S&P 500: Another Low-Risk, High-Reward Trade Could Be in the Offing
US500
-0.12%
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The S&P 500 finished Monday down 0.1% after spending most of the session bouncing between small gains and losses.
S&P 500 Index-Daily Chart
As I wrote previously, I was short the market last week, but I was keeping that trade on a short leash because I was losing faith in it:
As luck would have it, I bailed out the next day for a small profit, not long before the market took off and started setting new record highs.
This isn’t the trade I had in mind when I shorted the market. But as I wrote when I placed that trade, I wasn’t shorting because I was bearish, but because the market was giving me a low-risk short entry with a nearby stop.
Two weeks ago, the market was stalling at 5,100 resistance, and by acting decisively and early, I was able to short the market with a stop just above those intraday highs.
As expected, the buying cooled off over the next few sessions and prices slipped, allowing me to lower my stops to my entry points, turning this into a low-risk/high-reward trade.
If the index kept sliding, the profits would roll in. If prices bounce, like they did, I would get stopped out near breakeven.
Even though that trade didn’t work as envisioned, I pulled the plug for a small profit when the follow-on selling failed to materialize.
So yeah, I was wrong, but it didn’t cost me anything I got a free trade out of it.
Luckily, I didn’t have to wait long for the next opportunity to pop up because Friday’s price action presented me with the mirror image.
This time, the market rallied above 5,100, and since I pulled the plug on my previous trade Thursday, I was in cash and perfectly positioned to take advantage of the break above 5,100.
Now, I have no idea if this trade will be any more successful than my previous short, but by acting early and decisively, I was able to buy not long after the market retook 5,100, and I could place a stop just under this level.
When the rally kept going, I was able to lift my stops to my entry points, creating yet another low-risk/high-reward trade.
Maybe this latest buy gets stopped out at breakeven in a few days. No harm, no foul. But if the buying keeps pushing the index toward 5,200, then I will let those profits roll in. It’s like a free lottery ticket. Only a fool would turn his nose up at it.
