5 Setups To Beat Stock Market Stagnation
In this article:
- Setups to beat ‘summer doldrums’
- Making plans for Fed interest rate hikes
- Five stocks to watch (and some bonus plays)
Good news rolled out along with high payroll numbers from the U.S. Labor Department, citing higher than expected new jobs in May.
Bad news followed as the Federal Reserve sees this as a green light to further raise interest rates in June and July to curb the economy and bring down inflation toward the end of the year. This places consumers, businesses, and traders square in the storm of ongoing economic and market volatility.
The ongoing tussle between strengthening the economy and saving consumers from suffocating higher costs has the market twisted entering the summer.
An otherwise seasonal slowdown is shaping up as a tricky trading season for active traders.
Simpler’s traders are looking at five “stagnant” setups to beat the “summer doldrums.”
(Check out the free video, above, for insight into trading this changing market.)
Working 5 ‘Stagnant’ Setups For Summer
Stronger fundamentals within the labor market – 390,000 reported new jobs in May (above estimates) and increased labor force participation – are curbing an economic move into recession, at least from a labor market perspective.
So why are traders still expecting “summer doldrums” within the stock market?
Summer is seasonally a time of reduced participation for traders in the stock market. People head out for vacation and other seasonal adventures while market volume tends to decrease as traders reduce exposure in the market before returning to a more active status in the fall.
Early signs are showing weakness across the major indexes – Dow, Nasdaq, and S&P 500. Recent sessions revealed almost “stagnant” chop in the indexes with all three tilting to the short side.
Traders have contributed to this chop by willingly and quickly “switching sides” from buying to selling with a hint of the slightest shift in direction.
Many traders are still holding onto “buy the dip” in their trading plans despite major companies reporting first quarter earnings with less than stellar results. Traders then want to jump to the short side because of FOMO (Fear Of Missing Out).
This “jump ship” trading environment contributes to shifty price action and consolidation in the markets. At some point the market will have to break one direction or the other. Until then Simpler’s traders work to target stocks that tend to navigate through the doldrums.
Five “watch” stocks may also present trade opportunities over the next few weeks heading into the second quarter earnings season that begins in July.
These tickers may keep the summer doldrums from being “stagnant” sessions for traders:
- Microsoft (MSFT) – Continuing in a downtrend, trading below the 34 exponential moving average (EMA). Possible short trades with target prices aligning with downtrend, and watching for squeezes in lower time frames.
- Google (GOOGL) – Previously looked like a “go” at the 50 simple moving average (SMA) at its previous high. If it can move higher going into the July stock split is a big “if.” Might be a bullish play, but not counting on it as an egg in the basket.
- Apple (AAPL) – Charts for AAPL are setting up much like MSFT. Seeing chop through June with resistance levels keeping plays to the short side.
- Amazon (AMZN) – The AMZN 20:1 stock split is a done deal. Traders must work new, lower price levels while not forgetting company performance to this point. AMZN didn’t rally much into the split, so trades to the upside are speculative considering the overall downside pressure in technology and services stocks.
- Tesla (TSLA) – Elon “Twitter Me Fiery” Musk keeps blowing up social media as the electric vehicle company bounces along in a state of chop and drop. Similar to the others (above), expectations are that only a major reversal could signal trading TSLA to the upside.
- Advanced Micro Devices, Inc. (AMD) – We couldn’t stick with five, so here is a bonus. … This extra has perked up a bit on the charts and a market gap up may offer shorter term upside plays. Otherwise looking to sit back and watch.
- Nvidia Corp. (NVDA) – And, another bonus. This ticker also has a short-term upside tick, but not something to get excited about too soon. Waiting for the overall market and technology sector to chime in for possible setups going forward.
While it seems as though earnings season has just finished, in a few weeks tickers will start showing pre-earnings momentum, if any.
If this collection can’t get anything going into earnings, this may well signal tougher times to the downside through the summer.
The focus on these “stagnant” setups is the collective past history showing strong moves when the market has directional bias. Most trade setups today will focus on shorter term moves based on the individual stocks and chart structure on shorter time frames, i.e. minutes, hourly, daily versus weeks or months.
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Plan trades to beat chop, rising interest rates
Avoiding the doldrums can be challenging during this off-season environment.
The Federal Reserve (Fed) has indicated plans to further raise interest rates and the next hikes are planned for June and July. The last increase of 50-basis points in May rallied the market with the Dow jumping 900 points.
Traders should keep in mind this past history of market action to adjust accordingly in their bullish or bearish plays as these dates approach. (Remember to keep Fed event dates on the trading calendar.)
Since the last rate hike, the overall market has leaned into the short side and there is no sign of a sustained, major shift away from a choppy market pushing further to the downside.
One of the problems for traders so far this summer is lack of defined direction in the market. This market has proven to be shifty, moving quickly from slightly up to slightly down within the overall downtrend – extremely choppy.
The past few market sessions have been a sharp example of choppy trading.
Heavy selling on Friday shifted to a flat, but positive, close on Monday, and then a move to the downside early today before the market recovered to close higher.
The Dow closed at 33,180.14 points to rise .80% (adding 264.36 points on the day). The Nasdaq climbed to 12,175.23 points for a .94% gain while the S&P 500 just topped all the indexes, moving up .95% to 4,160.54 points.
Simpler’s traders are working multi-leg options strategies that manage risk against moves opposite a trade position. This includes butterfly setups which are designed to avoid buying calls or puts “at the money.” Committing to just one – call or put – in a choppy market exposes the trade to more risk in the opposite direction and likely decay of the option value.
Remaining cautious while trading in this environment may seem boring, but the intent is to protect against unnecessary exposure in a market that too often shifts quickly, but doesn’t sustain the directional change for long.
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