The S&P 500 started Friday’s session with nice gains following a better-than-expected monthly employment report. Unfortunately, those gains were short-lived, and the index finished the session -0.6% in the red.
As I’ve written many times, the market is in a choppy phase, and that means lots of back-and-forth. And so far, the market continues living up to that reputation.
I had no idea Friday afternoon’s fizzle was coming, but I’ve been doing this long enough to know chasing that early strength was a risky trade, so I was happy to let that wave of buying pass me by. And the afternoon selling shows why.
Friday’s early push to record highs that subsequently tumbled into the red gave us a great shorting opportunity. Rather than buy Friday morning’s good news and keep pushing prices even higher, big investors were taking profits.
That intraday reversal is never a good sign, especially when the index starts the session at record highs.
The savvy trade was shorting the dip into the red with a stop above the intraday highs. While shorting an uptrend is a risky trade, keeping a sensible stop nearby limits the risk to a very manageable level.
And with all of the air underneath us, the potential upside is multiples greater than the risk. A risk/reward that is skewed in our favor is hard not to take.
And now that the market already moved half a percent in our direction, we can lower our stops to our entry points, lowering our risk even further. These are the setups savvy traders dream of.