Stock Market Struggles Through Chaotic Day
In this article:
- Market benefits from final hour push
- ‘Layering’ variables can define direction
- SPX signal in May leads to August profit
Doubt may be creeping into the mindset of traders expecting bulls to maintain control of the stock market.
A promising day quickly went against the bulls on Wednesday as two of the three major indexes lost early session gains before recovering into the close. The chaotic price action left traders assessing mixed results.
Rough days like this give testimony for traders needing setups and tools to handle the sudden shifts.
Final push into close lifts stock market
The S&P 500 4,300 mark was a significant psychological level for traders today.
A push higher through this level and then the S&P 500 gaining support here fueled anticipation that the index could continue higher toward 4,371.
The market seemed to be delivering this upside continuation from the previous session until mid-afternoon when selling began. The S&P 500 barely recovered, closing just above 4,300 in the final minutes of trading.
In the market today, the Dow closed at 34,152.0 points to lead gains at .71% (adding 239.57 points on the day). The Nasdaq slipped to 13,102.55 points for a .19% stumble while the S&P 500 eked out a .19% gain to 4,305.20 points.
This wild price action was the talk among Simpler’s Traders who are working with the idea that bulls are exerting influence in this market. At least for now.
Volatility signals, such as the Volatility Index (VIX), have been contracting for weeks. This is attributed by Simpler’s traders to fewer market-influencing events, such as Federal Reserve (Fed) meetings, heading into the end of August.
If the VIX were to fall below 18.45 after monthly options expiration at the end of the week, stocks on average could be headed higher. The VIX closed at 19.64 today after climbing above 20 mid-morning and mid-afternoon. VIX above 20 is considered high volatility.
Upside influence may not be as strong as many traders hope as evidenced by the sharp reversal into the close today.
Other negative factors could be at play, countering upside movement and pushing a possible reset of market signals into next week.
The struggle for traders in this market is determining a single marker or signal to watch and determine direction.
‘Layering’ market signals to find direction
Henry Gambell, Senior Managing Director of Options Trading at Simpler Trading, works through market uncertainty by “layering” various signals to formulate potential directional setups.
Along with the VIX, traders can follow the put-call ratio for signals supporting a bull market uptick. Henry also adds in key stocks to watch, such as Tesla, Inc. (TSLA), Apple, Inc. (AAPL), and Microsoft, Inc. (MSFT), for any squeeze setups.
The overall idea is to use various key tickers more as market metrics to gauge direction and potential plays vs. just sitting back and saying, “This is how the market is right now.”
As an example, Henry has been following movement in Tesla ahead of its 3-for-1 stock split after the market closes on Aug. 24.
Henry asserts that if TSLA can get above the previous swing high that was made on Aug. 4, above $940, a path to $1,000 may begin to accelerate. TSLA closed at $919.69 today, down .89%.
Tesla, as it has in the past, may be a factor that influences the market higher.
While there are no guarantees in these possibilities, watching these various metrics and working to “layer” these signals may present trade possibilities moving forward no matter how the market shifts.
Henry pointed out two more “layers” to consider when assessing market movement in this environment.
He categorized this movement into two considerations:
- Reversion to the mean – This is when price moves toward its long-term average, and should be strongly considered as price levels move further away from the mean, either down or up. For example, the S&P 500 is at +2 average true range (ATR) today. Price tends to revert to the mean at some point in any market.
- One-time framing – One-time framing follows the relationship between the current low being higher than the previous low (ticker moving up) and the current high being lower than the previous high (ticker moving down). Traders can follow price with this method in choppy markets that don’t present strong directional signals.
“If we continue this kind of one-time framing action, and each day respecting the range of the day prior, I actually think that there is a chance we’re going to be moving up into this 4,371 level,” Henry said. “I think this will be an important area of resistance.”
To learn more about Henry’s market assessments, click HERE.
Working the SPX for ‘divergent’ profit play
Allison Ostrander, Director of Risk Tolerance at Simpler Trading, provided a strong example of how traders use charts and indicators to their advantage.
Allison regularly uses the Divergent Bar indicator which helps track a higher high or lower low and can be used on various time frames. On Wednesday she was following the S&P 500 (SPX) intraday using an hourly chart.
Early in the session the SPX moved down to test support at the 10-day simple moving average (SMA) on the hourly chart. Price held, and then ended up forming a bullish Divergent Bar signal. This means there is a probability of a higher high within the next three bars on the chart (next three hours on the hourly chart).
Allison executed the morning options trade using a call vertical spread at 4,300 at .90 net debit. In the second hourly bar following, price hit a higher high. Allison then profit recycled the call vertical spread into a butterfly to protect original capital at risk. This locked in a .45 profit in the first leg of this trade.
Allison then let the butterfly cash settle at 4,297.14 on the SPX trade at the end of the day. The call vertical spread and butterfly setups combined for a 2.59 profit.
Allison was alerted to this trade based on watching the Divergent Bar back in May on the monthly SPX chart. The Divergent Bar was signaling a bullish move three bars ahead (three months ahead in August). This identified a potential bounce back up toward 4,300 in the SPX.
Allison uses the Divergent Bar in combination with her charts, trade analysis, and other indicators to track how the market is moving and decide on trade setups.
“It can create a valid setup where, as long as I’m mindful of my risk, it’s one I consider taking,” Allison said.
Following solid market structure
This market continues to prove a toss-up for traders whether they are leaning bearish or bullish.
Simpler’s traders are avoiding going into overdrive any direction the market shifts, preferring a steady plan of attack that can shift into neutral if the market uncertainty accelerates.
The plan is to look for signs of solid structure in either direction and back any moves with consideration of “layered” variables.