More Chaos Ahead In Topsy-Turvy Stock Market

Have you heard this before?

A day after a central bank event the stock market was in a topsy-turvy state that sent prices of equities gapping down and spiking higher by hundreds of points.

More of the same is ahead and traders will need to work within the chaos.

Wild swings continue in chaotic market

News Wednesday gleaned from the Federal Open Market Committee (FOMC) meeting minutes sent the market into a tailspin. That direction appeared to be continuing today before the market caught its balance and moved to the upside.

Equities spiked higher in early trading before falling almost 500 points on the Dow. The market recovered the early losses and the Dow finished 108 points higher than the close of the previous day.

In the market today, the Dow ended a four-day losing string by climbing to 33,153.91points to gain .33% (adding 108.82 points on the day). The Nasdaq notched higher to 11,590.40 points for a .72% boost while the S&P 500 managed a .53% increase to 4,012.32 points.

This chaotic trading environment can be taxing on traders.

“These big wild swings make it tough to trade this thing,” said Bruce Marshall, Senior Director of Options and Income at Simpler Trading. “It’s definitely not boring.”

Most traders would like a little more “boring” in how the stock market is moving.

“It’s really hard to pick direction if you’re trying to do so for more than a few hours,” said Bruce, who has been working the market in zones.

Intraday setups help traders work zones

Recent market action has shown equities moving within zones that Bruce refers to in his online trading sessions.

These zones occur as the market shifts between the highs and lows of the day.

For months Bruce has shifted to shorter term trade setups – hours or daily versus days or weeks – and trades intraday within these market zones.

Bruce turns to trade setups such as iron condors, diagonals or calendars that stay within intraday time frames. These setups fit within the volatile zones the market is moving in daily.

‘Sticky inflation,’ recession talk continue

Bruce sees the market price range chaos as fueled by central bank actions on benchmark interest rates.

As the FOMC continues on a path of raising interest rates to fight inflation, traders can expect more sharp peaks and valleys in stock prices.

“Sticky inflation” – where consumer prices don’t fall back to levels before high inflation set in – is likely to be around for a while. Prices are just moderating off the highs, Bruce noted, but still cost more than before inflation shot to 40-year highs.

Central bank officials have pledged to continue the inflation fight as needed, including higher interest rates possibly into the end of the year. This has led people to predict a recession for months, but nothing has been formally declared.

“Does it get worse?” Bruce asked. “I don’t know. In my opinion we’ve been in a recession for months but nobody seems to want to admit it.”

Bruce doesn’t see the central bank backing off its hawkish interest rate stance until at least mid-year, and only if inflation shows a considerable decrease.

In the meantime, he plans to continue trading in the market zones. Bruce sees the larger zone within the stock market as the range in the E-Mini S&P 500 (ES) index futures from a “lid” of 4,200 down to a low of 3,500 (last hit in October).

A difficulty for traders is the continued threat of a negative catalyst – inflation numbers spiking again, a strong job market, higher retail interest rates, housing market losses, or the bond market remaining inverted.

“There are a lot of variables out there,” Bruce said. “It is really hard to see a way the market goes substantially higher from here. We’re not out of the woods yet.”

Long-term predictions sketchy in this market

Much of what traders must do in this trading environment is wait on what might happen.

Bruce expects a choppy stock market until late March after more inflation data is released and the next Federal Reserve meeting is held. This time frame might bring more clarity in equities price movement.

“It’s virtually impossible to make any long-term predictions because we don’t know what’s going on with inflation,” Bruce said. “If you’re looking at trading something and the only chart pattern is straight up or straight down, that’s hard to trade.”

Until there is a stronger level of clarity Bruce continues on a trading plan that carried him through the chaos of last year.

Trade setups such as iron condors, calendars, diagonals – all range bound setups – have been working for him. All are designed with shorter time frames that limit risk. If Bruce can “hit singles and doubles” – take smaller wins when he can get them – this provides profit potential within the market chaos.

The goal is to continue with a profit focus while avoiding risk.

“Management is the key to all types of trading,” Bruce said. “Manage your trades and your risk.”