On Thursday June 20th I wrote “Looking For The Bounce” where I discussed a long SPY trade that never materialized so I exited for a loss. Yesterday, the market setup for another bounce attempt and I took it.

Many short term trading setups trigger after three trading days. After the market’s large sell offs on Wednesday and Thursday many short term traders were looking for a large gap down in the market on Friday to make a “bounce play”. This is another type of “momentum reversal” trade similar to the trades in TSLA and DDD discussed in my most recent webinar. Bounces often occur at key prior support areas after sellers become exhausted from aggressively selling in a short period of time.

This SPX chart illustrates well the support area I was keying off of for the bounce. (Not using SPY chart as the 84 cent dividend is currently distorting the price levels.)

I put on a SPY short pre-market when we traded up to the prior day’s failure area at 159.65. Adjusted for the 84 cent dividend we were at the 160.50 which was the support that held for the prior two weeks. I got flat my short position when the market supported SPY 158 on the Open. I nibbled on the SPY long above 158 shortly after covering my short. My “dream price” for a long entry was 157.50, which corresponds with the bottom of the support area highlighted above, so I stayed light. When the market began to sell off again and got closer to my 157.50 price I bought more lowering my average cost to 157.80. At this point I had the price I wanted to be long for the bounce but was now waiting for a change in the price action.

One of the things you look for in a bounce is momentum to the upside to confirm buyers have taken control of the market. We never saw that on Thursday and that factored heavily in my dumping my long position. When I saw momo enter the market to the upside on Friday this was my key to look to add to my position. I added into each pull back following this StockTweet.

Here is the price action that led me to make the above StockTweet.

I scaled out of my position into 159 and added back into the next pullback to 158.50. Eventually I got flat into SPY 159.50.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 17 years. His email is [email protected].

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