One of the things I take great pride in is understanding the potential moves that may occur on any given day. This applies equally to stocks that I may be trading as well as the market in general. Today, I was unprepared for the large bounce that occurred in the market during the final 90 minutes of trading.

Currently, US equity markets are trending lower. This downtrend started with the huge volatility in August 2007 that was the first indication of the current crisis in our financial system. This downtrend and the accompanying volatility has been a boon for all professional day traders. We thrive during times of high volatility while the average investor is losing sleep.

The easiest money to be made in a downtrending market is on the shortside. But there is also opportunity trading from the long side as well. Even in a weak market there will be stocks with good news. Even in a weak market you will get an “oversold” condition in the market that will lead to powerful upmoves that may last up to several days.

Today there was a great oversold bounce from 2:30-4:00pm. I completely missed it. In fact, I lost money on the short side. An oversold bounce occurs when sellers have knocked stocks quickly down to prices where those with a lot of ammo (hedge funds, pension funds, mutual funds) want to put their billions to work in the market.

I’ve been trading for over 12 years and one of the things I pride myself in is being long when the market is moving higher and being short when the market is moving lower. So why did I miss the bounce today? I think there were several factors: 1)The last bounce in the market was greeted with powerful selling the next day. This put the thought in my head that we were going to have another large down leg before bouncing 2)I focused too much on some crazy selling in the financial stocks the past couple of days that made me think that they would stay at depressed prices and 3)I ignored the pop in the futures that occurred at 2:30pm.

#3 is truly what caused me to lose money and not make money today. Even if I weren’t mentally prepared for the large up move that occurred I should have immediately covered my shorts when the futures popped quickly through their intraday highs at 2:30pm. Traders can never afford to ignore what they are seeing on their screens. The futures were signaling higher equity prices. I should have covered and looked for good entry points to get long. I won’t make that mistake again…hopefully 🙂