Why the smart trade was buying Friday’s bounce

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Friday was another back-and-for session for the S&P 500.

For as bad as this week looked, Friday’s session wasn’t all that bad. While we opened the day with losses, that was as bad as it got and it was all uphill from there. The index ultimately closed in the green and near the highest levels of the day. Not bad, not bad at all.

While no one is bragging about a 0.2% gain, bears had the perfect setup to send stocks tumbling for the third day in a row. But rather than trigger the next wave of defensive selling, supply dried up and prices bounce.

As I said Thursday evening, this was the setup I was looking for:

At this stage, only fools are expecting these wobbles to trigger the next big breakdown. The rest of us realize stocks spend most of the time going up and down for no real reason at all. Without a significant fundamental driver behind Thursday’s selling means I’m looking to buy the next bounce. Maybe it arrives Friday morning. Maybe Friday afternoon, or even early next week. But a bounce is coming because it always does.

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Because I arrived Friday morning with a plan to buy the next bounce, I was ready when Friday’s early weakness failed to trigger a bigger wave of defensive selling. When bears couldn’t deliver on that perfect setup, that meant they were already out of gas and it was time to start buying. I initiated a partial position and a stop under the early lows. And when the market continued to trade well in the afternoon, I added more.

To be clear, there are no guarantees in the market and the selling could resume Monday morning. In that case, my stops will keep me safe. But buying fear is never easy and it often means making a hard trade. As easy as it is to hate this latest pullback from 4,200 resistance and violation of 4,100 support, trades that start out feeling wrong often end up being right.

I have no idea what next week holds, but I saw a great buying opportunity and I jumped on it. If I get dumped out at my stops next week, no big deal, I step to the sidelines and wait for the next bounce, most likely closer to 4k support. In fact, being wrong here would actually be a better outcome for me because the further this falls now, the more money I make when it finally bounces back.

Plan your trade and trade your plan. As cliche as that sounds, there are few things more essential to trading successfully.

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