Why Friday’s failed bounce is good news for the half-empty crowd

By Jani Ziedins | End of Day Analysis

Jul 21

Free After-Hours Analysis: 

The S&P 500 attempted a midday bounce Friday as it tried to recover some of Thursday’s stumble following disappointing earnings from NFLX and TSLA. Unfortunately, the dip buyers failed to show up in meaningful numbers and the index finished Friday’s session flat.

But this lethargic price action was expected. As I wrote in Thursday afternoon’s free post: 

While we can’t read too much into one day’s price action, recent gains across the market leave us vulnerable to some near-term weakness. I’m in no way predicting a top, but it wouldn’t surprise me if the indexes cooled down following this month’s impressive 200-point run to 4,600.

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Friday’s 0.03% session didn’t give us much to go on. The half-full crowd points to the stalled selloff. The half-empty side counters with Friday’s failed midday bounce.

Who is right? At this point, either side could be right. Lucky for us, the market is terrible at keeping secrets won’t be able to hide its cards for long.

If selling is truly over, prices will bounce nicely on Monday. If there is more selling left in this cool-down, expect another wave to hit us instead.

As far as trades go, this one is very straightforward; buy strength and sell weakness.

For those of us who shorted Thursday’s weakness, keep holding that short with nearby stops. If we get blown out of our positions on Monday, it’s no big deal. That’s the way trading goes. Thursday’s short was a low-risk/high-reward trade that was worth taking even if it didn’t work. But if the short keeps working Monday, press it and move our stops down to our entry points, turning this into practically a free trade.

For the long-only crowd, wait for the bounce. If it doesn’t happen on Monday, then expect a few more days of selling and a much better dip buying opportunity later in the week.

Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

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About the Author

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.