Mike’s note: Mike Merson here, Jeff’s managing editor.

Last night, Jeff posted a special update to subscribers of his trading blog, Delta Direct. He gave his thoughts on the brutal selloff we saw in yesterday’s session… and showed why he’s not concerned. In fact, Jeff’s looking to take several bullish positions today.

With his permission, we’ve decided to share it with you. Be sure to read it before making a single trade today…

Don’t panic.

Yes, that’s easier said than done – especially when the market is in freefall. Everybody is selling. Prices just keep falling. There’s no real explanation. And, it looks like the proverbial rubber band I keep talking about is breaking rather than snapping back.

It’s easy to panic and just sell everything in that environment. But, the easy trade is almost always the wrong trade.

Think back to the days just before Christmas in 2018. The stock market was in freefall. Everybody was selling. Oversold conditions got even more oversold. And, it sure looked like the rubber band was breaking.

Back then, as the S&P 500 started to cascade lower, I wrote to my subscribers and pointed to three levels at which I was willing to buy – 2600, 2525, and 2450. I determined how much I was willing to invest, divided it by three, and put the money to work as the S&P hit each of those levels.

It was enormously painful when the index closed at 2350 on Christmas Eve.

Part of the pain was from sitting on a losing position because the market kept falling despite the oversold conditions. But, most of my pain came from my fear that subscribers would panic out of their trades at just the wrong time.

During those shaky days just before Christmas, I wrote multiple updates to subscribers reminding them of the oversold condition. A vicious snap-back rally could start at any moment… The decline phase was nearing an end… etc.

But, the price action didn’t improve. Stocks kept falling. And, subscribers wrote me notes telling me I was crazy, and questioning my genetic lineage.

One week after Christmas, the S&P 500 was back to 2500. Two weeks after Christmas, the index was at 2600. And, by the end of January the S&P 500 was trading at 2700. Anybody who bought the S&P 500 in the days before Christmas, 2018 was sitting on nice profits just one month later.

I suspect the same will be true of folks buying into this current decline in the market.

Please understand… I am not bullish. I think there’s a very good chance the S&P 500 may have peaked at 3025 or so a couple of weeks ago. And, stocks will likely be lower by the end of the year than where they are today.

But, stocks rarely move straight in one direction for too long. And, at the moment, the market has made too dramatic a move to the downside. The proverbial rubber band is as stretched today as it was heading into Christmas Eve.

Conditions are violently oversold. And, a snap-back bounce could begin at any time.

That doesn’t mean we throw caution to the wind and just buy everything in sight. No.

Reasonable traders do what we did last December…

We pick three levels at which we’re willing to put money to work. We figure out how much we are willing to invest. And we put 1/3 of that money to work as the S&P hits those levels.

I put some money to work in the market on Monday when the S&P 500 hit 2875. My next level is 2800. My third level is 2725.

Of course, the market could keep falling. Anything can happen. And, if the rubber band breaks then all bets are off.

But, in the 38 years I’ve been trading the rubber band only broke once. That was on October 19, 1987 – the day of the crash.

At the moment, we are not set up for a crash of that magnitude – at least, not yet. So, I’m willing to bet on the market snapping back from here.

The CBOE Put/Call ratio closed at 1.24 yesterday. So, folks are jumping over themselves to buy put options here… while the Volatility Index is spiking to its highest level of the year.

In other words, most folks are so scared, they’re paying huge premiums to buy insurance now, AFTER the S&P has already fallen 190 points.

From a contrarian perspective, that’s bullish.

The McClellan Oscillators (NYMO and NAMO) closed Monday at their lowest levels since Christmas Eve. They’re remarkably oversold, and at levels that often lead to bounces within just one or two days.

Folks… I know it’s hard to hold onto positions here when it looks like the financial world is melting down. But, selling stocks here is the wrong thing to do. Conditions are too oversold. We’re due for at least a reflex rally to relieve those oversold conditions. You’ll likely do better waiting to sell into that bounce rather than selling into the current decline.

And, for aggressive traders, buying index ETFs in the manner I described above looks like a pretty good bet to me.

Best regards and good trading,

Jeff Clark