Trader Beware

The S&P500 traded to new 52 week lows today, possibly beginning a new leg down. There is a possibility that the markets attempt a double bottom in this area, but my gut feeling is that if that scenario played out, it would likely be a bull trap. The market is already oversold, but the market is vulnerable to whoosh right now and traders need to be cautious. One only has to look back to early August to see one possible scenario that could unfold soon. While we are not necessarily doomed, things are likely to get uglier before they get better.

If you are an inexperienced trader, you should really be thinking twice about trading in this market. It takes experiencing (and surviving) a few market cycles to truly respect the power of a runaway decline. There is a lot of noise during these market periods, and shakeouts in both directions are common. If you don’t have confidence (and sound strategy) you will get chopped up or worse. Many traders that are reasonably profitable end up blowing up in these environments by getting faked out and then holding on to losses for fear of getting faked out yet again. If you were not profitable during the past month, you should really think twice about whether to wait a few weeks before wading back in. The market is not going anywhere.

I’m putting a chart of $SPY below to illustrate how I’ve been seeing the recent market. I think the past month has been rather straightforward, although certainly complicated by overnight gaps. After the sharp decline in August, the markets traded in a channel that resembled a bear flag before finally breaking down. This hasn’t been an easy market to trade for sure, but for experienced traders there has actually been a lot of short term opportunities. After the August decline, volatility expanded and all of the indexes have seen a sharp increase in their ATR. $SPY for instance, had its ATR more than double. Anyone playing mean reversion within the channel likely had a good month with many sharp moves. Now comes the difficult part, as the markets are oversold and threatening to breakdown further.

The reason its difficult is that it’s too early to realistically play a bounce, yet we are likely past where shorting is a low risk trade. My course of action is to watch the next day or two for either this sell off to accelerate, or a bounce attempt to materialize. Once I get either, I will get look to initiate a few more positions.

Good Trading,

 

Joey

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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