2023 started the same way 2022 ended, volatile and directionless. The S&P 500 opened Tuesday’s session with nice gains, but minutes later the index retreated into the red and quickly retested 3,800 support.
As dramatic as that 80-point collapse felt, rather than trigger a bigger wave of follow-on selling, supply dried up and prices bounced, which wasn’t a surprise because that’s exactly what we’ve seen every time the market tested 3,800 support over the last couple of weeks.
Big money is still on vacation, and that means retail investors are still in control. And in typical retail fashion, these impulsive traders overreact to every little bump in the road. Lucky for us, their accounts are so small they run out of money long before they can do any real damage.
Big money starts returning to the office later this week and into next week. That’s when we will get a better sense of the market’s mood and what direction we’re headed next. Until then, expect these choppy reversals to continue.
As for trading this chop over the next couple of sessions, if dumb money is selling, the smart move is fading that weakness. I bought this morning’s bounce off 3,800 support with a stop just under this level. While not a high-probability, high-reward trade, if I can get in with such limited risk, why wouldn’t I give it a shot?
And the same goes for when prices approach the upper end of the recent trading range Wednesday. When dumb money starts buying is when I plan on harvesting profits in this trade.
The next directional move is coming, but we will get a few more of these dramatic intraday reversals first. Might as well take advantage of them while we can.
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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.