Why Friday’s huge rebound was inevitable

Free After-Hours Analysis: 

The S&P 500 exploded 1.6% higher Friday and easily reclaimed 4k support.

While I’m sure the financial press came up with a justification for this latest wave of buying, the simple truth is we ran out of sellers and a rebound was inevitable.

A month of selling is a long time and the lack of acceleration under 4k support told us supply was drying up. As scary as the last few weeks felt, we actually haven’t fallen all that far from recent highs.

As I reminded readers over the last few weeks, every routine dip feels like it is the start of something much bigger because if it didn’t, no one would sell and prices wouldn’t dip in the first place.

As expected, without a significant and unexpected fundamental driver changing a large number of peoples’ minds, this latest wave of selling petered out and this bounce was inevitable.

While it is easy to point out these things after the fact, I’ve been telling readers this wave of buying was just around the corner. Here is what I wrote four days ago in a post titled, “Why savvy traders are getting greedy“:

As far as contrarian trading signals go, the market’s pessimism suggests this is the time to be looking for buying opportunities. The last time the AAII sentiment survey had this few bulls was back in early January, which as it turned out, was a great time to buy stocks because the index rallied nearly 10% over the next few weeks.

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Now, some of my critics will point out that even a broken clock is right twice a day. And that’s true, I’ve been trying to buy this bounce for a while, and in the market, early is the same thing as wrong. But I knew the odds of failure were high and that’s why I was buying each of those previous bounces with a partial position and a nearby stop. When the previous bounces failed, I got out for a small loss on a partial position.

While I’d much rather be making money, small losses aren’t the end of the world. And Friday was when the patience and persistence finally paid off. After taking a few small losses on previous buys, I was in the right spot at the right time when Thursday’s selling stalled and prices bounced hard.

I got in early and when that trade kept working, I quickly scaled up my position. So yes, I was wrong and collected a couple of small losses along the way, but Friday was the day when it all came together and I made a pile of money on a full position.

Small losses and big wins are the way we beat this game.

That said, we need to keep expectations in check. Just as there wasn’t a real reason to be crashing, there isn’t a real reason to be rallying. That means we shouldn’t expect a big rally and this rebound is simply a normal and routine gyration higher following a bit of down.

Rather than get cocky and complacent with my newfound success, I recognize this is still a choppy market and I don’t want to let this pile of profits escape, so I’m already lifting my trailing stops and getting ready to lock in worthwhile profits if the selling returns next week.

Remember, we only make money when we sell our winners. We don’t have to look far to find bears who wish they were a little more proactive in locking in their profits.

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