The S&P 500 popped Tuesday morning after inflation hit a new 40 year high.
While record-high inflation and rising stock prices don’t go together intuitively, that didn’t stop people from chasing that early wave higher. Apparently, a fair number of traders were relieved inflation was not even worse.
Unfortunately, that relief proved short-lived and stocks ultimately slumped under 4,400 support in late afternoon trade.
But as wild as the intraday ride felt, it was actually a fairly benign session with the index finishing down a modest 0.3% and just a hair under 4,400 support. Not exactly panic material.
As I wrote yesterday, I was out of the market and looking to buy the next bounce. Which I did Tuesday morning. But as always, I started small, got in early, and kept a nearby stop.
While that initial buy started working right out of the gate, by midday, it was pretty obvious the bounce was faltering and it was time to pull the plug on my small position.
The thing about bounces from oversold levels is they take off and don’t look back. Any kind of second-guessing like we saw Tuesday afternoon tells us stocks are not yet oversold and further weakness is likely.
While my initial stops were back at Monday’s close, there is no reason we need to wait until our stops are hit before we sell. When a trade isn’t working the way it is supposed to, don’t wait for the losses to pile up, get out and start looking for the next trade.
If Tuesday afternoon’s fizzle turned out to be a false alarm, no big deal, there is no reason I can’t jump back in. But most of the time when these things don’t stick, things are only going to get worse the longer we wait.
The greatest strength we have as independent traders is the nimbleness of our size. If we give that up because we are too scared to jump aboard an early bounce or we are too hesitant to pull the plug on a trade going wrong, then we have no chance at surviving this game against bigger, stronger, and more sophisticated opponents.
Big money has its strengths and we have ours. And we can both make money if we stick to our trading plan.
As for what comes next, I’m out and looking to get back in. If prices bounce Wednesday morning, then I get to do this all over again. The best thing about a failed bounce is it means we are that much closer to the real one.
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