S&P 500: Why the Selloff Shouldn’t Surprise Anyone

Yesterday. the retreated 1.3% and gave back a big chunk of last week’s gains.

Easy come, easy go. But this shouldn’t surprise readers because we knew something like this was coming. As I wrote last Friday:

Markets move in waves and after a nice bit of up, it is time to get ready for the next bit of down. It’s been a nice run since the December lows and that means we are sitting on a pile of profits. But rather than get greedy, this is when we need to shift to a defensive mindset. There are few things more humbling than watching a leak in our bucket rob us of all of these hard-earned profits.

Remember, we only make money when we sell our winners. As easy as it is to buy back in, there is no reason to stubbornly hold on to a winning position as it moves away from us.

Now, to be clear, I am in no way calling this a top. But the risk/reward has shifted against us after 300 points of upside has been realized and the air underneath our feet gets higher by the day. Markets move in waves, that’s what they do. And we shouldn’t be surprised when the next routine and healthy wave lower arrives.

There is no reason to overreact to one day of selling, but it was fairly obvious the index would run into some resistance near the November and December highs.

This is as basic as technical analysis gets, and it shouldn’t surprise anyone when swing traders start locking in profits at these obvious technical levels.

S&P 500 Index, Daily Chart

As I wrote on Friday, I am in no way bearish and think this rebound still has room to go over the medium and longer term. But I also recognize markets move in waves.

As I wrote on Friday, we only make money when we sell our winners, so challenging 4,100 resistance looked like a perfect place to start locking in some worthwhile profits.

Maybe prices don’t fall further than Monday’s lows, and it is all uphill from here.

But as easy as it is to buy back in, I would rather lock in January’s worthwhile profits when I have them rather than risk letting them get away by getting greedy and holding too long.

Maybe I will end up buying the next bounce Tuesday morning. But if that’s the case, no harm, no foul. But maybe it takes a few more days for this down wave to bottom, in which case I will be getting in at even better prices.

But no matter what happens next, the profits from my last trade are guaranteed, and I will be in a great position to jump aboard the next trade no matter where and when it starts.