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The S&P 500 decisively broke through 4,450 support and the 50dma on Wednesday. The index now finds itself just a hair above 4,400. And so continues the reflexive selling that started early Tuesday after China lowered rates in an attempt to revive its sluggish economy.
Stocks go up and stocks go down. No one should be surprised by this pullback from 4,600 following a nearly 800-point rally since January.
As I wrote back in late July when the index was testing 4,600:
The run to 4,600 was a good one, but rather than greedily hold for higher prices, I collected worthwhile profits and got ready for the next trade. At this point, I’m looking at 4,600 as a tipping point. Either we keep going higher, or we don’t. If the rally resumes later this week or next week, I will buy back in. But if the market is finally ready to take a break and cool off, I’m happy to short the step back to 4,400 support.
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Readers know I collected my short profits last week as the dip stalled near 4,450 support. A continued pullback to 4,400 was always possible, but I’m never one to risk holding too long when I have worthwhile profits in hand. In my opinion, there is no greater crime than letting a good trade turn bad, so I always err on the side of taking profits too early.
When the market attempted a bounce off of 4,450, I even gave the long side a shot again with a small position and a nearby stop. As everyone knows by now, that 4,450 bounce didn’t stick.
While buying this bounce didn’t work, I don’t mind. My loss on a partial position with a nearby stop was trivial. And to be honest, the lower this goes now, the more money I make buying the next bounce, so I’m actually happy my initial trade failed and I get to buy an even bigger discount when this finally bounces.
I hope prices will fall even further on Thursday and Friday. But if they don’t, I will be one of the first standing in line to buy the next bounce. I’d love to get in at much lower prices, but I don’t get to choose what the market gives me. If this wants to bounce at 4,400, I’m a buyer. If it waits until 4,300 to bounce, that’s even better. The only thing that matters is I don’t get left behind when the bounce finally arrives.
Remember, we don’t buy dips, we buy bounces. And as always, start small, get in early, keep a nearby stop, and only add to a position that’s working. Follow those simple rules and we will be ready for whatever comes next.
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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.
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