The S&P 500 rebounded decisively Wednesday, adding 2.6% after oil prices pulled back from recent highs. A month ago no one would have believed stocks would rally because oil was selling for $109/bbl, but that’s the world we find ourselves in.
Markets always take things too far, especially when emotion gets involved. That means it was inevitable this latest spike in energy prices was going to overdo it. And at least to this point, it appears like Tuesday’s run to $130/bbl was a bit too far and prices have since moderated from those overbought levels.
Maybe $130 was the capitulation point and things get better from here. Or maybe this is just a temporary reprieve before the next push to $140. Unfortunately, we won’t know until after it happens.
While some people try to guess the answers ahead of time, successful traders follow the market’s lead, especially when it comes to wildly emotional and unpredictable moves like these.
While $130/bbl is definitely unsustainable, that doesn’t mean prices cannot hit $140 or even $150 before falling back to a more appropriate level.
While I have opinions, I’ve been doing this long enough to know better than to trade those opinions. Instead, I follow the market’s lead and Wednesday the market was telling me to buy the bounce. Start small, get in early, keep a nearby stop, and only add to a trade that is working.
If prices continue higher Thursday, great, I will add more. If the bounce stalls and retreats, no big deal, I get out near my entry points and try again next time.
Maybe this is the real bounce. Maybe it is another false bottom on our way lower. Either way, my trading plan has me covered. Buy the bounce, sell the breakdown, and repeat as many times as necessary.
The next big bounce is coming and it will leave a lot of people behind. Luckily, I won’t be one of them. (If the selloff continues for a few more days or weeks, even better, I watch the carnage from the sidelines and swoop in and grab even bigger discounts when the next bounce finally arrives.)