Why savvy traders saw this bounce coming and how they got ready for it

By Jani Ziedins | End of Day Analysis

Apr 05

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The S&P 500 rallied 1.1% on Friday after the monthly employment revealed another strong showing in April. So much for Thursday’s huge selloff.

In case anyone missed the memo, this is a back-and-forth market. That means frequent and dramatic reversals, as greedy bears learned the hard way on Friday. Unfortunately for them, Thursday’s big dip was a continuation of this back-and-forth pattern, not the start of something new.

Luckily for readers, I said as much Thursday night following that day’s big bloodbath:

[T]here wasn’t any meat to Thursday’s selling, so I question the sustainability of this move lower. We need headlines that will shatter bulls’ confidence and turn them into fearful bears for this rally to break. I didn’t see anything on Thursday that will convince bulls to start selling their favorite stocks. Until proven otherwise, I will be looking for the next buyable bounce; it will probably be here sooner than most people will be ready for.

We didn’t have to wait more than a few hours for the next buyable bounce. Hopefully, you didn’t miss it.

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As for how savvy traders approached Friday’s session, when the sellers failed to show up and prices bounced, that was our signal to buy. As I wrote Thursday evening, this moment was going to arrive far sooner than most people were expecting, which is why savvy traders arrived Friday morning prepared for the unexpected.

For those who bought Friday’s bounce, we can already lift our stops to our entry points, turning this into another low-risk, high-reward trade. If prices retreat next week, we get out at breakeven, no harm, no foult. If the rebound continues, let those profits roll in.

But most importantly, don’t get seduced by the same overconfidence that stung bears on Friday. No matter whose side you are on, this is a back-and-forth market, and that means collecting profits early and often. If you hold too long, those profits will turn into losses.

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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.