Bulls Lose Energy, Stock Market Falls To Downside


Simpler Trading Team

Oct 19th 2022  .  3 min read

A day to the downside halted the runaway rally that kicked off this week in the stock market.

Equities across the board faltered Wednesday as all three major indexes gapped down.

The downside day confirmed expectations of Simpler’s traders who have been working setups that feed off this up-and-down cycle.

Bulls lose energy, stock market falls on the day

Bulls in this stock market just don’t seem to have the fervor to keep a rally running.

“Though the bulls have had a good showing over the last few days, I continue to think the path of least resistance is to the downside,” said Taylor Horton, Vice President of Directional Options Strategies at Simpler Trading.

Taylor shared his plan and trade setups in the Simpler Options online trading community. His focus has been on the strength and structure of price in the S&P 500 (SPX).

The SPX faltered Wednesday after two consecutive days of upside moves.

“Not a bad pop Tuesday, however I don’t think enough has changed just yet,” Taylor said. “I don’t have enough evidence to want to get long in the market for a swing trade.”

Taylor is holding to his game plan to short rallies as they pop up in this bear market.

“I think you want to short the rallies in a fashion where you have time to expiration,” Taylor said. “Don’t put yourself in a position where you get short and the market has to roll over immediately. Give yourself a cushion.”

Taylor shared in Simpler Options his setup that looks to short the SPX into a December expiration options contract using a call credit spread.

Taylor has observed how bigger time frames – likely squeezes on monthly charts – are showing signs that are more bearish. This keeps him focused on shorter time frames where there are clear signals for shorting the market on the “pops,” or rallies.

He’s not interested in rushing into any trades that can leave the setup on the opposite side of a sudden market move.

Taylor encouraged traders to “take it day by day, being patient.” Trades that he targets give him the “time and cushion” to analyze what the market is doing as it unfolds.

In addition to the SPX charts, Taylor is seeing certain bullish signs that keep him leaning to the short side.

The U.S. Dollar Currency Index (DXY) and the Volatility Index (VIX) are both holding strong. This bullish sentiment is not a positive sign for traders looking to go long.

As the dollar and VIX rise, equities fall.

Into the final hour of trading Wednesday, the dollar was up .71% to $112.93 and the VIX – “fear” index – was up 1.80% to 31.05. Simpler’s traders are ever cautious as the dollar pushes toward $115, and the VIX above 30 signals more bearish sentiment among market participants.