Why Markets Should Have Been Ready For Thursday’s Pullback
Jani Ziedins | Jan 14, 2022 03:05AM ET
Thursday started off well enough for the S&P as it opened with a 0.2% gain. Unfortunately, that was as good as it got and it was all downhill from there. By the end of the session, the index shed 1.4% and it closed at the daily lows. Ouch!
As the saying goes, easy come easy go. Luckily this drop didn’t surprise readers of this blog and we were ready for it.
As I reminded readers earlier this week:
First bounces have high failure rates. And this bounce is not any different. When everything starts feeling easy is when the market tends to pull the rug out from underneath us.
Now don’t get me wrong, I was not predicting a top Tuesday evening. I learned a long time ago trying to predict the market’s exact turning points is a fool’s game. But just because we are not predicting the market’s next move doesn’t mean we cannot prepare trades based on probabilities.
The market covered a huge amount of ground from Monday’s very nice (and very buyable) bounce. That does two things. First, the higher we go now, the less upside we have remaining in the move. And two, risk is a function of height, so the higher we are, the more room we have to fall.
Less upside and more risk? That is a poor buying environment and tells us we should be shifting away from offense and getting into a defensive mindset.
If I traders came into Thursday with a defensive game plan, they would have been perfectly positioned to protect this week’s nice profits.
Anyone playing defense Thursday is now we’re sitting on a pile of profits. But rather than pat ourselves on the back, it is time to start looking for the next buyable bounce. It could come as early as Friday so we need to be ready.
Maybe the selloff continues Friday and the index crashes through 4,600 support. Or maybe prices bounce off of this support level Friday morning. Either way, cash is the best place to be because we don’t have to worry about how big this selloff will be. Instead, we eagerly await the next trading opportunity. And the lower this goes now, the more money we make buying the next bounce.
If the market bounces Friday, remember, start small, get in early, and keep a nearby stop. And if the index closes at the upper end of the day’s range, add more.
Did you miss the signals telling us to get our defensive trading plan ready? Don’t sweat it.
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The meme stocks are getting killed. Sometimes things get so bad they become good. But in the case of GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC), and HOOD (NASDAQ:HOOD), bad is just bad. These are momentum stocks and the momentum is most definitely negative.
Savvy traders abandoned these stocks when they violated support back in November. But if a person is still hanging on to these deadbeats, it isn’t too late to sell. Things will only get worse the longer you wait.
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