Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Why Smart Money Was Buying The Bounce

By Jani ZiedinsStock MarketsJan 20, 2022 11:04PM ET
Why Smart Money Was Buying The Bounce
By Jani Ziedins   |  Jan 20, 2022 11:04PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

Yesterday’s session for the S&P 500 was far more dreadful than the day’s 1.1% loss suggests.

S&P 500 Index, 5-Min Chart
S&P 500 Index, 5-Min Chart

The day started off well enough when the index popped nicely at the open and rallied all the way to 4,600 support by late morning. But rather than propping up the market, 4,600 turned into a ceiling and that was as good as it got. By the end of the session, the index shed 120-points from those intraday highs and crashed through recent lows. Ouch!

But if Thursday was such a dreadful session, why were savvy traders buying that morning bounce?

The answer is simple, it gave us a nice, low-risk entry and it would have been foolish to not take it.

All too often novice traders fixate on whether a trade worked or not. But what these rookies fail to realize is a good process is far more critical to long-term success than the result of any individual trade.

For example, if an eccentric trader bought far-out-of-the-money call options based on an astrology chart, just because the trade worked for him that single time doesn’t mean it was a good trading decision.

While people often claim it is better to be lucky than good, the problem with luck is it always runs out.

Stick with a good process and we don’t need luck, we just need to be smart enough to stick with it.

Even something with an incredible 80% win percentage will still fail one time out of every five. Does it make sense to throw out a highly reliable process simply because it didn’t work that one time? Of course not.

And the same goes for buying yesterday morning’s bounce.

Now, don’t get me wrong, buying bounces doesn’t work 80% of the time. Not even close. In fact, it only works about 30% of the time. But the win percentage isn’t the genius of the trade. It’s the unbelievable risk/reward these setups give us.

Buy the bounce early with a partial position. When prices continue higher, as they usually do, move our stops up to our entry points. Bam, this just turned into nearly free trade.

If Thursday’s bounce returned to the highs, like every other dip has over the last 14-months, that’s 200 points of profit in our pocket. If the bounce stalls and retreats, like it did Thursday, we get out at our entry point for what we paid. No harm no foul.

So a trade with 200 points of upside and close to zero downside? Who cares if it only works 30% of the time, we should be buying it every chance we get.

This is why smart money was buying Thursday’s early bounce.

And you know what? I will do it again today if we get the same setup. Except this time there will be 300 points of potential upside if we return to the highs. Bring it on!

Netflix (NASDAQ:NFLX) got hammered after the close following disappointing subscriber growth. While the after-hours losses put the stock back to $400, that’s a long, long way from the $700 autumn highs.

But here’s the thing, savvy traders are not taking yesterday’s 20% haircut. This stock has been in free-fall since failing to hold $600 support at the beginning of January. If a person didn’t sell the first $600 violation, there was no excuse to keep holding after it fell under December’s lows.

Big selloffs like this are many months in the making and while it feels like it hits us all of a sudden, anyone caught up in this ignored a lot of very obvious sell signals. I mean seriously, the stock gave us THREE chances to get out at $600!

And while it feels like this cannot possibly get any worse and it has to be close to a bottom, just as a Peloton (NASDAQ:PTON) owner how much lower these things can fall.

I like NFLX. They have a great product. But this is a momentum stock and the momentum is clearly in the wrong direction.

I’m more than happy to buy the next bounce, but it needs to bounce first.

Why Smart Money Was Buying The Bounce

Related Articles

Declan Fallon
Bulls Gain Traction By Declan Fallon - May 18, 2022

Buyers were able to maintain the buying from last Thursday with a close at the high of the day across lead markets. A challenge of the last swing high in early May would set up the...

Why Smart Money Was Buying The Bounce

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Cornel Pod
Cornel Pod Jan 21, 2022 3:09PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Excellent analysis and really written; rhx
tanner sn
tanner sn Jan 21, 2022 3:45AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email