Why smart money is buying this bounce

By Jani Ziedins | End of Day Analysis

Oct 31

Free After-Hours Analysis: 

The S&P 500 rallied another 0.6% Tuesday, extending this week’s rebound.

Nothing meaningful changed in the headlines to justify this bounce, but after a certain amount of selling, we always run out of sellers. This time, it took eight days to exhaust the supply of near-term sellers.

As I wrote last week, and again on Monday, this is the bounce I was waiting for:

I have no idea if Monday’s bounce will stick, but it was a good start, and that’s all I needed to put on a partial position. Start small, get in early, keep a nearby stop, and only add to a trade that’s working.

If the index retreats on Tuesday, I will pull the plug for a small loss and try again next time. If the rebound keeps going, I will add more and lift my initial stops to near my entry points, greatly reducing my risk.

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I still have no idea how long this rebound will stick around, but now that prices are comfortably above my entry points, I lifted my stops to my purchase prices, making this nearly a risk-free trade. If the index retreats on Wednesday, I get out near breakeven. If the rebound continues, I will let those profits keep rolling in. These low-risk/high-reward trades are what I dream of.

The odds are still good this bounce will fail because two bounces fail for every one that works, but if this rallies just a little further, expect bears to start scrambling for covers as they get squeezed.

Maybe this week’s bounce is nothing more than a false bottom on our way lower, but as a nimble swing trader, I’m okay with that. I plan on collecting profits long before the next down wave hits.

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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.