Traders: Avoid Complacency, Focus On Price

2020-05-14 | Simpler Trading Team

Is a selloff and a test of the pandemic lows just over the horizon?

The current choppy uptick could be lulling optimistic new, and seasoned, traders into a sense of complacency as they hope for a steady, rising market.

Historic milestones hint at a less positive market turn.

When looking at the 200-Day Simple Moving Average (SMA) related to the S&P 500, the index has stayed below the 200 SMA for 30 days. This has happened only a few times in the last several decades, and in most cases price moved toward a tumble.

Simpler Trading noted that this market signal follows more than 3 million new accounts added so far this year at online broker Robinhood and more than 600,000 accounts added with TD Ameritrade. Interest in trading has accelerated, along with rising optimism toward the market.

When optimism creates the environment of expecting the market to trend upward (complacency), traders tend to look for opportunities to buy inexpensive calls and capitalize on the trend.

And what does history say about the market’s reaction to complacency?

It’s similar to leading lambs to the butcher, and it’s common in bear markets.

Market indexes have shown how a selloff is followed by a retracement near 50% of that move, and then the markets retest the lows.

Traders expecting a long-term uptrend should consider less dependence on “hopism.”

Simpler’s traders are watching signals alerting to possible downturn movement, and are holding off long exposure.

While the Federal government may work against any change to the downside (like it has so far), historic market conditions have shown how the environment can change quickly.

Keys to navigating this erratic environment are to focus as a trader the main goal is to make money.

Whether the market rises to new highs or rolls over and collapses, Simpler’s traders stay dialed into price action. Peeling off any emotional blinders helps understand what’s coming down the pipeline while at the same time being flexible enough to go with the flow.

It’s a lot to expect, but this focus is key to tracking a market possibly setting up for a new harsh reality.

We Saw: a wild market swing — 

  • Markets were down early and soared in the final hour
  • Production cuts gave oil prices a boost
  • Week may end with worst results in almost two months

We’re Watching: … historic signals and long positions —

  • Alerts from 200-Day Simple Moving Average
  • “Hopism” vs. historic market signals
  • Action in DIS, ZM, SHOP, COUP, KR, IYT

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