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Markets have a funny way of bouncing when everyone’s feeling the most pessimistic.
That’s exactly what I was thinking about when I spotted two consecutive down days in the S&P 500 recently — and it reminded me why the fade strategy remains one of my favorite setups.
The fade strategy is all about going against the grain when short-term momentum gets overdone. I define fading as essentially trading counter-trend, or counter to very short-term trends. When we see two down days in the S&P 500, that’s our cue to consider trading to the upside.
If we had five up days instead, a fade would be positioning to the downside.
Setting Up the Perfect Fade
Here’s what I look for: two down days minimum, but three down days really gets my attention. While two consecutive down days can work, three provides much higher conviction for the setup.
We’ll see markets paint that pattern fairly often — one down day, two down days, three down days, then fade.
The psychology behind this makes perfect sense. After multiple days of selling pressure, you’ve got oversold conditions building up. Short-term traders start covering positions, bargain hunters step in, and suddenly you’ve got the ingredients for a nice bounce.
It’s not about calling a major bottom — it’s about capitalizing on that natural mean reversion tendency that markets exhibit.
Timing Your Entry and Exit
Execution is everything with fade setups. I like to time my entry near the close when I’ve identified the setup, then look to sell in the morning if we get that market pop I’m expecting.
This isn’t a buy-and-hold strategy — it’s about capturing quick moves that often happen within a day or two, often in less than 24 hours.
The beauty of this approach is that it takes advantage of what markets naturally do. They don’t move in straight lines, and those short-term reversals create opportunities for traders who know what to look for.
When I see those consecutive down days setting up, especially three in a row, I know it’s time to start looking for those counter-trend opportunities.
Graham Lindman
Graham Lindman Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
P.S. Only ‘APEX’ Stocks Will Survive When September’s Volatility Kicks In
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