Why Monday’s strange price action didn’t surprise savvy traders

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session unchanged. This isn’t the price action most investors would have expected if they knew a last-second deal would avert the October 1st gov’t shutdown. But the market has a nasty habit of not doing what most people think. (Hence why so many inexperienced traders complain, “the market is fixed.”)

There are a few reasons this weekend’s budget deal didn’t move markets. First, this is nothing more than a patch job that, at best, delays the budget fight for a few more weeks. Second, if the disgruntled Republicans depose McArthy, then the next round of negotiations could end up being even more contentious. And lastly, a gov’t shutdown happens every few years. It isn’t a big deal, and the market wasn’t really worried about it. If stocks don’t fall much on a headline, they don’t have much room to rebound after everything gets solved.

As readers know, I bought last week’s bounce:

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.

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As it turned out, I got stopped out for a small gain Friday afternoon after lifting my stops above my entry points. While this wasn’t the trade I was looking for, being wrong about the bounce and still making money isn’t a bad thing. Give me a free trade and I will take it a million times over.

As for what comes next, not falling on Monday is always better than falling, especially given what September looked like. Unfortunately, the longer we hang out near recent lows, the more likely it becomes that we make new lows.

I am not a bear by any stretch of the imagination, but if this market is going to bounce, it needs to happen soon. I will buy back in if prices bounce on Tuesday, but I need to see constructive price action first. Until then, I’m sitting on my hands and watching this from the safety of the sidelines. (Aggressive traders can short another breakdown.)

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