Why Tuesday’s nice rebound doesn’t matter

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The S&P 500 finished Tuesday nicely higher, bouncing back from Monday’s retreat from 4,100 resistance.

As I wrote previously, I started locking in worthwhile profits last Friday:

Now, to be clear, I am in no way calling this a top. But the risk/reward has shifted against us after 300 points of upside has been realized and the air underneath our feet gets higher by the day. Markets move in waves, that’s what they do. And we shouldn’t be surprised when the next routine and healthy wave lower arrives.

But as soon as I get out, I always start looking for the next opportunity to get back and I put on a partial position Tuesday morning, exactly as I said I would in Monday evening’s free post:

[M]aybe prices don’t fall any further than Monday’s lows and it is all uphill from here. But as easy as it is to buy back in, I would rather lock in January’s worthwhile profits when I have them rather than risk letting them get away by getting greedy and holding too long. Maybe I end up buying the next bounce Tuesday morning, but that’s the case, no harm no foul.

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Under normal circumstances, I would have added even more Tuesday afternoon given how well the market rallied. And believe me, I was definitely tempted to leverage up, but given the Fed’s looming policy statement headed our way Wednesday afternoon, I knew Tuesday’s price action didn’t really matter to the big picture.

I’m happy to hold a position ahead of the Fed’s policy statement, especially one sitting on a nice profit cushion, but I’m not interested in gambling on the outcome with a full position. As easy as it is for nimble independent traders like us to get into the market, I don’t mind waiting for the market to make up its mind before I put my hard-earned money at risk.

While other people are gambling on the market’s reaction to the Fed’s latest policy statement, I will be over here waiting to hitch my wagon onto whichever direction this wants to go. No doubt I will be a little late jumping on the next big move, but during times like this, I would much rather be a little late than risk getting run over if I’m wrong.

As for what comes next, recent gains leave the market vulnerable to a slip if the Fed doesn’t say all of the right things. But once we work our way through that volatility over the next few sessions, I expect the “less bad than feared” rebound from the October lows to continue. The only question is if it continues from 4,100, 4k, 3,900, or 3,800. And while I count consider myself bullish, the trader in me would love to see this fall to the lower end of that range before bouncing.

Don’t jump on the first knee-jerk reaction Wednesday afternoon because it often goes in the wrong direction, but it won’t be long before the market can no longer hide its true intentions and it starts the next multi-day move. If it’s up, buy it. If it’s down, get out of the way and wait for the next bounce, which could come along as soon as a few days later.

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