‘Grinding’ Stock Market Challenges Traders


Simpler Trading Team

7 min read

In this article:

  • Trade management key in uncertain market
  • Multi-leg setups provide options on stocks
  • ‘Collection’ of bullish market signals surface

You just don’t know about this market.

There has been a steady pace of rips higher, gaps down, heavy chop, and then repeat.

Are there opportunities in this consistent state of market volatility?

Simpler’s team is watching key levels and working trade setups to identify a path through the whiplash of this grinding market.

‘Grinding’ Stock Market Presents Challenges For Traders

“Be careful in this market,” said Bruce Marshall, Senior Director of Options and Income at Simpler Trading. “This market is tricky.”

Sage advice from a 30-year veteran when it comes to working options trades in the stock market.

“We have been getting huge daily swings in both directions which makes it very hard to get on the right side of a trade,” Bruce said.

Does this mean this market can’t be traded? No, and in some cases trading the volatility may be an advantage.

The key is trade management – limiting capital exposure and risk.

Trade management can be frustrating, especially when the best decision may be to take a loss or maintain zero loss. As traders should know, not every trade is profitable

Bruce has been on top of market movement that has shown clear signs of erratic behavior.

He pointed out key market shifts that traders can keep in mind when examining what lies ahead in current market conditions.

When the pandemic hit in February to March of 2020, the market dropped rapidly from its high and lost more than 1,200 points in the S&P 500. From this new low, the market then began a rapid bullish rise to more than double pre-pandemic levels. This, in turn, was followed by the more than 1,150-point drop from January to June of this year.

Along this grinding path have been sharp spikes, drops, and frustrating sideways chop.

“That’s the reality of the market we’re in,” Bruce said.

Recent market signals have indicated the potential for another shift to the upside, at least in the near term.

Traders, even those following strict technical analysis, may want to consider that market and economic conditions during Covid are not the same as market environment today. This caution comes from the economic impact of inflation, much less adding in rising interest rates and other “event” catalysts such as job reports and economic data releases such as non-farm payroll and consumer cost data.

Bruce has been able to manage trades successfully during the rough stretches of this year. His B.I.A.S. program account is up 24% year to date.

He credits this positive outcome to managing trades through multi-leg options setups that include butterflies, diagonals, iron condors, and calendars.

Bruce leans into the assertion that the current market appears to be shifting to more bullish sentiment, at least for the near term.

Bruce pointed out that there was a 500+ point spike higher in March before the market fell to the June low where the market was oversold. Since June the market has pushed higher by 680+ points in the S&P 500.

In the market today, the Dow closed at 33,999.04 points to stay positive by .06% (adding 18.72 points on the day). The Nasdaq was above flat at 12,965.34 points for a .21% gain while the S&P 500 was up .23% to 4,283.74 points.

Still, Bruce cautioned any commitment to the upside beyond the near term.

When comparing past market movement to current sentiment, Bruce is reminded that 40-year high inflation is a constant sticky point that could affect the market.

The most recent inflation report was “down” by .6%, yet year-over-year inflation remains at that 40-year high. Bruce questioned what happens if the next report shows inflation ticking up, even slightly?

He also noted that inflation is accompanied by major corporations publicly sharing mixed expectations – good or bad – for third quarter earnings ahead. Add in the Federal Reserve (Fed) meeting in Jackson Hole, Wyo., next week and at any point the market could shift suddenly, again.

This market is a grinder and will take out shorts as well as longs, so we must be careful.

Bruce Marshall, Simpler Trading

From here Bruce encourages traders to learn how to manage trades.

“Try to be on both sides of the market if you can,” Bruce said. “Don’t just try to pick a direction. If you pick a direction and get a profit, take it and get out as fast as you can – the market giveth and the market taketh away.”

Bruce encouraged traders to review where their trading plan stands in this uncertain market.

“This has been a tough trading market,” Bruce said. “Yet, if you can trade in this market and make money, that’s awesome. If you don’t lose money, that’s awesome.

“When we come out of the other side and we get into a trending, more predictable side of the market, you will be a better trader if you can manage through this kind of market environment.”

Market reveals support, resistance levels

Traders often need to take a step back from the flurry of market activity and get an overview of the big picture of where the market might be headed.

David Starr, Vice President of Quantitative Analysis at Simpler Trading, incorporates a combination of tools to develop this overall view. He does this through Voodoo Lines®, Fibonacci, and Elliott Wave calculations as part of his trading plan.

David recently shared his assessment of the S&P 500 decline from the January high to the new low in June.

In the last few weeks the market has moved higher through targeted levels of resistance. This is happening as a number of specific identifiers across Voodoo Lines®, Fibonacci, and Elliott Wave levels are collecting near each other and pushing toward 4,350 on the S&P 500.

There is no guarantee which way the market will shift once this higher resistance level is attained, but the collective of identifiers show the market favoring bullish sentiment.

David expects this move to be rough for bulls playing the move, because he expects a pullback before a move possibly even higher. There is no time frame set, but there lingers the possibility of a 100-200 point gap down before turning into a longer bullish upside push.

The key, according to David, is whether the S&P 500 holds above 4,250 and moves more to the upside. A break below support, and he expects price to continue further down.

David offered this assessment as an alert to consider this scenario related to price action over the next several days into the next several weeks.

Working through an uncertain market can be difficult for traders. David shared how following support or resistance levels can help traders to start incorporating these markers into a trading plan. He particularly focused on Voodoo Lines®.

“These lead traders to see where price may bounce higher (support) or fall lower (resistance),” David said.

He explained that price exhibits several common behaviors in the way it moves to and from Voodoo Lines®. Learning to spot these behaviors helps interpret the way price interacts with the price levels corresponding to these lines.

“The benefit of Voodoo Lines® is that they tend to hold at certain price levels for long periods, even years at a time,” David stated. “This provides traders with a targeted method of planning trades as price moves toward or away from these Voodoo Lines® , or even breaks through the established levels.”

“Voodoo Lines® are used as a complement to trading strategies – another insightful tool to target potential trades,” David said. “Voodoo Lines® are used to identify promising behavior in price to help make useful decisions in real-time within market movement.”

Indicator toolbox guides trades

Learning the specifics of market support and resistance levels is a standard skill for traders.

Any indicator of where the market might go next is a helpful tool. Combine a toolbox of indicators to apply to stock charts, and traders can build confidence in trading decisions.
The days, weeks, and months ahead will prove important to traders who want to learn through the volatility and be prepared for any extended trend ahead.