Why this week’s red closes are actually bullish

By Jani Ziedins | End of Day Analysis

Aug 11

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The S&P 500 spent most of Friday bouncing around just under breakeven before finishing the session -0.1% in the red.

While red is red, Friday’s price action wasn’t all that bad. The index opened at one-month lows Friday morning, but within a handful of minutes, those sellers disappeared and prices bounced off of those early lows, even spending a portion of the day in the green.

Most noteworthy is the initial push to fresh lows didn’t trigger a follow-on wave of selling. In fact, it was quite the opposite, with buyers taking advantage of those discounts as they pushed the index above those early lows.

As I’ve written previously, the index’s wedging price action lower can actually be bullish. After countless attempts, the best bears can do is knock a few points off of the market at a time. If there was real downside potential here, these five and ten-point violations would spiral into 50 and 100-point losses within hours.

The fact so few owners are interested in selling each day’s successive new low suggests we are on the verge of running out of supply and bouncing. Quite simply, if we were going to crash, it should have happened by now.

To be clear, few things shatter confidence like tumbling prices, so the longer we hold near the lows, the more vulnerable we are. But as long as each fresh low keeps being met with indifference, the market is actually setting up for a bounce despite all the red closes we’ve seen over the last two weeks.

As I wrote on Thursday:

As crazy as it sounds, I will be happy to buy a bounce off of 4,450 Friday

That’s is exactly what I did. Start small, get in early, and keep a nearby stop.

This trade might not work, but I liked the way it set up, and by starting small, getting in early, and keeping a nearby stop, my risk is low. If prices fall on Monday, it is no big deal. I take my lump and get ready for the next trade. But if it works, I add more and lift my stops.

It really is that simple.

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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.