The S&P 500 added a modest 0.3% Wednesday, but that was good enough to make this three up days in a row and leaves the index within 1% of all-time highs. Not a bad result given all the panic selling we were experiencing only a few sessions ago.
But that’s the way this usually works. Prices don’t bounce until the crowd has given up and now a lot of impulsive sellers are left watching this rebound from the outside.
I’m a huge believer in using stops to protect my backside. There is never a valid reason for a nimble trader to hold through a larger pullback. But at the same time, I also recognize stops often get us out unnecessarily.
So what’s a trader to do when faced with these competing concerns of selling just before the bounce or holding through a larger decline?
It actually isn’t that hard if we start with a sensible trading plan. First and foremost, never be foolish and cheat our stops by holding a falling market. I always get out when I say I’m going to get out.
But once I’m out, the first thing I do is start looking for that next opportunity to get back in. Maybe that causes me to chase my tail every once in a while. But you know what? I would much rather chase my tail than A) hold through a larger decline or B) miss out on the next big rebound.
As it turns out, tail chasing is really cheap insurance that helps ensure we sidestep the big declines while also making sure we are in the right spot at the right time to catch the next big wave higher.
All too often people get hung up, thinking a trade is dead once they sell and they have some phobia about getting back in. If it was a great trade before, it is probably still a great trade and there is no reason to avoid it because of a perfectly normal, healthy, and temporary step back.
As for stops, the best way to avoid getting out at the wrong time is by getting out early. Sell at the beginning of the decline when the first signs something is wrong emerge. Not the bottom of a dip when impulsive traders pull the plug after getting overcome by fear and regret.
As I often remind readers, start small, get in early, keep a nearby stop, and only add to a trade that is working. Follow those simple rules and events like the Omicron hubbub are nothing more than a blip on our way higher.
GameStop (NYSE:GME) posted disappointing earnings after the close.
But did this actually surprise anyone? This is a retailer with an obviously obsolete business model.
Their last hail mary is Christmas shopping and if they cannot get their act together this quarter, the company won’t survive, let alone justify of $13 billion valuation.
At best, this is a $15 stock selling for $170. Get out while you still can.