Why I’m already buying Friday’s bounce

By Jani Ziedins | End of Day Analysis

Aug 25

Free After-hours Analysis: 

Friday’s session took the S&P 500 on another wild ride. The index opened up 20 points, then fell 40 points from those early highs, before finally rebounding and closing with a respectable +0.7% gain. Watch that price action too closely, and one is bound to get whiplash.

The big economic headline was Powell’s speech from Jackson Hole, where he stressed a cautious approach to further rate hikes. That was enough to keep the market from tumbling into another tailspin, but it wasn’t enough to get buyers to start chasing prices higher with reckless abandon. In the end, we recovered half of Thursday’s tumble, which was a fairly decent showing, all things considered.

Lucky for us, this performance is exactly what I was looking for. As I wrote Thursday evening:

As for what comes next, last Friday’s bounce is still alive, even if it is on life support. If we trade well Friday afternoon, Thursday’s selling will be nothing more than the herd getting spooked and panic selling. On the other hand, if the index falls under Friday’s lows, anything is possible.

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The index held above Friday’s lows and closed decently well, making this a buying opportunity.

The market’s natural inclination is to go up, and breakdowns are breathtakingly fast. Combine those two concepts, and Friday’s modest rebound definitely favors the bulls. If we were going to break down, prices should have taken another tumble on Friday.

We are still in the early stages, and any stability near the lows is fragile. It doesn’t take much to trigger the next wave of selling, but so far, this is acting well enough to keep giving it the benefit of the doubt.

At this point, I’m cautiously optimistic this Thursday’s tumble was a fluke, not last Friday’s rebound. For the time being, I’m a buyer of Friday’s bounce, with stops not far behind.

If the bounce continues on Monday, I let those profits come to me. If the selling resumes, I get out for a minor loss and try again next time. Lots of upside and limited downside. What’s not to like about this trade?

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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.