Why the safe trade is buying Wednesday’s bounce

By Jani Ziedins | End of Day Analysis

Sep 27

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It looked like Wednesday would be another ugly session for the S&P 500 as the index skidded another -0.8% in midday trade. But just when all hope was lost, the index bounced hard, erasing all those losses over a handful of minutes.

While it is definitely premature to claim September’s selloff is over, when it ends, this is what it will look like.

As I wrote Tuesday evening, I was looking for a bounce, and Wednesday afternoon’s pop definitely qualifies:

Maybe prices bounce in the second half of the week, or maybe it doesn’t happen until next week. But as long as I wait for capitulation and the inevitable bounce (and keep a nearby stop), any false bottoms won’t be a problem. More importantly, I stay alert and ready to go because the market loves symmetry and the inevitable bounce will come hard and fast. Wait a few hours too long, and you will miss a big pile easy and fast profits.

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I don’t know if Wednesday was the true capitulation bottom I’ve been waiting for, but I do know that buying the bounce is the best trade a person could make here.

By getting in early, a savvy trader is already sitting on a profit cushion and moving their stop up to their entry points, making this a low-risk trade. If the selloff resumes Thursday, no big deal, we get out near our stops, no harm, no foul. But if the bounce continues, a wave of profits will come rolling in hard and fast. Low-risk, high-reward trades are what dreams are made of.

As I said above, it is way too early to claim the selloff is over, but this is the best buying opportunity we’ve had in a while. And if this bounce doesn’t work, no big deal, we get out and try again next time. One of these is going to work spectacularly well, and we don’t want to miss it.

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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.