This is the oversold bounce we’ve been waiting for – a vicious face ripper that finally sent those greedy bears packing. The biggest winners were the basket of stocks hardest hit by the coronavirus. We’re talking airlines, cruise lines, hotels, home builders, and casinos. Some have come roaring back, zipping higher by 50% to 100%.

The rebound was inevitable and long-anticipated by anyone with half a brain. What is surprising is how long it took to arrive. We’ve had so many false starts and fakeouts along the way that you’ll be forgiven if you lost faith that a snapback would ever strike.

I’m using today’s post to provide a few thoughts on how you might use this pop to your advantage.

It’s a TRAP

I’m in the camp that says this is a bear retracement and nothing more. With the widespread destruction wrought across the market, there’s not a snowball’s chance in Hades that we V-shape recover to February’s prices. Even with the two-day 17.5% jump in the S&P 500, it still sat well below its 20-day moving average at today’s highs.

It will take time to heal this, and additional evidence is needed before even entertain a discussion on whether that was the bottom. If you’re interested in hearing my take on all bear markets over the past century and how they finally ended, then listen to last week’s Cash Flow Club.

Because this is likely a retracement and nothing more, I would be ringing the register on short-term bullish trades. If you faded the fear with short puts or put spreads ahead of the rip and don’t at least take partial profits into this, you need your head examined.

Shame on Me

I view bounces in bear markets with the following adage in mind:

Fool me once, shame on you; fool me twice, shame on me.

Avoid the shame

Let’s say you had bullish positions into the last stage of the market’s meltdown. The wicked fall was the market fooling you. Shame on Mr. S&P. But here’s the deal. If you had bullish positions you hated two days ago, you now have a golden opportunity. You can use this rebound to your advantage. Sell calls, buy puts, or do any other number of adjustments to reduce exposure.

If you don’t, and we end up falling back into the abyss then, well, I hate to say it, but that’s on you.

I’ve been selling covered calls, and stock positions and teeing up bearish leaning spreads in case we rollover. And, I kid you not, as I’ve been writing this, S&P futures just puked up their gains with a nasty 100 point drop into the close. Yuck.

But because we at least closed in the green, the streak of not having two consecutive up days is finally over. It’s about time.

Don’t Chase

Next point – you must avoid the temptation to chase. Buying beaten-down names after a monster bounce rarely pays out. While I suspect the majority of the buying in names like SEAS, CZR, DAL, WYNN, DHI, and F was short covering, I’m sure a few late-to-the-party-Charlies entering new longs today.

Don’t be like them.

It’s better to wait for a more definitive bottoming pattern – or how about at least a low-risk entry?

Bears Rejoice

The biggest cheerleader of this rally should be bears, not bulls. If you think we’re in the early or middle innings of this downtrend then rallies like this provide fantastic entry points for new short trades. This is only the second swing setup we’ve seen during the entire crash, and it should be celebrated by everyone hesitant to add short delta trades last week when the market was desperately oversold.

We provided many candidates for selling the rip in last weekend’s Stock & Options report. Go check them out if you haven’t already.

Have I missed anything? How are you using this rally to your advantage?