Why The Scarier This Looks, The Better It Is For Our Trading Accounts
2022.05.10 08:30
The S&P 500 crashed 3.2% Monday, closing under 4k for the first time in over a year. But this isn’t a surprise, as I wrote last week:
Failing to do anything with the biggest up-day in two years is not good. Not good at all. While I’m an optimist by nature, at this point, recent intraday lows near 4,130 are all but toast. And I doubt it will get any better once we get there. 4,400 didn’t hold. Neither did 4,200. And 4,000 is going to be the next victim.
Well, here we are a few days later and now we can cross 4k off the list.
S&P 500 Daily Chart
Now that 4k is a victim of 2022’s correction, the next big bogie is 3,840. While that number seems somewhat arbitrary, it is significant because that represents a 20% correction from recent highs and would turn this correction into a full-on bear market.
Markets tend to go where the crowd is looking and if we came this far, it wouldn’t be anything to see it take those last few steps to make this official.
The good news is once this becomes a bear market, we can finally stop talking about it. And once we stop talking about it, odds are good people will stop selling it too.
The silver lining is Monday’s 3% plunge was one of the largest down days of the year. As far as capitulation goes, the selling typically accelerates moments before the bounce. So a big tumble means we are getting really close.
The problem is we won’t know what is too far until after it happens. Maybe Monday was capitulation. Or maybe we have another 4% or 5% tumble coming Tuesday or Wednesday. As I said, we won’t know until after it happens.
But lucky for us, these things are super easy to trade because the resulting moves are large and in one direction. Once this thing gets moving on Tuesday or Wednesday (either up or down), expect it to keep going.
If that’s down, get out of the way and wait to pick up the pieces. If that’s up, grab ahold, keep adding, and moving our stops up.
If we can get past our fear, riding these swings is a fast and easy way to make money.
While we are setting up for a nice bounce in the indexes, be careful with Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN). These stocks will bounce alongside everything else, but don’t be fooled.
These growth stocks broke their sacred contract with the market and stopped growing. (How dare they!) Any bounces in these stocks are nothing more than a quick trade. It will be six or 12 months before these are investment-grade again.
While Tesla (NASDAQ:TSLA) isn’t in this boat just yet, it is nearly 40% off the highs and it will be a while before people trust this stock again. Maybe Musk is selling as aggressively as he is because he knows something we don’t know yet.
