All good things must come to an end

Free After-Hours Analysis: 

The S&P 500 added another 0.2% Wednesday, making this 11th winning session out of the last 13.

Not bad, considering sentiment was in the toilet three weeks ago after the index fell into correction territory (-10%). Yet, here we are, a handful of sessions later, within 2% of 52-week highs. Funny how that works.

Luckily, loyal readers were well-positioned for this whipsaw. As I wrote in my free analysis three weeks ago when this 400-point rebound was only one day old:

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.

As I frequently remind readers, buying bounces is hard because two-thirds of them fail. But if we limit our losses on the false starts by entering with partial positions and keeping stops nearby, riding a winner higher with a full position will more than offset any previous losses.

Sign up for my FREE email alerts so you don’t miss the market’s next big move

I will be the first to admit I didn’t see a 400-point rebound coming, but we must be standing in the right place at the right time before we can get lucky. And that’s exactly what happened. I didn’t know how far and fast this rebound would run, but I knew a bounce was coming, and I grabbed hold.

But 400 points later, it is hard to be excited by the diminishing rewards left ahead of us versus the growing risks looming underneath us. Everyone knows stocks move in waves, and just as obvious as it was that a bounce was coming our way three weeks ago, it is equally obvious that this rate of gains cannot keep going.

Now, to be clear, I’m not calling this a top and the index’s momentum could easily push us higher for a few more days, but common sense tells us the rewards above our heads are far smaller than the risks underneath us.

This has been a great trade, but all good things come to an end. We only make money when we sell our best trades, and this is the time to be collecting some very well-earned profits.

Sign up for my FREE email alerts so you don’t miss the market’s next big move

If you find these posts useful, help me out by liking and sharing them!

Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox every evening.

What’s a good trade worth to you?
How about avoiding a loss?
For as little as $1.28/day, receive actionable analysis and a trading plan every day during market hours

Follow Jani on Twitter @crackedmarket