Wednesday turned into another painful session for the S&P 500 as it shed an additional 1%. This leaves us 5% under recent highs of only a couple of weeks ago. Easy come easy go…
But Wednesday’s follow-on selling wasn’t a surprise. As I explained yesterday:
Emotional selloffs rarely kiss support and bounce cleanly. Get this close and a more painful violation is all but inevitable. While there are no guarantees in this business, the risk/reward is definitely stacked against us. As the prudent saying goes, “never try to catch a falling knife.”
We got a modest bounce Wednesday morning, but the dip-buying barely lasted an hour before another wave of selling knocked us under 4,600 support for the remainder of the session.
While that early bounce was technically buyable, as soon as prices undercut Tuesday’s lows, it was time to get out. As easy as it is for independent traders like us to get in and out of the market, there are no valid excuses to continue holding a falling market. That was true two weeks ago when this selloff first started and it remains just as valid today.
Now that most readers are safely in cash, we cannot allow ourselves to sit back and relax. Instead, we are always looking for that next buyable bounce.
Stocks bounce hard and fast from oversold levels. While only fools try to pick bottoms, if we wait more than a few hours after a bounce, we quickly find ourselves getting left behind.
Start small, get in early, keep a nearby stop, and only add to a position that is working. Follow those simple rules and you too will profit from the next big rebound.
And if the next bounce turns into another false start, no big deal. We simply get out at our nearby stop and wait for the next bounce.
By starting with partial positions and having clearly defined exits under recent lows, buying these bounces is a low-risk proposition. Compared to the potential upside of riding this 5% dip back to the highs (15% in a 3x ETF!), I’m more than willing to take a few small and calculated lumps along the way.
This is a numbers game. As long as we stick with our trading plan, we guarantee we will be standing in the right place at the right time when the real bounce finally takes hold.
This will only bounce after most people have given up. That means we need to be more persistent than most.