If traders can learn anything from the action this week, it’s that the stock market’s rubber band just about always snaps back.
We came into this week looking to buy stocks into Monday morning’s selloff. The S&P 500 was already oversold. The Volatility Index (VIX) had closed above its upper Bollinger Band three days in a row. And, the McClellan Oscillators (NYMO and NAMO) had closed below their lower Bollinger Bands.
In other words, the stock market’s proverbial rubber band was stretched pretty far to the downside as we started the week.
The rubber band would stretch even more on Monday morning when the S&P gapped down 70 points on the opening, and then traded as low as 2830 later in the day. It was hard not to get caught up in the selling pressure on Monday. Everybody else was selling. Everybody else was worried about a crash.
But, when conditions get that oversold, the downside is usually limited. And a quick bounce can get started at anytime.
Yesterday, the S&P 500 closed at 2938 – a full 108 points above Monday’s low, and basically at the same level at which it closed last Friday.
So, if you were looking to sell any time on Monday or Tuesday, but decided to wait for a bounce before exiting your trades, you now have a chance to do so at much better prices.
And, if you bought into Monday’s decline, you should be sitting on some nice profits. Now is a good time to trim some of those trades, or at least raise stops on the positions to make sure you don’t give back the gains.
Conditions are still closer to oversold than to overbought. So, there’s probably a bit more upside left to this bounce. But, successful trading isn’t about maximizing profits on any one trade. It’s about constantly reassessing the risk and reward to any position and then managing the trade to reduce the risk.
Buying stocks during Monday’s decline – when the rubber band was so stretched to the downside – seemed to me to be a low-risk proposition. Now, the rubber band has snapped back towards neutral.
It’s about an even-money bet whether we go higher or lower from here. So, traders should take advantage of the bullish action over the past couple of days and trim some of the gains on trades made on Monday.
Best regards and good trading,
P.S. With stocks seeming to change direction every few days, it’s hard to call this a buyer’s market or a seller’s market. Really, it’s a trader’s market.
Heck, think about the gains you could have booked just this week… if you looked at this action with a trader’s mindset. Every big move was an opportunity to make money.
I understand that learning to trade doesn’t seem easy. But, it’s actually quite simple.
So, that’s why I recently launched a new project aimed at teaching anyone to start trading – using just three high-potential stocks, over and over. Learn more about it right here.
In today’s mailbag, a new Jeff Clark Trader subscriber thanks Jeff for the service…
Hello, a new subscriber here and I took your recent trade recommendation. Made a modest profit, only because my trading capital is very small. I also agree about the bounce that will occur today and I will get in for another small profit. It’ll add up to where I can trade larger, and multiple, positions.
My confidence is growing. Thank you, Jeff, for offering a reasonably priced subscription for people who can’t afford to pay out thousands of dollars.
And another subscriber comments on current market conditions…
I am finding this market impossible to trade. It seems like our commander-in-chief is eager to usher in the crash you see coming…
I know that I am not the only one who feels like throwing up my hands and exiting the market in the face of this uncalled-for unpredictability. The contrarian in me says hang in there and go against the crowd but how do we trade tweets?
Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming at [email protected].
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