Tuesday’s -2% bloodbath was the ugliest session for the S&P 500 since May. And this decline leaves the market teetering on the edge of collapsing under last week’s closing lows (4,357). From there it is only a hop, skip, and a jump to last week’s intraday lows (4,305). As bad as Tuesday felt, it can definitely get a lot worse.
If last week’s bounce isn’t already dead, it is hanging on by a thread. These things don’t simply kiss support and then bounce. That would be too easy and the market doesn’t like easy. This will get a lot scarier before it is all said and done and that means crashing through support. From there, it largely depends on how previously confident owners respond to the pressure. Do they shrug and keep holding like they have been doing all year long? Or do they finally lose their nerve and abandon ship along with everyone else?
As I wrote last week, these things often require a few failed bounces before they find their footing. While last week’s bounce started off well enough, Tuesday killed it and that leaves us waiting for the next bounce.
For nimble traders, Tuesday’s selloff was no big deal. We got in early last week during Monday's and Tuesday’s rebound. From there, we lifted our stops to at least our entry points on Wednesday and Thursday. By the time the selling hit us Tuesday morning, nimble traders were locking in modest profits and eagerly awaiting the opportunity to buy the next bounce.
Getting in early and getting out early is the name of the game. While buying last week’s bounce didn’t pan out, I actually consider myself lucky when I can make money when I’m wrong. And to be honest, I don’t even consider buying last week wrong. The only way to ensure we are in the right place at the right time is to buy every bounce.
Jumping aboard the bounces early and getting out of the false bottoms early means any potential damage is minimal, and in cases like this week, we actually collect a few dollars for our efforts. But the real payoff comes from riding the real bounce back to the highs. Everything else is pocket change.
Start small, get in early, keep a nearby stop, and only add to a position that is working. Follow this simple recipe and episodes like this sell off actually become fun. And now that we’re in cash, the lower this goes, the more profit opportunities we get.