Why smart money is buying this bounce

Free After-Hours Analysis: 

The S&P 500 gave up -0.3% on Tuesday after starting the session up a respectable 0.4%

Nothing much happened in the headlines, and this continues to be a sentiment based trade echoing last week’s Chinese rate cut.

As I said last week, it’s been forever since China mattered to U.S. stocks, and I don’t think that is going to change here. Instead, the market cooled off for no other reason then it needed to cool off, and it didn’t really matter what the headlines were.

Since there isn’t much bite to last week’s headlines, it won’t require a massive capitulation to reverse itself and pull out of this tumble. Odds are decent Friday could have been the worst of this latest wave of selling.

Luck for readers, we were ready for it. As I wrote on Friday:

By acting decisively Friday morning, we already have a nice profit cushion and can move our stops up to our entry points, greatly reducing our risk. If this bounce is the real deal, the profits will keep rushing in. If this is another fake bottom on our way lower, we get dumped out near our entry points and get to try again next time, no harm, no foul.

As for next week, if the index retreats back to Friday’s intraday lows, all bets are off. But until that happens, we have the green light to keep holding, adding, and lifting our stops.

We will learn a lot about the market’s mood over the next three sessions. That’s when either the buyers or the sellers run out of ammunition and the market moves in the opposite direction. A strong performance in the back half of the week and the bounce is still on. Fall back to the lows and bears are still in c0ontrol. It really is that simple.

At this point, the bounce is still alive, and I’m giving it the benefit of the doubt until it proves me wrong.

Keep holding Friday’s purchases with stops already moved up to at least our entry points. If the rebound continues, we let the profits roll in. If the selling resumes, we get out near our entry points and try again next time. Lots of upside and very little downside, what’s not to like about this trade?

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