The Smart Way To Trade This Week’s Selloff

Half-full or half-empty? Both sides have good arguments here.

Not extending the selloff is a bullish sign. Collapses are breathtakingly quick. Stop to ask questions and you are already too late. So holding at these levels for a full day is definitely helpful and is the first step in a recovery.

But on the bearish side, there was little dip-buying Thursday. Prices bounce hard and quick from oversold levels, meaning we might not be oversold yet.

So which is it? While both bulls and bears will tell you they know for certain what is going to happen next, the simple truth is no one knows and only time will tell.

In reality, both sides will probably be right. Prices will fall further, initially proving bears right. But inevitably, every selloff finds a bottom and prices bounce, proving bulls right.

What should traders do during turbulent times like these? Leave our biases at the door, stay nimble, and only trade what is happening right in front of us.

Ideally, most of my readers were using sensible stops and bailed out Wednesday afternoon when the index undercut our stops. Now that we’re safely in cash, the first thing we start doing is looking for the next entry point.

Thursday morning gave us an interesting buying opportunity. Unfortunately, the opening bounce failed not long after it got started. But if we were disciplined and started small, got in early, and kept a nearby stop, any slippage from buying that early would have been trivially small.

Small risk, large potential reward, those are the trades we wait months for. Just because it didn’t work this time doesn’t mean it was a mistake. Give me a low-risk/high-reward trade like that and I will take it every time!

The market bounced again off of those mid-morning lows. Again, giving us another invitation to buy a partial position when it got above the opening levels. Again, start small, place a stop under the intraday lows, and wait to see what happens next.

While it would have been nice to see prices rally strongly into Thursday’s close, the market gave us an ambiguous close, deferring its next move to Friday. No big deal. These things happen.

Should we have held that small position overnight or pulled the plug?  That’s entirely up to you. If you like this bounce and are willing to let a small position ride. Go for it. A little uneasy, no problem, pull the plug and try again Friday. There are no wrong answers here.

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And if a person feels like they missed a bounce, don’t sweat a few points here or there. Getting in 20 points late won’t matter much when the real bounce rallies another 200. More important is we get in even if that means missing the lows by a few hours. The timing isn’t nearly as important as most people make it out to be.

And if this isn’t the real bounce and we get dumped out again? No big deal. Trading small positions limits our losses and we simply wait for the next bounce.

Remember, periods like this is when we make our money. If this was easy, everyone would do it. But the payoff will be there as long as we stick with it and don’t give up.

GameStop (NYSE:GME) popped as much as 30% in after-hours trade following reports it was getting into NFTs. If you don’t know what NFTs are, don’t worry, no one else does either. All you need to know is NFTs are the newest buzz term and companies embracing it is the equivalent of adding “.com” to a business’s name back in the 2000s. It’s good for some temporary hype, but real investors want to see the money and so far NFTs have been more hype than substance.

Even with this big pop, GME only reclaimed a few weeks’ worth of losses. This stock is in a strong downtrend and unfortunately a no TLA*, no matter how buzzy, is going to bring its momentum back. (*three-letter acronym)

Written By: Jani Ziedins