This morning I messaged on StockTwits that I was long SPY for a bounce play. Here are the messages time ordered. The original reason for the SPY long was a combination of how quickly we had moved from SPY 165 to 161 and my long positions showing relative strength to the SPY. Many times when I see this type of divergence a bounce in the index will follow.

Arrow 1–If stocks aren’t making new lows with the SPY perhaps it is just the machines pounding the indexes and when they relent the indexes will catch up with the individual stocks leading to a bounce

Arrow 2–averaged into my position as the SPY dropped back to 161

Arrow 3–Bounces should have force. I have been long for more than 30 minutes and I have not seen the aggressive type of buying that is typical of the first stage of a bounce. The slow steady up move to 161.20 is more indicative of a retracement that traders are happy to short. I sold about 25% of my position into this retracement and was prepared to sell more with a powerful down move.

Arrow 4–This retracement was even weaker than the prior move up to 161.20 so I decided to sell most of my remaining position taking about a 20 cent loss. At this point I was beginning to think about how I could transition to the short side in case the market failed at recent support. This is a tricky position for a trader as it can be very difficult to move from one side of the market to the other and execute well. I was down to 10% of my original position and in wait and see mode.

Arrow 5–Instead of rolling over the market got above 161 which was the key support level in the first hour. I watched as the 161.01 bid got pounded and wouldn’t drop. I bought back my position at 161.02 and placed a stop at 160.98. The 161.01 bid never dropped and SPY started to grind higher.

As we approached VWAP I scaled out of my position as this move was the slow grinding type and not “bounce mode”. I let traders on the desk know this was the spot to begin initiating shorts against 161.40 for a re-test of the morning lows.

Arrow 6–As soon as we ticked lower from VWAP I got flat. I ended up losing about 5 cents on the trade overall, which felt like a victory as the market never bounced and eventually rolled over dropping another two points.

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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