The Low-Risk/High-Reward Trade Staring Us In The Face
Jani Ziedins | May 13, 2022 01:29AM ET
The S&P 500 finished Thursday mostly where it started. While the final result sounds fairly innocuous, getting there was anything but a smooth ride. In mid-afternoon trade, the index was down as much as 2% before a late rebound came to our rescue and erased nearly all of those losses.
As has been the case for a while, not much new is going on in the headlines, ie everything that is broken has been broken for a while. Instead, traders are mostly arguing over how bad the looming US recession is going to be. And right now bears are winning.
As I wrote on Monday, if 4k failed, 3,840 was up next. Why 3,840? Because that represents a 20% pullback from recent highs and makes this officially a bear market.
Thursday’s pullback stalled at 3,858 before bouncing, but when it comes to the market, this isn’t hard science, and getting within a handful of points is close enough. At least that’s what yesterday afternoon’s dip buyers thought.
While I feel a little silly buying this bounce given how many false bottoms we’ve had over the last several weeks, I did it anyway because that’s what my trading plan told me to do. I started with a small position and a stop under intraday lows.
Will Thursday’s late rebound stick? Probably not. But I buy all of the bounces because I’m not psychic and I don’t know which one will work. The only way to make sure I don’t get left behind is to buy all of them. And by starting small, getting in early, keeping a nearby stop, and only adding to a trade that is working, I can buy these bounces with very little risk.
In fact, I’ve made more money over the last three weeks buying these quick bounces than I’ve lost. When the market gives us free trades, only a fool passes those up.
If this trade blows up today, I’m only on the hook for partial position and at worst, I take a small loss. But on the other hand, if this rebound takes us back to 4,300, that’s a whole lot of profits. Small losses versus large profits? Yeah, I’m taking that trade every time.
Everyone knows markets move in waves and we’ve been going down for a while. Even bears should be willing to acknowledge we are setting up for a near-term bounce.
Did the cryptocurrency market just go pop? I don’t know. But 50% off the highs for Bitcoin is definitely not good. And unfortunately, most alt-coins wish they were only down 50%.
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While I’m not a Bitcoin fan, I do love bounces, and Bitcoin’s bounce back above $30k Thursday evening is interesting, especially if the equity indexes find a bottom today.
Start with a small position, a stop under $30k, and see where this goes. If the trade works, add more. If it doesn’t, pull the plug for a small loss.
Low-risk/high-reward? These are the trades we dream of.
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