Bulls, Bears Battle In Uncertain Stock Market


Simpler Trading Team

Aug 04th 2022  .  7 min read

In this article:

  • Recognize “stops” and market risk
  • Follow key calendar events ahead
  • Uncertainty can be a teacher for traders

Bulls attempted to run over bears in recent sessions and this left some traders holding trades that quickly became unprofitable.

Simpler’s traders have been navigating around the volatile major indices that continue to see-saw in price action. The Dow, S&P 500, and Nasdaq indices moved against the bear market in an uptick spurred by strong technology earnings last week.

Now that August opened to the downside, traders are forced to adjust once again.

Options with Henry Gambell
Futures with Raghee Horner

Traders need to recognize market risks

The indices and stocks that were showing a bear rally drew the attention of traders looking to trade shorts. The runup left some trades to the downside getting stopped out to protect capital just before the indices dropped once again.

Traders who scurried to trade shorts in the stocks and indices that they believed would revert to lower price actions saw them rally before reverting to their lows. Selloffs occurred and trades were “stopped out.”

Some traders in similar positions hold on to the trade for a longer time frame to wait for another move or they exit the position with a loss on a stop-loss order.

Generally, a stop-loss target prevents further losses and can move in either direction.

To manage risk in this environment traders can turn to multi-leg options trading as an alternative to stop-loss hedging. Traders are often familiar with the long trade of a bullish stock, yet find options trading to be confusing. While stocks give traders partial ownership in a company, options are contracts that give traders the right to buy or sell options on the underlying asset (stock or other assets such as futures or an exchange traded fund) at a set date and price.

For the cost of the premium, traders purchase options contracts in anticipation of a rising or falling stock (or asset) price. These options contracts fall into puts and calls.

Options trading carries more risk than trading stocks, so traders should consider this in their risk management plan.

How to find a trading mentor

If you are looking for a trading mentor who has “been there, done that” then consider getting to know more of the team members at Simpler Trading. Each has a unique style and strategy with a focus on reaching financial freedom.

You can get to know our team members through our community of like-minded traders. Gain access to live-trading sessions and real-time stock alerts while learning how professionals operate in this market. Give it a try today.

What to watch in an uncertain market

Simpler’s traders are aware that the market is full of uncertainty as the summer begins to transition from the doldrums to fall activity.

Traders can add economic information to their calendars to prepare for major reports and Federal Reserve (Fed) speaking engagements and scheduled meetings. Being aware of these events can be critical to a good trading strategy, i.e. Fed announcements of interest rate hikes.

What’s on the calendar among Simpler’s traders?

Key data reports – economics or jobs – along with Federal Reserve (Fed) actions are highlighted on the Simpler Trading calendar. Here are key events to watch in the days ahead:

  • Consumer Price Index (CPI) – The CPI measures consumer costs for important staples such as housing, gasoline, utilities, and food. This index shows how inflation is holding at 40-year record levels and influencing the stock market.
  • U.S. Producer Price Index (PPI) – PPI tracks the change in wholesale cost – the price of goods sold by manufacturers. Rising wholesale prices bleed through to higher costs for consumers. Continued labor and supply chain issues are expected to be reflected by the PPI showing more inflation across the board.
  • Non-Farm Payroll (NFP) – This report measures U.S. workers outside farming, such as employees in construction, goods, and manufacturing.
  • Federal Reserve (Fed) – The Fed has various speaking engagements and meetings where monetary policy is discussed and changes, such as raising benchmark interest rates, are announced. The Fed has been a significant influence on stock market action in the last year.
  • Earnings season – This has been a back-and-forth topic among traders who are cautious following second quarter earnings reports which continue to be released. Market reaction to earnings reports has been mixed. Previous disappointing earnings reports have traders expecting weak corporate guidance that could spur further market uncertainty.

As these calendar events play out, market volatility is expected to continue or even increase, and traders must adjust accordingly.

Are shorts in trouble?

The major indexes have been difficult to trade this year as the bear market has held on longer than some traders anticipated.

This bear environment continues to support volatile chop and down movement in the indices. The downtrend has experienced bullish rallies at times as money gets put back into the market.

Traders could take advantage of this volatility with long puts or by shorting the indexes. Be ready to manage risk when shorting. Traders need to look for an edge they can trade, such as an overbought resistance.

Traders at Simpler are looking for sectors in the market that exhibit clarity with strong stock chart signals. In choppy markets, it’s important to pick stocks, corners of the market, and sectors carefully for bullish or bearish trends.

Difficult market conditions teach strategy

Simpler’s traders factor in personal tolerance for loss in any setup they put together.

Trades often move against the intended profit potential. Traders should already know what percentage of capital they intend to risk before taking any trade.

When the market is in a wide, choppy environment that changes direction, traders often find themselves unsure of their strategy. This uncertainty can lead to losses.

Simpler’s traders develop a setup for how a trade should work and confirmation that the strategy works. Traders should not only understand the process as to why they are in the trade but be able to analyze the success, or failure, of the trade.

If the trade is not playing out as it was intended, traders should employ an exit strategy.

Looking back at the previous weeks, traders had to consider whether rallies were a range of very wide chop or an uptrend. It seems the bears never went to sleep and are operating strongly in this market.

Simpler’s traders take opportunities in markets such as this to learn something new and apply proven strategies as they can.

When traders do this, they build confidence in their trading style and strategies in different market environments.

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