Is The S&P's Bounce Still Buyable Or Is Smart Money Selling The Breakdown?
Jani Ziedins | Feb 04, 2022 02:07AM ET
Four consecutive up-days was all the S&P 500 could manage before the inevitable down-day came along and took back some of our profits.
But this was expected and only a fool was surprised by Thursday’s step back. -2.4% is definitely on the larger side, but as I wrote previously, the market loves symmetry. January’s spectacular correction was followed by a huge bounce, which ended with this oversized step-back. This is the way the market works. Always has, always will.
But as long as the amplitude of each successive swing is smaller than the one preceding it, we are moving in the right direction and the market is finding its footing.
Will stocks bounce back today? Or will we violate the 200 dma and retest 4,400 support? Either outcome is likely and that means our trading plan needs to account for both.
Lucky for us, the plan is super easy: buy the bounce and sell the breakdown. It doesn’t need to be any more complicated than that.
This is an emotional market and that means the next move will also be oversized. And lucky for us, those are the easiest to trade because once they get going, they keep going.
As I told readers Wednesday evening, if Thursday’s opening gap bounced, hold the bounce and move our stops up to those early lows. While the mid-morning bounce looked promising, the index fizzled and retreated below the opening levels shortly after lunchtime. And that was our signal to start peeling off this week’s profits.
As easy as it is to buy back in, there is no reason to stick with a falling market. If prices bounce Friday morning, great, we get back in. If Thursday’s selling continues into Friday, no big deal, step aside and wait for the next bounce. Which could come as early as Friday afternoon.
People freak out when the market gets this volatile, but it really is easy to profit from these swings if we keep our heads and are willing to act decisively.
Start small, get in early, keep a nearby stop, and only add to a trade that is working. Follow those simple rules and we don’t have to fear volatility. In fact, with a little bit of practice, you will actually start looking forward to these profit opportunities.
Meta Platforms (NASDAQ:FB) set all kinds of records during Thursday’s -26% implosion. But we already discussed most of this Wednesday evening and it isn’t worth repeating tonight. Instead, FB owners want to know what comes next, and unfortunately, the news isn’t good.
Get The News You Want
These things are almost never one-day events and that means there is more selling ahead of us. While the stock fell a tremendous amount and this was the highest volume session by miles, we still didn’t get a whole lot of turnover in ownership during Thursday’s session. The bulk of the losses came when the market was closed and by the time it opened, most owners were too shell-shocked to sell. That means there is still a lot of supply left in this stock.
If you want a recent example, check out Peloton (NASDAQ:PTON). That’s what it looks like when a high-growth stock stops growing and investors lose confidence. It isn’t pretty.
Now, it is premature to write off FB as dead. This is still one of the most successful and profitable companies in the world and no doubt the stock will make a comeback at some point. But it needs to get waaaay more oversold before that happens.
But for the optimists in the audience, if this stock breaks convention and actually bounces, that is a buyable opportunity with a stop under recent lows. Just don’t get your hopes up.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.