Down Market Risks Anything At Play

2022-05-06

In this article:

  • Heavy selling, losses close out the week
  • Anticipating “sucking away” of liquidity
  • Look to the opposite side of market moves

There is a trading phrase that circulates among Simpler’s traders: “Don’t lose your ass on a Friday.”

Anyone playing this market today should have known they were stepping into a chaotic, down market environment that risks anything in play.

Market performance on Thursday – heavy selling across the board – will go down as one of the biggest losing days in stock market history. The gap down was a message (preceded by many signals) that this market likely hasn’t hit bottom.

After a wild session Friday, the indexes continued the bleeding to close the week.

The Dow closed at 32,899.37 points to fall .30% (dropping 98.60 points on the day). The Nasdaq dropped further to 12,144.66 points for a 1.4% setback while the S&P 500 lost .57% to 4,123.34points.

(Check out the free video, above, for insight into trading this changing market.)

Down market ‘sucks away’ liquidity

The team at Simpler Trading has been actively engaged in tracking the chaos of this down market.

Traders participating in Simpler’s online chat rooms were privy to the anticipated drop and short covering rally on Wednesday and signals of a potential recession on Thursday.

Even a positive payroll report on Friday – the U.S. added 428,000 jobs in April – didn’t stall market losses.

And before the $TICK hit the fan, one of our traders exposed the market volatility before the week kicked off.

Sam Shames, Vice President of Options at Simpler Trading, pulled back the curtain on market liquidity in his This Week In The Market report.

“This week nothing changed, except the risk for a liquidation event rose exponentially,” Sam warned Sunday night. “In a liquidation event, everything gets sold to raise cash as overleveraged traders finally capitulate.”

Sam is not one to mince words when it comes to making money while trading.

“Hear that?” he asked subscribers. “It’s the sucking sound of liquidity draining out of the system.

 “Usually nothing survives this until the max pain point is reached.”

Market pundits and economists are opening up to the possibility that this market has not hit bottom. This despite Thursday when the Dow closed at 32,997.97 points to fall 3.12% (dropping 1,063.09 points on the day). The Nasdaq dropped to 12,282.88 points for a 5.26% tumble while the S&P 500 crumbled 3.78% to 4,137.43 points.

Sam has tracked the setup of a sharp downturn for months, and now traders (and investors) must protect their capital as the bleeding plays out in markets across the world.

Many market participants are concerned about the gap down, but in market history this type of downturn is all part of the trading cycle.

“This is good and healthy in the long run, but you don’t want to get in front of it until max pain is reached and we are far away from that,” Sam shared with subscribers.

The market environment has set up so that everything either goes up or everything goes down. So far the ship this week is listing to the downside.

“There will be no nuance, no rotation until the indexes find a tradable low,” Sam shared.

The Federal Reserve announcement on Wednesday of a half-point raise in interest rates sparked market chaos this week. Geopolitical and economic concerns added fuel to the market dumpster fire that saw the three indexes fall so low on Thursday.

News vs. technical chart analysis

Geopolitical and economic concerns aside, it isn’t always what is shown in the news affecting major shifts in the market.

The news will always come and go, and often lags behind market cycles. This can influence traders to focus on the wrong side of the market.

The team at Simpler Trading always leans into technical chart analysis and charting indicators to anticipate market movement and stay on the right side of price action.

Do you want to learn to trade this down market?

Indicators are essential, but learning to use them during live-trading market sessions cannot be stressed enough.

The team at Simpler Trading understands what traders go through, and that’s why we have the Simpler Options membership. Traders can gain access to trade with professional traders, get real-time trade alerts, and access the learning center. Get started today and stop trading alone.

How do you catch a market shift?

Simpler’s traders work to uncover the chart signals that show when the market starts hinting at  shifting.

As early as January, chart indicators were showing the possibility of a breakdown in support in the once bullish market. For example, the technology-laden Nasdaq Index shifted toward bearish momentum when many were still hailing the investment “sanctity” of Big Tech.

A key indicator tracked by the Simpler Trading team is the 200-day exponential moving average (EMA) on the stock charts. This “propulsion tool” can help signal a breakdown in key support among stocks.

By layering different tools on the charts, Simpler’s traders are able to confirm the signals of a particular indicator.

Once the bearish momentum had already shown up on the charts, the geopolitical situation with Ukraine and Russia only decreased momentum in the already dipping market. After a few months of chop-filled volatility, the market seemingly broke across the board this week.

Watch outlying possibilities for trades

The downward trending corners of the market can offer up actionable trades.

Use the big three indexes as a guide — Dow, S&P 500, NASDAQ – which can reveal patterns for potential setups. And, add in the Russell for a broader perspective

Learn to think about the opposite of bull market trades.

Consider adding a short-the-rip strategy to the trading  skill set. Short-the-rip is basically the other side of buy-the-dip. This setup is used during downward, bearish momentum that has a bounce — or rip higher. (Remember the short covering rally this week?)

This is one way Simpler’s traders take advantage of the downside of the market.

The majority of the market wants to buy long when prices are moving higher and short when prices move lower. Classic trading style, right?

During a short-the-rip setup, traders step back to view the broader picture or the long-term patterns in structure that are playing out with a different dynamic.

Traders learn to trust the ‘technicals’

Trusting the stock charts and indicators gives Simpler’s traders the edge they need to look beyond the news and fear in the market.

This opens up the opportunity to benefit from momentum – even to the downside – and take advantage of what the market is giving today.

After this week of fast, heavy downside movement, Simpler’s traders are focused on technical analysis for what lies ahead and look to stay nimble while managing risk.

This, too, shall pass in a volatile market, but no one knows when for sure. So plan for next week, so there is no posterior weight loss on Friday.