The S&P 500 finished 0.7% in the green on Tuesday as the index continued Monday morning’s rebound off of 4,200 support.
As obvious as this sounds, either 4,200 support holds, or it doesn’t. But sometimes, it is worth stating the obvious because a binary condition like this sets up a really nice trade. Buy the bounce early with a nearby stop and see what happens.
If prices rally back up to the 50dma, we rake in a pile of cash in a 3x ETF. If the selling resumes, we get dumped out near our entry points for a small loss. Big rewards and small risks, what’s not to like about this trade?
Of course, my critics will complain that I’m bringing this up after the bounce. But if they read Monday’s post, I was saying the same thing hours after this opportunity landed in our lap:
I liked Monday’s early bounce, and I bought it. But as a new position, I started small and kept a nearby stop under Monday’s lows. If the rebound continues on Tuesday, I add more. If the selling resumes, I get out and wait for the next bounce.
I have no idea if this trade will work, but I will never turn down a low-risk/high-reward trade. And so far, it looks promising. Squeeze the bears on Wednesday or Thursday, and I will already be looking to cash in some of these 3x ETF profits.
Remember, some of the best buying opportunities happen in down markets when the bounces come hard and fast. Look at all the profits savvy bounce buyers collected a few weeks ago when the index rallied nearly 200 points from the October lows.
And if I get dumped out near my entry points on Wednesday, it’s no big deal. I wait for the next bounce and then try again.
As my dad always told me when I was a teenager, “You snooze, you lose.”
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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.