How To Trade S&P 500 In Volatility


Simpler Trading Team

Apr 25th 2022  .  7 min read

This market is behaving almost every way it can. It’s not as though traders anticipate an easy ride, but this market has been in an erratic mood.

The broader averages continue to trend in heavy chop with economic issues, geopolitical conflicts, and now the busiest earnings week this quarter. Not to mention the ongoing Twitter buyout battle.

Last week closed with all three major indexes (Dow, Nasdaq, S&P 500) down by more than 2.5% on Friday, and this week opened with the indexes struggling to get out of the gate. With these lead indicators of the broader market so uncertain, Simpler’s traders turn to the S&P 500 to find more stable price patterns.

Before we settle into how to trade the S&P 500 (think more certainty), let’s take a look at the broader market.

The S&P 500 index, and more

The indices – S&P 500, Dow Jones Industrial, and NASDAQ – are spending some time in the bullish hemisphere followed by the mostly bearish hemisphere are still in bearish chop. (Yes, the explanation is as erratic as the market environment).

The market continues to have a downtrend in the 10-year yield and that does not bode well for technology stocks.

This means the Nasdaq and the sectors within it will have difficulty gaining any traction as long as that downtrend continues.

Traders at Simpler Trading are searching for tickers that have the wind at their back, so to speak. This means traders are attempting to find whether this market is going to continue moving lower or whether it will make a correction.

Simpler’s traders embrace the simple idea that we don’t know where the markets are going next, but following stock chart indicators provides guidance should markets reach target price points. 

For example, tickers with the path of least resistance are finding support using the Darvas indicator which takes automated price action to another level.

By using color-coated arrows, the Darvas indicator provides signals to Simpler traders when an asset price has reached key levels. Traders can be alerted when price has attained selected minor low and minor high patterns that the Darvas is built upon.

These automated arrows signal turning points and confirmation of high-probability levels.

By using these “signal arrows” to identify both entries and exits once they’ve been triggered, the support and resistance signals highlight opportunities as the pattern forms. This updated indicator also signals where there’s a probability of a stall or reversal.

When traders at Simpler have a support level in this market volatility, the Darvas indicator can present opportunities for traders to become short sellers or buyers of puts.

Recognizing market direction – ‘heart of trading’

It’s simply an impossibility for any trader to know exactly where the markets will go.

Proficient traders embrace the “not knowing” – because nobody knows market direction, especially in the short-term.

Traders can use an analogy of baseball which is – you are a major league batter and the market is the pitcher. The pitcher will throw the ball. Batters, or traders, must react to what is thrown at them.

What traders don’t know is to recognize as quickly as possible whether the ball is in the strike zone – and hopefully make contact with it. This is the job of traders.

It is an essential practice to focus on not knowing where the markets are going to go, but to know what to do when the markets reach target prices… and follow through with pre-set strategies.

That is the “heart of trading.”

Why focus on trading the S&P 500?

Within the existing market chop, trading the S&P 500 is an interesting place to be with broad movement in either direction.

Traders using the setups and strategies available in the Simpler trading rooms have the slow stochastic setting as well as a number of free indicators at their disposal to find the right side of a trade (check your online trading platform for these tools and indicators). If traders are going to find support in the S&P 500, there are several areas on the slow stochastic indicator they can look for confirmation.

Traders at Simpler prefer to look at the slow stochastic indicator in chop because that’s exactly what the stochastic tool does. This indicator is used for oscillating, range-bound and choppy markets. And, this market qualifies on all those details.

Range Stochastic is good at pinpointing range lows or highs when accompanied with Fibonacci or other support and resistance indicators.

How do traders recognize chop in the S&P 500 or the broader markets?

Consider the JT Multi-Trend indicator which reveals the overbought stochastic and oversold stochastic signals.

JT Multi-Trend is an at-a-glance tool that shows which symbols are green (in an uptrend), red (in a downtrend), or blue (neutral).

This indicator is designed to serve as further confirmation of market sentiment and momentum. It is not a stand-alone indicator.

Being that structure of the market precedes trend, the JT Multi-Trend helps traders avoid a misread of both recent and current market behavior. The indicator automates the process by putting all of the moving averages on a chart. This increases both speed and accuracy and leads to more accurate conclusions. 

Some of these indicators have been built into thinkorswim® which allows this tool to overlay the same grid which uses less space. A slow stochastic was built into thinkorswim® that defines the context of chop.

Look for S&P 500 opportunities

The only index showing strength in this erratic, volatile market is the S&P 500 which represents the 500 largest publicly traded companies in the U.S.

There is a corner of the S&P 500 that has kept it from looking as weak as the Dow Jones Industrial, the Russell 2000, and the Nasdaq. Traders who are looking for a buy-the-dip opportunity that’s related to the S&P 500 may want to consider sectors that are outperforming within the volatility.

For example, the healthcare sector.

Simpler’s traders are watching the Health Care Select Sector SPDR Fund (XLV). There are heavily weighted stocks within the XLV that can point to stocks showing strength in this market.

The goal of this healthcare index is to provide effective representation of the healthcare sector of the S&P 500 with exposure to pharmaceuticals, healthcare equipment, healthcare providers, biotechnology, and related technology services.

Another example of a sector to watch is crude oil which bounced off the Darvas indicator. Traders who missed that bounce are watching for a pullback for possible buy opportunities.

Grocery store commodities, such as soybean meal, are another sector to watch. This sector looks to have a potential setup for continuation, or even a breakout, rather than reversal.

When traders at Simpler use indicators and tools to determine where to focus, the potential to find solid setups for trends in either direction increases.

In this market environment, that means traders can find opportunities in the outperformers in the sectors at the stock level.

There are good things happening in the markets if traders know how to find them.

Earnings season still a consideration

As traders look at  quarterly earnings season, keeping a watchful eye on the earnings and economic calendars is an essential part of a well-rounded trading plan for Simpler’s team.

If traders don’t already keep up with the earnings calendar, this is the time to make this part of the trading routine to prevent being blindsided by market response to earnings. This can happen four times each year.

Earnings season typically falls in January, April, July, and October as companies need time after each quarter ends to put together these reports.

In the aftermath of this earnings week, potentially the market will reveal more clarity in the S&P 500 – or maybe more clarity in financials as we head into the second quarter.

S&P 500 ties into broader trading market

Traders who take advantage of the broader trading market also benefit from the volatility of the S&P 500. This provides traders with the opportunity to expand their trading plans.

Traders can work to consistently grow their account with a trading plan that works best to achieve their ultimate goal.

Traders should take steps to lower risk with the overall objective of making consistent profits in any market environment. This provides traders with the ability to find entries that are optimal in every market condition.