In the last edition, we discussed strategies to use to prepare for market pullbacks. Market pullbacks are just part of our reality as traders. For me, like I noted, I tend to stick with a swing trading approach and hold through a minor reversion to the mean.
Typically, especially on a news related drop like we experienced this week, as long as the market is fundamentally strong, it usually resumes its trend within a few days. However, a normal reversion to the mean would be a pullback to the 8, 21, or 34 EMAs. At this point, we’re breaking the 50 SMA. It’s crossing my boundary of ‘normal’ reversion to the mean.
So for this issue I’m going to give you my overall market analysis, but then I’m also going to introduce you to a new strategy.
A strategy that’s pretty much fantastic for a situation like the one we’re currently in…
After two down days, yesterday the S&P showed a bit of strength, and for a second it looked like the pullback was over. Then, overnight there came more bad news related to the current trade war discussion with China, and the market gaped down again today.
At this point, it’s a pretty key decision level because the S&P has broken the 50 SMA on the daily chart, and the Nasdaq is breaking it as we speak. Before this occurred, I was ready to look for buys in the market, using Phoenix, to watch for names of strength trading higher on a 15 minute chart. However, with this break, it usually leads to more panic related selling.
So then what am I looking at?
At this time, I’m focused on the high put/call ratio. It’s telling me that the market’s slanted to the short side, and traders are heavily short. This means that it’s possible for a short squeeze, and higher trade, to come through. However, that can’t happen if the price continues to fall. It’s a really precarious spot, and I don’t want to add shorts at these levels, nor do I want to add longs. I need more stability for longs, and shorting here would be shorting in the hole — unless you’re day trading.
I lightened up almost all of my longs, and the few that I have left have taken plenty of heat at this point, so I’m just going to continue to hold and wait for the market to perk up and add some more longs. I think it’s coming soon, but I’m not seeing it just yet.
I’ll let you know when I do.
As a trend follower, it’s never that enjoyable when the market pulls back, but the important thing to focus on is knowing how to prep for it next time. One of these ways is by adding varying trading strategies to your plan, such as trading futures — or considering even longer time frame trades that aren’t as impacted by market volatility.
Cue that new strategy I was talking to you about at the beginning.
This is why I wanted to take a minute and discuss with you a different trading strategy. I know you’re familiar with Phoenix by now, but I also know that there are many of you out there that aren’t able to trade as actively as I do. I’m sure there are also a lot of you out there that don’t want to worry about market pullbacks at all.
One of the best ways to do this is by focusing on longer term swing trades — ones that don’t require watching the charts all day, and all week long.
For this reason, I wanted to introduce two of my trading colleagues at Simpler Trading, Allison Ostrander and Jack Roberts, who have an upcoming webinar tonight at 7pm Central about longer term trading strategies. Like all our webinars here at Simpler, it’s completely free.
If you’re interested, you can grab a spot here.
As a trader, it’s important to learn varying strategies and setups, to create a well-rounded trading plan. For this reason, I wanted to ask them for some of their favorite tips and tricks, and pass them along to you.
Allison mentioned that her three favorite benefits of matching the data with the technicals on the Long Game Strategy are:
- Excellent Entries
- Learning When to Take Profits
- Conviction of Strength
Some of the information they’re going to discuss in their upcoming class will include their Long Game Checklist. So as a ‘Five Star’ community, I wanted to give you a sneak peek.
Here it is:
Once you’re done with the Data Checklist let’s move on to how to pair it with the Techincal Checklist.
- How is the data lining up? Does it look overall positive or negative?
- Next take a look at the Daily, Weekly, and Monthly chart and ask the following: Is the price near the Bollinger Bands? Is the momentum at the top of the axis? If the answer is yes or high to these, then you may want to hold back from an entry at this level and wait for a pullback. If the answer is no, or the momentum is low but building in favor of your direction, then this may be an excellent spot for the entry of your trade.
- Are there any Squeezes printing on these time frames (or multiple ones)? Squeezes can allow for a better entry with a stronger potential move.
- Has there been a recent ATR Trailing Stop switch from resistance to support (or vice versa) on a Weekly or Monthly Chart? This free indicator can be an early clue for entry or jumping into a trade.
If you want to learn more, make sure you join them tonight for their free webinar. Here’s that link again.
As a closing thought, our informational webinars are the best opportunity to learn more about the general topic and the class that dives deeper into that topic. You can also see if it’s something that’ll work for you. Allison and Jack’s following class will be about looking for higher confidence swing trades when combining data with the technicals on the chart.
It’s great for anyone who doesn’t want to sit in front of their computer all day trading or is looking to build their portfolio.
I find it interesting that you guys will continue to buy @ all time highs but the market goes down a little tiny bit and you call that shorting in the hole.
John, by “shorting in the hole” I think she meant that it’s to late to be getting short right now.
Danielle, what to you think about Honey Badgers that don’t seem to be phased by this downturn? Are those safe? Or are they just going to be the last to fall?
Hey JLP –
Yes, that is correct – nobody ever asks about shorting until the Dow is down 400+ points. At that level, generally it’s ‘shorting in the hole.’ When I say ‘shorting in the hole,’ I mean it’s likely the low. Whenever everyone starts asking me what they can short, it is usually the best indicator that it is indeed, the low.
Now, this also depends on your time frame. I am primarily a trend follower, as that is what makes me the most money. Sure I can have some shorts here and there, but it doesn’t add up to anything substantial on a regular basis. So, that is why I stick with the trend.
As far as honey badgers go, yes, they are typically the place to focus when the market is volatile. Right now I am avoiding anything with a China impact. Even a honey badger can be impacted by the market, but if you are like me, and want to focus on the long side since it’s the path of least resistance, focusing on honey badgers with smaller position size and intestinal fortitude is the best bet. As far as ‘safe’ goes – nothing is ever 100% safe in trading, as we have to be prepared for anything. But, being 100% safe would require sitting on the sidelines – and I’m not about to do that 🙂
-Danielle
We buy at new, all-time highs because we are momentum traders, and we focus on strength within the market. The strongest stocks are the ones that continue breaking to new high after new high, regardless of what is going on in the market.
We don’t typically short after 3+ days of downward price action, because history shows that after 3-4 days in our current market, that is usually the low – before buyers come in, because of the strong bull market we are in.
In all reality, this depends entirely on the time frame you’re trading. At Simpler, we primarily trade short-term. For me, that can be anywhere between a time frame of a few hours to 3 weeks, tops. So, when we are ‘buying the highs’ it’s likely just a momentum breakout I’m trading for 3-7 days. I’m not coming in and buying stock at the highs. For my long-term stock account, this is managed differently. However, for options, you need greater than expected moves to make money. This typically happens on momentum breakouts.
Have a great day –
Danielle
Eventually, everything comes down in a nasty market environment like the one we’re in; I.e., no such thing as a honey badger in a really poor market. You saw that today with Irdm, and twlo, among others
Hey Rick –
Well, yes and no. Generally I identify honey badgers based on the stocks that are up on the down days. I would classify IRDM and TWLO a little bit different but one could argue semantics. Usually, the high flying industry groups I classify as ‘Phoenix Flyers,’ which are the high growth industry groups. The honey badgers are usually random stocks that stand on their own, that don’t really fit in. For example, for me, today the honey badger was ZTS – Zoetis. It’s a medicine and vaccine manufacturer for pets and livestock. I consider this more of a ‘random’ name, as it sort of falls within healthcare but not likely to be impacted by political events. Additionally, the technicals support it, and it was up on a down day in the market. While the honey badgers may be few and far between at times, they can still be found.
Hope that helps –
Danielle