Volatility, Volatility, Volatility. This has been the Magic Word for trading this week. Friday’s trading range was a small precursor to the wild swings that took place this week. Whenever I start to see swings like this in the market, swings that appear to ignore my daily support and resistance levels, there are two things I like to do:
1.) Look back in my charts at other strong volatile movements in the indexes that were similar to this and see what happened after. When I started to see this movement on Monday, I could not help but be reminded of the market going into the start of 2016. The market during that time showed a similar style of sharp volatility. If I am to look back at that time period for historical guidance I am reminded that the market took the sharp decline, followed by consolidation, and ending back in an overall rising trend. It only took the market until mid April to be back positive for the year and continue the rising trend that has been in up until this point. If I take another look further back I see strong volatility in September of 2014. However, before the end of of October 2014 we were back above the level we initially dropped at and were on our way to making higher highs.
2.) Take my charts from a Daily View to a Weekly or Monthly View. On these longer term charts I am able to look at my longer support and resistance levels. On a Daily chart, the tick dropped well below my moving averages and outside the Bollinger Bands in some cases. On a Weekly or Monthly Chart, the tick has only just moved down to some of these support levels while everything else continues to be in an overall rising trend.
When I take into consideration these two things I am able to keep a calm mind in a storm of uncertainty. As of right now my charts show this is just a normal correctional pull back. This does not mean the market couldn’t continue to break below support levels. I am also not taking off the table that this could be the start to another crash, but until I see the tick break my longer term support levels there is no need to start panicking. Keep in mind, the market does not move in a strait line. Even if this is the start to a strong declining trend, there will always be an opportunity to jump into some declining bias trades to make some profits on the move lower. Don’t let the wild moves make your trading emotional. Keep your eyes on the charts and stick to your trading plan to stay ahead of the fear of other traders.
John — Towards the end of January, the multi-year low reading on the 10 day moving average of the combined equity/index put-call ratio screamed caution on the long side, with a reading at .70. I haven’t seen it this low in years. The easy part of that signal is cutting down on market exposure. At that point, 90% cash was the order of the day. You never know when the markets could roll over, but you suddenly know that the odds of a sell-off have increased exponentially with a reading like that. Why? At those levels everyone is long. When everyone is long, there is no one else left to buy. If there is no one else left to buy, well, we just saw what happens next. Buying some calls on the VIX makes a lot of sense when readings hit that level. And being patient.
The selling started normally enough. We’ve all seen selling before. However, the action was exacerbated by a factor of 3 due to the excessive use of leverage to “short” volatility. Exactly the wrong thing to do when the 10 day MA put-call ratio reading is at .70. While we watched SVXY and XIV blow up safely from the sidelines, we did our best to take advantage of the ensuing volatility.
What happens next? Panic patterns all follow a similar tune. So far this market is acting very similar to the mini flash crash we had towards the end of August, 2015. At this point, I am looking for continued violent swings – not as big as we saw this week – with the aim of running stops on people who have too much conviction either long or short. The market is an equal opportunity dream killer, and is perfectly happy running stops on both sides of the camp. Case in point today. The moment it looked like the end of the world and the only trade was short, buy programs took the NQ 200 points higher in the blink of an eye. And remember, don’t focus on the fear of the unknown in this market. Just focus on the risk of the unknown. That means trading smaller to the point where you can maintain the same mindset as a normal market. If you need to go down to 1 lot from 10, that’s fine. Manage your mind and have a great weekend.
Jared — As of now we’re nearing our fourth day in the green for the crypto market. After weeks of intense selling, this past Tuesday Senate hearing with the SEC and CFTC seems to have been the clarity bulls were looking for before they stepped back in. With that said, I’m looking for Bitcoin to clear the shorter-term downtrend where price has been rejected since the middle of January:
From this image, you can also see that a Squeeze has started to form on a 4 hour chart. Bitcoin is currently up about 2% on the day. With a lot of above average buying volume coming in this week, I would expect this Squeeze to fire long over the coming days. Going into the weekend I’m feeling bullish on the crypto market for the first time in probably a month.
Danielle — Wow, if I thought last week was a whirlwind, this one was even crazier. Where do we stand right now? The S&Ps didn’t break the low they made on Tuesday – that’s a vote for the upside, however they are still sitting faily below their 50 day moving average. I don’t like them long until they can recover that moving average, and break the .618 retracement level to the upside.
Stocks on my watchlist that didn’t fare terribly this week? ANET, FFIV, FTNT, and COLM.
I’m going on vacation today and couldn’t be more excited. I’m ready to be flat for a few days and I’ll come back on Thursday to see where we stand!
Bruce — We have had a very, very crazy week with wild swings. I have been targeting 2538 on the SPX for the low and we hit 2532 today. I am writing this before the close, but I think we may be done at least in the short term. As far as next week, I am very light and sitting on cash. I will be buying selectively, but until we get clear direction, I will remain light. We need to be aware that we could a double bottom or could still even see more downside from here. Bottom line, I will remain light and nimble and try to enter new trades selectively. Have a great weekend.
Carolyn — Everyone wants to know if this is going to be a great buying opportunity, or if we have a more important high in place. Guess what!!…No one REALLY knows the answer to that question. All I know is that we had those weekly cycles for a high and that they finally kicked in. At this point the market is still vulnerable to the downside, but I’m suggesting tight stops here since I have daily timing for a tradable low between now and early this week. …so now the mode instead of cautious bull…is cautious BEAR because we’ve pulled back enough to where a nice bounce is due. We won’t act on this info however, unless we see some clear buy triggers that tell us to participate!!
Henry — The first full week of February was the most volatile I can recall from recent memory. These situations do call for sometimes drastic adjustments, the main one being you can’t just wait and let the bull market bail you out of positions that aren’t working. You’ve got to be much more vigilant with the management of trades and be willing to change your opinion on a dime, while at the same time not being too jumpy. I try to take advantage of these markets by selling premium where I can, using setups like we’re working with WYNN. I also like trying to find stocks like LULU that are doing a pretty good job of holding up in a very down market. Outside of that, I will trade some futures around these kind of moves. Shorting the Dow was a solid trade most every day this week. Hanging on to them and knowing when to reverse was the catch! I still think there’s a good chance we swing down to take out those lows in the indexes and until that happens I’m going to be very careful with anything I’m looking to buy.
David — The S&P 500 reached some measured Fibonacci pullback levels on Friday with patterns which would allow for the market to turn back up and resume its advance. Yet other interpretations are possible and it would take a move back above Wednesday’s high to build confidence that the march toward more new all-time highs had resumed. Otherwise, we’ll need to watch short-term patterns for clues about the next direction.
Trade of the Week Update
Bruce Marshall says: I am still in the AMZN trade and with small size, the loss is still minimal. I still like AMZN to the upside and think we may see a pop next week.
See the original setup HERE
Expert: Bruce Marshall
Setup: Setup on AMZN
Update from Bruce: Hold for now and remember that when the short expires next week, we still have the long out to 16 MAR. If the short expires worthless it will be a nice profit locked in and we can be patient with our long call for the move higher.