When a seasoned trader sees a V bottom, they instinctively shudder. V bottoms rarely provide anyone who is trading markets a chance to get on board; it really messes with a trader’s mind. Unfortunately, we have been dealing with a V bottom recently in the form of a sharp drop followed by an eye-popping rally.
This particular rally was a whopper – the SPX was up 220 points in just three short weeks, an historic move. Most traders didn’t get in before the turn, and a slew of others thought the end of the bull rally was nigh and leaned to the bearish side too heavily.
That proved fatal in mid-October, unless you had the courage to admit you were wrong. But once the rubber band was stretched far back enough, it snapped, and the market started to rise. If you were on the sidelines, where and when were you going to get in? So many traders thought, “I will wait for a 10% correction and then get in.” Lo and behold, we went down about 9.4% over a month – that seemed just about the right level to get in, didn’t it?
Meanwhile, the media frenzy was in full force. As the market was taking a nosedive, you’d think the world was coming to an end. “There is no end in sight – 5% down will lead to 10% down, which will lead to 20% and a bear market.” Fear mongering is great for ratings – after all, trading markets that only go up is so boring. As I’ve said for years, ignore the noise and distractions that take you off your game. Some thought the September IPO of Alibaba signaled the market top, yet the charts said this was not the case.
Now, could we have predicted a rally of this size? Heck no – and anyone who says so is lying their butt off. I thought we were overbought 100 handles ago, but the market doesn’t care what I think. Trade what you see, not what you think. This was a move of monumental proportions that had just about everyone flummoxed. However, the conditions were ripe for a move. As a momentum trader, I do not try to find bottoms or tops – I leave that for the market timers to fight over. It’s a fun game to play, but you’ll lose money at it, guaranteed.
With that said, I absolutely recognize a lopsided condition, even if it is a rare occurrence. When you spot one, you trust your judgment, pull the trigger, and let it fly. Unless something disastrous were to occur, the odds were pretty good the market would snap back sharply. (See the futures chart below, which identified a buy point after the bottom was hit.)
So here we are with V-shaped rally. Many traders think they are late to the party and are frustrated for missing a rally of more than 10%. My advice? Listen to the message of the markets, proceed with caution, and go with what is working. If things look up, then go with it, but protect yourself, pay attention, and bank profits when you have them. Easier said than done, but it is not impossible if you are focused and prepared.