This is only hard if we fall for the market’s tricks

Free After-Hours Analysis: 

The S&P 500 tumbled 0.8% Tuesday as it undercut both the 50dma and 4,450 support in midday trade. While an afternoon bounce reclaimed 4,450, it wasn’t enough to get the index back above the 50dma.

I warned readers last Thursday something like this was coming when the crowd was busy gorging itself on stocks at the highest levels in several weeks:

[T]his is a better place to be collecting our 3x ETF profits than adding new money. By the time it looks safe, it is usually too late to buy…Now, don’t get me wrong, I’m not predicting a return to recent lows under 4,400. But everyone knows the markets move in waves, and after a nice bit of up, we need a little down.

[E]xpect a little more cooling off over the next few sessions. For the most aggressive, they can short any incremental weakness but keep positions small and profit targets close. Shorting an uptrend is one of the hardest ways to make money in the market, and it requires impeccable timing.

Sign up for my FREE email alerts so you don’t miss the market’s next big move

Well, here we are, three sessions later, and the index is down ~50 points. While 50 points doesn’t sound like a lot, that turns into real money in a 3x ETF.

For the unfortunate masses who held the previous trade too long, they watched a big chunk of their profits escape during Wednesday’s decline. For the nimble traders that collected worthwhile profits last week and then flipped direction, that’s well over 100 points of profit for a few days’ work. Do that a couple of times a month, and now we are talking real money.

As for what comes next, the market loves symmetry. Since we didn’t rally very far from the August lows, we shouldn’t expect this subsequent step-back to be very large. Maybe Wednesday’s test of 4,450 support is all we need to reset the clock. If that’s the case, we should hold above Wednesday’s lows for the remainder of the week.

On the other hand, if we retreat under Wednesday’s lows, look for the selling to push us back near 4,400 support. At this point, I would expect that to be the last gasps of selling before bouncing. (If it’s not, the August lows are under serious threat.)

As I wrote last week, I wasn’t expecting a lot from this week’s retest of support, and that means I was already peeling off my short profits. If the bounce continues on Thursday or Friday, I’m pocketing all of those short profits and going long again. But if we can’t hold Wednesday’s lows, I’m jumping back on the short bandwagon…

Sign up for my FREE email alerts so you don’t miss the market’s next big move

If you find these posts useful, help me out by liking and sharing them!

Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox every evening.

What’s a good trade worth to you?
How about avoiding a loss?
For as little as $1.28/day, receive actionable analysis and a trading plan every day during market hours

Follow Jani on Twitter @crackedmarket