Erratic Equities Markets Push Traders Toward Futures


Simpler Trading Team

Oct 11th 2022  .  6 min read

The equities markets are bouncing all over the place this week and Simpler’s traders are pursuing alternatives to their regular stock watchlist.

Adapting to this ever-shifting market is necessary, and stepping away from the comfort zone to diversify trade possibilities simply makes sense, according to Henry Gambell, Senior Managing Director of Options Trading at Simpler Trading.

That diversity in trading includes wading through the uncertainty of a fluctuating stock market during a week of unknowns.

Options with John Carter
Futures with Raghee Horner

Uncertain equities markets push traders into futures

The equities markets are simply in turmoil right now, according to Henry.

This prompted him to look into diversifying his trading portfolio with potential opportunities in futures, particularly in the agricultural sector. This included wheat and corn futures.

“Those could provide some viable trades if you’re looking for some alternatives to various equity (stock) exposure,” Henry noted.

Henry is focusing on price movement possibly setting up a squeeze to the buy side over the next few weeks. He specifically targeted potential movement higher toward the 21-day exponential moving average.

Along with longer-term setups, these futures present daily squeeze possibilities.

“There will still be resistance along the way, but I feel like as long as that moving average relationship can be maintained then movement higher would make sense,” Henry said.

For traders wanting to limit risk exposure in equities markets, keep in mind that futures trading has a high level of risk. Henry also pointed out the micro contracts for various futures products.

“If you’re looking for a way to participate but don’t want quite as much movement as the full futures contracts, there are micros that are offered,” Henry said. “It makes sense to have some diversity. Look at it on a day-to-day basis.”

The stock market moves ‘violently’ toward lows

The prompt for Henry to look beyond equities markets setups played out in the stock market today.

The market opened to the downside on Tuesday, then the three major indexes turned positive by noon – led by a surging Dow. But the Nasdaq was struggling and weighing against any strong overall market upside.

By the final hour of trading, the market was jittery and closed with mixed results on the day.

In the market today, the Dow managed a late rally to recover earlier loss and closed at 29,239.19 points for a .12% uptick (adding 36.31 points on the day). The Nasdaq dropped to 10,426.19 points for a 1.10% tumble while the S&P 500 lost .65% to 3,588.84 points.

In this volatile market, Simpler’s traders are paying close attention to the first 30 minutes of the open session. The information revealed by the market in the first few minutes each day helps track market movement throughout the day.

“We’re just violently consolidating at the lows,” said John Carter, Founder of Simpler Trading. “The market is heavy.”

Simpler’s traders focus on the reality of the ‘ugly’ market

As the market and economy get ugly, traders can get frustrated by the uncertainty.

John pointed out that the market has experienced this before even though traders “can’t imagine” a severe drop. Yet, a drop is required for the market to rally.

The market is facing more uncertainty from outside influences.

The U.S. Producer Price Index (PPI) report is set for release tomorrow morning followed by the U.S. Consumer Price Index (CPI) numbers on Thursday morning.

There are also other influences on the market, such as mortgage rates topping 7% this week with loan qualifications tightening. The housing industry is experiencing the pains of a weakening market.

John believes this is to be expected considering the heavy influence of the Federal Reserve (Fed) on the market to this point.

After its .75% (75 basis points) rate hike last month, the Fed anticipates raising interest rates further through 2023, to a level as high as 4.6%. The latest hike raised the target range for the federal funds rate for the fifth time this year, bringing the target range to 3% to 3.25%.

John sees continued volatility as the market works through this “curveball” environment.

John cautioned traders to be wary of any “slightly positive” news ahead which could result in short-covering rallies that fake out traders.

“You’ve got a market that is heavily short,” John said. “You can get these hair-trigger rallies.”

The problem with these unstable rallies, John explained, is they don’t last and the pullback can catch traders on the wrong side of the move.

“It’s like walking through a forest of rattlesnakes,” John said. “We just need to keep on walking.”

He will stay mostly flat in his risk positions, and wait for what the market yields following PPI tomorrow.

Playing downside possibilities in technology

As the market struggles to find direction, Simpler’s traders still look to old standards for potential on the downside.

Henry is watching Tesla, Inc. (TSLA) and Apple, Inc. (AAPL) for potential squeezes that could fire short. These two technology sector leaders combined count for 20% of the Nasdaq index 

TSLA closed at $215.50, down 2.90%, while AAPL fell to $138.98, down. 1.03%. Both moved slightly higher in early after-hours trading. 

Apple stock has steadily declined since mid-August, and is down from $182.01 since Jan. 1. Apple has grown over the last two years, rising from a pandemic low of $57.21 in March 2020.

Apple – with extensive overseas operations – is susceptible to high inflation which is holding at a 40-year high. This is a common earnings concern among U.S.-based international companies.

Simpler’s traders continue to follow Apple to see if this high-value stock suddenly changes course, possibly signaling an overall market shift.

Henry sees these two key technology sector leaders as possible roadmaps to how the market is playing out in the volatility.

Caution as earnings season gets underway

Henry is also monitoring key stocks with upcoming earnings reports.

He is for the most part avoiding these based on how earnings season reports so far this year have caused erratic reactions in the market. Some good news mixed with negative – such as strong earnings numbers mixed with weak future performance forecasts – may not be good enough for this market.

This type of earnings environment sent the market reeling in some cases following second quarter earnings reports. Third quarter earnings season starts this week.

To keep his footing in this market, Henry continues to follow key chart levels such as momentum and the histogram, along with Fibonacci and Voodoo Lines® indicators.

Henry is not looking for huge moves, but shorter-term shifts that present possible price rising into resistance or falling toward support.

As traders focus on the day-to-day, this market is holding out for inflation numbers and how the Fed reacts.

Futures room