Is Smart Money Getting Out Before Things Get Worse?

Wednesday was yet another bad session for the S&P 500 as it shed a further 1.8%, leaving the index 12% under January’s highs.

Nothing new happened Wednesday to drive this latest round of selling and instead, this continues to be "sell before things get worse" sentiment convincing people to abandon stocks at 8-month lows.

S&P 500 Daily Chart

But to be perfectly honest, if I were going to sell, I would have done it weeks ago at the highs, not after stocks tumbled to multi-month lows. Which coincidentally enough, is exactly what I did back on Jan. 5:

"Does [January 5th’s] dip stand any better chance of succeeding than all of the other aborted selloffs the market shrugged off last year? Probably not. But as nimble traders, why do we need to pick sides? As easy as it is to jump out and get back in, why would anyone want to ride through a near-term dip if they didn’t have to?"

Well, as is turned out, the market’s "near-term dip" crashed another 500 points from that day’s close. Boy am I glad I switched to defense back when everyone else was too "fat, dumb, and happy" to be bothered.

These are the savvy moves we make when we follow the market’s lead and ignore what everyone else thinks "should" happen.

While I cleared out of the market on Jan. 5, I bought a few of these bounces on our way lower. That’s because emotional markets bounce hard and fast. If we get in early enough, within hours we build a nice profit cushion protecting our backside.

While most of these bounces turn out to be false bottoms and stocks ultimately continue lower, buying the bounces early allows us to move our stops up to our entry points and sometimes even a little higher. (Imagine that, being wrong on a trade and still making money. It doesn’t get any better than that!)

While no one is getting rich profiting off these failed bounces, the most important thing is we stay in the game. While the first, second, or third bounce might fail, one of them is going to work and it will heap huge profit on those that get it right.

My approach to profiting from this volatility is simple, jump aboard these bounces early, often moving my stops up to my entry point, and then waiting for the real bounce. If this turns out to be another false alarm, no big deal, I get out and try again next time.

Traders dream of low-risk, high-reward setups. Well, this is one if we have the courage to trade it. Buy the next bounce; start small, get in early, keep a nearby stop, and only add to a position that is working. If the next bounce doesn’t work, no big deal, get out and try again the next day, the day after that, or the next week.

This emotional market is well on its way to getting oversold and that means the next bounce will be hard and fast. Don’t be left standing on the sidelines when it happens.