Why Wednesday’s dumb trade looks genius on Thursday

By Jani Ziedins | End of Day Analysis

Sep 28

Free After-Hours Analysis: 

The S&P 500 popped 0.6% Thursday, adding to Wednesday’s late rebound.

Lucky for readers, this is the exact setup I was waiting for. As I wrote in Wednesday evening’s free analysis:

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.

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Thursday’s price action played out as expected, and everyone with the courage to buy Wednesday afternoon’s bounce is sitting on a nice profit cushion. Move stops above our entry points and this is practically a free trade. If the rebound continues, we make a pile of profits. If the selling resumes, we get out near our entry points for a breakeven trade. That’s a phenomenal risk/reward, and only a fool would criticize it.

As for what comes next, nothing meaningful changed in the headlines, and all of the problems that triggered the September selloff haven’t been resolved. But as I’ve written before, this is a sentiment trade, and sentiment frequently swings back and forth without rhyme or reason.

Between the Fed keeping interest rates higher for longer and the Federal gov’t on the verge of shutting down, there really isn’t a lot of good news going around right now, but that’s the point. When all of the headlines are bad, they can only get better. As I’ve written before, stocks will bounce long before the good news hits the presses. That means we must be brave enough to buy when everyone else is still in a foul mood. Anyone waiting for the news to become official will be way late to the party.

Is the worst of the September selloff already behind us? I have no idea. But I like this bounce, and it is giving us a ton of headroom to lift our stops, making this trade worthwhile even if it doesn’t work out in the end.

Maybe bears are right, and we’re wasting our time buying this bounce, but if we can do it in a low-risk way, why not give it a shot? One of these bounces will stick, and this could easily be it.

At this point, keep doing what is working and move our stops up to at least our entry points, turning this into a low-risk trade. If it works, great. If not, we get out and try again next time.

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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.