Have you paid attention to this market change?

And what’s working right now.

A few of the most common questions I get from traders are these:

“Danielle, how many trades do you normally have on? How long do you hold your trades? How much do you risk? What profit targets do you use?”

These questions ALL vary on the current market condition in which I’m trading.

During a trending market, or even a stock pickers market, I’ll have between 8-15 positions on, using primarily long calls, spreads, and butterflies.

However, once we get into pinball mode, I lower that down to about 5 positions, and only use spreads, butterflies, and unbalanced butterflies. I also use a smaller risk size per position. 

We’ve talked a bit about this, in the previous newsletters. But, at this point, we’re also seeing another critical change in the market…

Here’s what this critical change is and what you need to know about it… 

Sector Rotation 

Sector rotation happens when money leaves a particular sector or industry group, and goes towards another in masse. You can typically see this when you have a sector or industry group, that previously had a nice, steady trend, and the trend abruptly breaks. The break usually comes with a wide range expansion day, on volume. 

Sometimes it’s not very obvious, because you’ll see that while the S&P was down today, by the very end… it actually ended up just slightly positive. To someone who isn’t paying attention to the details, you may not think much of it.

But, when you look at the sectors, it’s because you have energy, financials, and industrials all trading higher — and the high growth stocks such as tech, communications, and discretionary, trading lower. Therefore, the S&P gets ‘evened out’ but, this is a critical juncture for us as short-term options traders (and anyone with a long stock portfolio!)

Why?

Well, when smart money sees trouble ahead, they start taking profits on stocks that are up the most. These are typically high growth names, in strong industry groups, like cloud computing, cyber security, and tech.

One or two days is one thing, but the creaming that we’ve seen in the cloud is a very eerie sign for what could be to come. 

Big money’s goal is to make money — if they don’t trust high growth stocks right now, we shouldn’t either. Not to mention the fact that a huge part of the reason we trade these is because they make exponential moves… so, if they can do it to the upside — well, they can come down even faster than they climbed. 

For example, McDonalds:

McDonald’s has been a nice, steady trending stock, but today it was down over 4%.

This is completely out of character for McDonald’s (MCD) stock. Upon investigating further, like I always do when big moves hit the market, my analysis determined that it wasn’t only MCD that was down — it was also additional stocks within our “Fast Food Fetish” group: YUM, CMG, SBUX. These are stocks that‘ve been very strong on the year, and ‘suddenly’ were getting creamed today. 

One stock could be news related. But the industry group? That’s a pattern.

So, what’s a trader to do?

We must exercise extreme caution here…

Keep our eyes open, and use what’s working! I’ll be talking more about what’s working for me, sector rotation, and how I want to make trading as SIMPLE as possible for you on tonight’s webinar.

If you haven’t yet, grab your spot here.

1 thought on “Have you paid attention to this market change?”

  1. Great analysis of Sector Rotation … I remember a while back JC discussing Hedge Funds have charters that require them to have certain % of a sector in their portfolio & when they exceed the % … they must reduce & put the money elsewhere. I’ve struggled with the WHY on Energy … since I was building a short position … very clear now. With the normal ebb & flow of Sector Rotation & the craziness of random tweets, this is definitely challenging trading times. I’m looking forward to Mastering your style of trading … appreciate so much the time & effort you put into your research. YOU ARE AWESOME!!!

    Reply

Leave a Comment

Up Next...

SPX 0 DTE: Part II

Hey traders! I posted a video on a neutral SPX 0 DTE strategy on Monday, and I had many questions, so I decided to do a follow-up video with a second example. In this video, I cover several questions, including the width of my iron condors, the length of time, the risk-to-reward, and more. Check … Read more

Read More

Trade Review: Using a Neutral 0 DTE SPX Strategy

  In today’s Trade Review episode, I cover a quick SPX 0 DTE trade from last Friday at market close. In this video review, I cover: Why I decided to make a bet that the market would trade sideways into the close How I analyzed the options chain and technical chart patterns Why I decided … Read more

Read More

Butterflies + Put Credit Spreads Combined

A Bullish Earnings Call Last week, in the trading room, one of our members requested that I analyze the ticker AAP. This ticker belongs to Applovin, a company I’ve never traded before. This find is a prime example of the collaborative aspect of the trading room, and it’s why I appreciate our dedicated traders so … Read more

Read More

Subscribe Today!

Want my up-to-date analysis, setups, top trading tips, and more? Be a Five Star trader, and join my free newsletter today!

Sign Up Now
all-as-seen-on-logos