Why Smart Money Bought S&P 500's Rebound

Unsurprisingly, the S&P 500 tumbled back under 4k support Wednesday morning.

While the market looked good Tuesday, as I’ve been writing over the last few weeks, the market is currently in a back-and-forth mood, which means every bit of up is followed by a bit of down.

That’s why I told readers I was proactively pulling some profits off the table Monday and again on Tuesday:

At points like this, it makes sense to lock in some of our really nice profits because we don’t make money until we sell our winners. But at the same time, the market is still behaving well, so it is equally worth holding on to some of our positions too. With one foot in and one foot out of the market, we will be in good shape no matter what happens next.

If I had known Wednesday’s open would crash through 4k support, I would have sold everything, but trading is a game of probabilities, and the odds of a continuation versus a retest of support were 50/50.

In cases like this, it is good to have some money in the market and some profits safely on the sidelines; that way, no matter what happens, part of my trade is in a perfect position.

Wednesday morning, it turned out that the part I sold was the better half, but it just as easily could have been the part I was still holding.

S&P 500 Daily Chart

As for the rest of my trade, Wednesday morning’s givebacks undercut my stops, so I locked in those profits too. But rather than give up on this trade, I started looking for the next bounce as soon as I got out, which was good because it arrived an hour later.

As it turned out, most owners shrugged at Wednesday morning’s selling and kept holding. That reluctance to sell put a floor under prices, which turned into another piece of evidence that this market wants to go higher, not lower.

Red days are a healthy and normal part of every move higher, and so far, I don’t see anything in this test of 4k support that says this is anything other than one of those normal and healthy step-backs on our way higher.

While holding through these gyrations would be easier than trying to trade around them, we are trading without a safety net if we don’t pull the plug when prices fall.

And while that might turn out okay most of the time, it only takes a few times of getting it wrong to erase all of those profits we made on the way up.

As much as I don’t like darting in and out of the market, it is a small price to pay for the safety of knowing I will never be caught on the wrong side of a big move.

And many times, it works out like it did on Wednesday, where I get back in at lower prices than I sold on Monday and Tuesday. The difference doesn’t add up to a lot of money, but getting paid to reduce my risk is about as good of a deal as it gets.

I bought Wednesday morning’s bounce with a stop under the mid-morning lows. I added more around lunchtime and even more when the index got back above 4k.

Act well Thursday, and all of my stops will get moved above my entry points, making this a free trade. Not bad for a market that, by most accounts, should be going down. Good thing I trade the market and not other people’s opinions.