Broader View Helps Track Market Direction

2022-03-11

When stock traders see charts, their first inclination tends to be to pick market direction – up or down. 

But options traders have the unique ability to structure trading setups into charts that are moving either direction, even sideways.

Still, all traders prefer a steady trend one way or the other, and it’s been hard lately to determine market direction.

(Check out the free Simpler Trading video, above, for additional insight into trading the stock market.)

Find market direction with precious metals

One asset area to consider is the precious metals sector. Specifically, gold has seen a surge higher.

The potential for directional movement in gold has been revealed through squeezes on the weekly and the three-day time frames. The potential for trend continuation still exists and could continue before, and maybe even after, Federal Reserve Chair Jerome Powell speaks next week.

To define risk levels in gold, Simpler’s traders utilize options setups such as the iron fly. This setup balances call and put options.

In the gold scenario, options on this asset could mitigate risk as the metal responds to the Fed and as the market hits the first options witching expiration of the year. 

What about options strategies?

Witching day is an options expirations event and refers to market sessions when multiple options and futures contracts expire simultaneously. These events only occur four times a year on the third Friday in March, June, September, and December.

In this wild market, traders can consider expanding their options trading opportunities.

Simpler Trading team members are probing the possibility of the euro as the best way setting up a U.S. dollar buy. Traders are specifically looking at the dollar, not the dollar index – which is a basket of currencies that comprises almost 58% euro.

The symbol that has the most consistent inverse correlation (negative) with the dollar is the euro. A euro short really is a long bet on the dollar

Another possibility is the Euro FX futures which recently hit resistance. This provided traders with two opportunities to set up a short position and is now moving lower.

What these examples reveal to Simpler’s traders is that there are opportunities to take advantage of a trend that had been preceded by an abundance of chop.

Buy the dip or short the rip?

Traders need to understand how to take advantage of market setups like these examples. Try to look at where to buy the dip during an uptrend, yet short the rip in a downtrend.

There are different characteristics of uptrends and downtrends. Uptrends are generally less volatile than downtrends until they go parabolic. The parabolic pattern is an uptrend pattern that often follows a period of accumulation or sideways movement. Follow the charts for an example of this in crude oil.

A pullback in crude oil would spike Simpler’s traders interest in a long position with crude oil and related sectors – and also associated stocks. This means there is a lot to like about getting a read on the broader commodity once you’ve identified the pattern in a specific ticker.

Is risky currency an option?

Jumping back to currency, a deeper look at the charts may show a downtrend in the euro. This downtrend opens up the potential to short the rip in the European Union tender. 

As with any trade, be cautious with currency and exercise proper risk management. There may be opportunity if the euro bounces into layers of resistance. To help mitigate risk, consider using the FXE alternative, Invesco CurrencyShares Euro Trust, to trade the exchange traded fund (ETF) instead of futures contracts.

As you can see, adding options setups to a futures approach (and some currency?) expands possibilities for Simpler’s traders. 

Expand your market view for potential setups

Having an understanding of what is happening in the indices and the commodities also gives traders a broader look at the stocks that move with the commodities – such as miners, oil stocks, and agri-business.

Even more, this gives traders additional insight into the movement of individual stocks and the sectors within the indices for a powerful “hand in glove fit.”

When traders develop proficiency finding alternatives to long trades in gold and the dollar, it gives them the ability to make setups with potential.