When To Start Looking For A Bounce

2022.11.04 04:20

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The shed another 1% Thursday, adding to Wednesday’s Fed-fueled 2.5% losses and leaving the index down 4.6% for the week. Ouch!

S&P 500 Index Daily Chart

As bad as this feels, unfortunately, it appears there are still more losses left in this “pain trade”.

Thursday was one of those tipping points where the market was telling us what it wants to do next. And the uninspiring price action told us dip buyers are not ready to bail us out yet.

The index opened down 1% on Thursday, rallied from those early lows, and even spent a portion of the session threatening to turn green. Finishing green would have been a very bullish reversal, but instead, a wave of selling knocked us back from those midday highs. As long-time readers of this blog know, how we finish matters most. Big institutions place their trade at the end of the day and rather than buying these discounts, big money was selling and running for cover.

Even though I came into the Fed decision with a long position, as soon as that midday rally broke down, there was no arguing with the market and it was time to pull the plug. And when trading a binary outcome, if we find ourselves on the wrong side, it only makes sense to change sides. So I shorted Wednesday’s breakdown and held that position through Thursday.

But just as important, as soon as I’m out, I’m always on the lookout for the next bounce. While we’ve seen a lot of big selloffs this year, each echo gets weaker than the one that came before it. Meaning odds are good this week’s selloff will bounce a lot sooner than many people expect. For someone that’s short this weakness, that means standing near the exits and being ready to lock in profits as soon as the selling capitulates, which could come as early as this afternoon.

I will continue holding this short as long as the market keeps falling, but I’m already lowering my trailing stops and it won’t take much convincing to get me to lock in these profits.

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