Traders Follow S&P 500 As Market Standard


Simpler Trading Team

May 10th 2022  .  8 min read

In this article:

  • S&P 500 is a standard for traders
  • Will inflation lead to recession?
  • Where to look in the S&P 500

Today was an example of why Simpler’s traders default to the S&P 500 when the market is in chaos.

After significant gaps down to end last week and start this week, the S&P 500 regained some composure – closing up by .25% – as traders faced another day of selling.

This market continues to chop with only hints of holding a sustained trend in either direction. Facing a lack of trends, traders find it difficult to anticipate where this market is headed.

On the positive side, the market showed signs of life today with the S&P 500 and Nasdaq up for the session while the Dow was just below flat.

On the negative side, the uptick wasn’t much solace to traders caught in the heavy selling the previous two days.

(Check out the free video, above, for insight into trading this choppy market.)

Turn to the S&P 500 in market chaos

The Standard & Poor’s 500 Index (S&P 500) tracks 500 publicly traded U.S. companies considered by the index as leaders in the market. The index uses various criteria that includes market capitalization of the large-cap companies listed.

As of January 2022, some of the largest companies in the S&P 500 were: Apple, Microsoft, Amazon, Google, and Tesla. Movement in these large-cap companies – individually or collectively – can affect the index and the broader market.

The S&P 500 is used as a comparison against overall market performance as well as individual stock prices. Simpler’s traders turn to the S&P 500 when the market isn’t trending or is volatile.

Traders can use the S&P 500 as a benchmark to formulate trade setups in the index, with individual stocks, within futures, and for options on these assets.

Simpler’s team leans into options trades when the market becomes unpredictable. Options setups can focus on swing trading or day trading to manage risk in market chaos.

S&P 500 is more than an index for traders

Performance in the S&P 500 is often used by Simpler’s traders as a guidepost when searching for possible trades.

The index also offers what some consider an alternative to market action during times of uncertainty like much of the market environment today.

Traders at Simpler keep an eye on the E-mini S&P 500 futures (ES) to determine market sentiment and get an idea of market direction. This can be helpful in a choppy, non-trending market filled with quick, sudden shifts up or down.

The price action of the ES has shown a propensity to move up, sell off, bounce back down before encountering indecision, and then go through more chop. This is a familiar pattern to traders over recent weeks.

Traders can get frustrated by a seemingly endless sea of chop while waiting for upside momentum to appear. Traders who are looking at the index from a short-term perspective are seeing an unpredictable workspace.

And, those still denying that this market is in bear market territory may stay frustrated.

Simpler’s traders are trading this market “carefully and lightly.” Many day trades are in the mix for only a few hours and many swing trades are only lasting one day to a few days.

Day traders, who understand the risk and have the experience for volatility, are seeing the fast-moving market sessions as opportunities for gains. (That’s one of the positive aspects of market uncertainty.)

For example, on Monday, the S&P 500 dropped to a major key zone from $4,055 to $4,029. This was a topic of discussion in the Simpler Day Trading community. This opened an opportunity to take advantage of this downward move with SPX puts for profit potential to start the week during a selloff.

Where to look in the S&P?

With any index or fund, part of the challenge of targeting winning trades is knowing where to look.

Start by reviewing the 10-day chart in the S&P futures. This gives insight into if the market is ripping higher and then selling off based on levels of support and resistance.

The current volatility – sharp gaps down and fast rallies higher – can make it seem impossible to get on the right side of this market for more than a couple of hours at a time (another reason day traders stay active in this environment).

Constant whiplash makes the market tough to trade and traders are feeling queasy. 

Traders who realize that buying options that could get wiped out in the short term may consider pricing options setups bigger over a longer term. Holding through the volatility could be painful to watch, but it might work out as a stronger trade setup.

Without question, the market is in need of a major catalyst. 

With ongoing earnings releases, a Eurocentric war, and economic woes in the U.S. – anything can happen. Inflation is at a 41-year high with the Central Bank scheduled to raise interest rates in May.

“Classic” trading strategies may not work out as expected in this market environment.

A “buy the dip” focus in this tricky market doesn’t seem to be working out as well as in the past.

Traders are finding results are the same way on the downside. Traders who short are finding the market moves up against them as they sell the rip.

Plan trading setups and work the plan

Trading in recent sessions has simply been difficult.

While staying in cash is a strategy, some traders want to stay in the action.

Traders who want to work through the volatility should consider reducing trade sizes and staying nimble – get in and get out of a trade.

Avoid pride or any unnecessary emotion in this market. When a trade is not working traders need to get out – a calculated, smaller loss is a lesser risk against the trading account.

In this market, consider trading in shorter time frames and with lower capital at risk.

Also consider shifting to tighter time frames if you are a swing trader. Try not to hold too far out which can increase risk. Traders should rely on charts and indicators to create fast, well-timed trade entries and exits. 

Traders continue to anticipate this market settling into a stronger directional trend – up or down – but there is no certainty in this uncertainty unfolding in the market.

Keep watch on inflation and recession

Simpler’s traders are watching a key report to be released this week.

Last week was full of earnings reports, economic struggles, and an announcement by the Federal Reserve of more interest rate hikes ahead.

This week traders are focused on the Consumer Price Index (CPI) report set or release Wednesday morning. The report gauges whether consumers are paying more or less for goods and services – a key indicator of inflation.

The CPI report could be a catalyst that gives the market a relief pop or drops it lower.

Inflation has become a big concern among consumers, economists, and traders.

The last time the U.S. saw consumer price spikes like this was in the 1970s and 1980s.

In this era, the Vietnam War had taken its toll on the U.S. economy and Federal Reserve policy added to inflationary pressures. The energy crisis served to make a bad situation worse.

Inflation today has risen to 8.5%, pushing toward the highest level which was in 1980. This is when the annual increase in the Consumer Price Index was 14.8%.

Will economic history repeat itself?

A common denominator in inflationary periods is energy.

The 1973 OPEC oil embargo had drastic ramifications for Americans at the pump. And, in 1982 the 12-month increase in energy, i.e. gas prices, was 68%. Today this marker sits at 48% heading into summer when energy consumption peaks all across the economy.

The economy is also reeling from increased automobile and housing costs along with a shortage of microprocessors – essential in almost every aspect of a technology-enhanced consumer market.

Shortages in consumer goods and supply chain issues (many related to the Covid-19 pandemic) have increased significantly more than with the 1970s-1980s inflationary period

Federal Reserve rate hikes in 1981 sparked an economic recession and it took years to recover.

Will inflation today lead to recession?

This will be debated, but some economic indicators could be moving faster in that direction. Consumer demand is still strong while elevated prices are expected to persist through the year. 

Simpler’s traders spend a substantial amount of time developing trading strategies to counter economic concerns and uncertain markets.

To increase the potential for winning trades in this environment, execute trade setups with planning and risk management while targeting well-timed entries and exits.

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