Why Smart Money Is Getting Ready To Buy The Bounce
2022.05.01 10:16
The market giveth, and the market taketh away. The S&P 500’s huge rebound on Thursday was swallowed by an even larger collapse Friday.
Friday’s -3.6% implosion was the biggest single-day loss since the depths of the COVID crisis. But as bad as that sounds, if you net Thursday’s gain with Friday’s loss, we are only down -1.1% from Wednesday’s close.
Not great, but not set-your-hair-on-fire bad either.
S&P 500 Daily Chart
This time it wasn’t COVID, inflation, interest rates, oil, or even the war in Ukraine. Instead, it was yet another tech highflier fumbling the ball. This time, the offense was committed by Amazon.com (NASDAQ:AMZN), falling -14% on disappointing earnings.
Combine that with Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) and many of the highflying pillars that propelled the market to record highs in 2021 that have come crashing down.
When the biggest and most important companies let us down, it hurts everyone and last year’s unflappable half-full mood has given way to this year’s half-empty outlook.
Actually, it’s more like three-quarters empty at this point. But as dramatic as these whipsaws have been, they have been amazingly easy to trade and avoid.
The hardest whipsaws to trade are the ones that happen when the market is closed. Those are the ones that jump our stops and leave us with a smoking pile of wreckage the next morning.
But this market hasn’t been doing that to us. Instead, the majority of these huge swings happened during market hours, meaning nimble traders had plenty of opportunities to get in and out before the serious damage happened.
Anyone that’s been reading my posts knows I like buying bounces. Sometimes they work amazingly well, like March’s hugely profitable 10% surge over a couple of weeks. (Ride that wave in a 3x ETF and now we’re talking real money!)
But April has been far more stingy. Lucky for me, the bounces have been large enough that after jumping aboard early, I’ve been able to quickly move my stops up to my entry points, giving myself a free trade.
When the bounce collapses the next day, I get out at my entry points for a breakeven trade, no harm no foul. Which is exactly what I did Friday morning.
Without a doubt, I would rather be making money. But when my “bad” trades don’t lose money, it is hard to complain too loudly about that.
Making money in the market is easy (everyone has good trades), the hard part is keeping it (giving back all of those profits in the next bad trade).
But as long as we follow a sensible trading plan, we make big bucks when the wind is at our backs and we sidestep the losses when it isn’t blowing our way.
We don’t need to know what the market will do next if we are nimble enough to follow its lead. That means starting small, getting in early, keeping a nearby stop, and only adding to a trade that is working. Follow those simple rules and making money (and keeping it) gets a lot easier.
As for what comes next, markets rarely kiss the lows and bounce. Instead, they tend to crash through them, scare the hell out of everyone, and then bounce. While fear is really high following Friday’s collapse under 4,200 support, it will probably get even worse before the next bounce.
4,200 failed and 2022’s intraday lows near 4,100 are up next. Maybe after tagging that level, we will finally run out of fearful sellers and bounce.
Even if this is a bear market, buying bounces is still a very profitable strategy. The biggest and most powerful bounces happen in bear markets, so I’m definitely not giving up on buying bounces.
As bad as April was, odds are good May will give us another tradable 30% rally in a 3x ETF. I sure wouldn’t want to miss that huge trade because I got discouraged and gave up too early.
Remember, savvy traders sell highs and buy lows. And right now we are a lot closer to the lows than the highs, meaning the next good trade is going to be a buy.
