Why Monday’s Rebound Was Predictable
Jani Ziedins | Nov 30, 2021 12:04AM ET
The S&P 500 bounced back nicely Monday, reclaiming 1.3% of Friday’s headline-fueled bloodletting.
The Omicron variant continues to dominate headlines, but after a weekend of thinking about it, investors are far less fearful than they were last week.
But this isn’t a surprise. As I was warning premium subscribers all last week, light holiday trade often leaves us vulnerable to elevated volatility. That’s because when big money heads out on vacation, emotional retail traders take control of the market. And boy do these little guys love overreacting to everything.
But as expected, when big money’s steady hand returned, a calm came back to the market. If the original coronavirus lockdowns and follow-up Delta variant couldn’t kill this bull market, why should we be any more afraid of Omicron? And based on Monday’s price action, the market’s answer is we shouldn’t.
Now, one day’s bounce doesn’t mean we are out of the woods. And without a doubt, the situation could take a turn for the worse, but between Friday’s tumble and Monday’s bounce, we have plenty of key levels to watch. The most basic being as long as prices remain above Friday’s intraday lows, this bounce is alive and well.
While it was fairly predictable to anticipate Monday’s bounce, that doesn’t mean holding Friday’s selloff was the right call. If the selling violated our stops, we had no choice but to get out. As the saying goes, it is better to be out of the market wishing you were in than in the market wishing you were out.
Monday’s bounce made a lot of sense, but we just as easily could have opened down -3% too. Anyone trading a leveraged ETF, that’s just too big of a risk to take. It is better to pull the plug and wait to buy the bounce even if that means missing a little in the exchange. In my book, that’s really cheap insurance and is worth it every time.
But now that everyone is back in the market following Monday’s bounce, it is time to spread our stops between Monday’s open and Friday’s lows and see where this bounce takes us.
And if we get dumped out, no big deal, we simply wait for the next bounce and try again.
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