Why savvy bulls were ready for Tuesday’s retreat

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The S&P 500 took a step back Tuesday, shedding -1.2% ahead of Wednesday’s Fed meeting and rate decision.

Two steps forward, one step back. Nothing unusual or surprising about this price action. As I wrote Monday:

Now is the time to start protecting last week’s profits by lifting stops and even taking some partial profits proactively. We don’t need to harvest a lot, but it is amazing how refreshing it feels to lock in some profits and put our minds at ease. A little security is all we need to ride through the inevitable chop as we continue challenging 4,200 resistance over the next few days and weeks.

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With a nice pile of profits locked in Tuesday morning, we were eagerly looking for the next buying opportunity. And as luck would have it, we didn’t need to wait long before the selling stalled and bounced in mid-morning trade.

As easy as it is to buy back in, there are zero reasons not to take worthwhile profits when we have them. And in many instances, we get back in at lower prices, like we did Tuesday afternoon. (Start small, get in early, keep a nearby stop, and only add to a trade that is working.)

A big portion of Tuesday’s second thoughts was driven by fear of the Fed’s policy announcement Wednesday afternoon. While most people expect a 0.25% rate bump and pause after that, until the decision is locked in, there is some risk. And with the index bumping up against 4,200 resistance, traders were overcome by a bout of second-guessing.

As for Wednesday, the Fed is not going to surprise us and we will get exactly what most people are expecting. That won’t stop impulsive traders from mashing the buy/sell button in the minutes after the announcement, but after a flurry of impulsive trading, the market will settle down and go back to what it was doing previously, which is consolidating recent gains under 4,200 resistance ahead of a move to challenge and even break through this key level.

Nothing changed Tuesday and nothing will change Wednesday. Stick to the plan and that is buying bounces ahead of a move above 4,200 over the next week or two. And as always, this is a choppy market and that means locking in worthwhile profits when we have them. Buy the dip, sell the bounce, and repeat as many times as the market lets us.

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