I trade the market and not other people’s opinions.
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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.