S&P 500: Keep Sticking With the Low-Risk, High-Reward Trade

The added a modest 0.2% in another mostly irrelevant session as the index continues digesting last week’s big NVDA pop.

S&P 500 Index-Daily Chart

As popular as NVIDIA (NASDAQ:) is as a momentum stock, its success is largely limited to the AI sector, and the company’s success doesn’t tell us much about what Main Street consumers are doing.

That means NVDA’s success shouldn’t have a big influence on the board market the way a bellwether stock like Apple (NASDAQ:) or Amazon (NASDAQ:) would.

And no doubt that limited reach is why NVDA’s big results haven’t triggered a multiday rally.

Instead, we are stuck with three largely sideways sessions following last Thursday’s big gains. As I wrote Monday evening, there are two ways to interpret this sideways trade.

Either the market is catching its breath before the next leg higher, or this is the last gasp of buying before the inevitable step back.

Both points of view have solid logic behind them, and I could easily see either scenario playing out. So what are we supposed to do as traders, flip a coin?

Nope, savvy traders look at the setup and pick the low-risk/high-reward trade. As I wrote Monday evening, I shorted the market.

Not because I’m bearish, but because I could enter that trade with a stop near Friday’s highs. If the index continues slipping, I rake in a pile of profits.

If prices bounce back above Friday’s highs, I close my position for a small loss and then change direction, buying the push to fresh highs, this time with a stop under this week’s lows.

As luck would have it, this trade has already worked well enough that I was able to lower my short stops to my entry points, making this nearly a free trade.

At that point, it doesn’t really matter if I’m wrong because this is like a free lottery ticket. I make money if it pays out.

If it doesn’t, I close my short near breakeven and get ready for the next trade, most likely buying a continued rally past last week’s highs.

Too high or not high enough? I don’t really care because I have a low-risk/high-reward trading plan that works in both directions.