I would not describe exuberant bounces we see in corrective markets as “bittersweet,” so much as I would call them, “sloppysweet.” If you are a relatively new trader, then you are particularly susceptible to being lurched in every direction, given that one day the market appears to be well on its way to crashing, the next it seems as though we are going to see a V-shaped move to all-time highs on the indices. Part of what causes such sharp, stunning rallies is that latecomer, cocky shorts start pressing into the correction when they should be taking some chips off the table, thus enabling a vicious squeeze higher. You also have trapped longs holding and hoping to get somewhat close to even, although we are still well below that May 1st key reversal on the S&P 500 at 1415.
If you have agreed with my thinking and are still mostly in cash here, there is no fear of missing out on a rally or crash. The reason for that is because we have gladly accepted that this market is still as high risk as they come, and only when it proves it has changed will we adapt. We accept that there will be sloppy price action, with violent moves in either direction. We accept that this is not yet a market ripe for aggressively long swing trading like in the first quarter of this year. We accept that we will not nail every single bottom, thereby not getting trapped in corrective legs lower. We accept that we will keep positions small until further notice. And we accept that this is a proven strategy that enables us to not only stay in this business as a trader over the long run, but keeps us confident, rested, and focused to the point where we are ready to pounce on the next uptrend.
For now, the market is merely trying to hold onto the 1320’s on the S&P 500. That is an area I mentioned yesterday, as we spent some time there in May and it coincides with the often-overlooked 150 day moving average. This rally can last a few more days, but with a declining 50 day moving average on the major indices, I am going to be very deliberate and methodical with the way in which I leg back in on the long side. Sloppysweet rallies are likely to feature some wild backing and filling. And, of course, all of this assumes that we have actually bottomed, which is far from a sure thing at this point.
