Ready… Aim… Hold Your Fire

Ready… Aim… Hold Your FireThe recent increased volatility has led to a short-term focus, which has created even more volatility. The dramatic daily directional market changes have virtually eliminated swing trading to manage positions over a period of multiple sessions.

Sharp and sometimes violent reversals quickly eat away any built up gains and make you wish that the profit was banked when you had it.

Daily stock movements of more than 3% in either direction are currently commonplace and can knock you out of the market with any reasonable stop loss. Price exit protection orders, while ABSOLUTELY necessary, are often within these new volatile trading ranges and flush out most everybody.

The resulting investment choices are either very short term to capture winners as soon as you have them, or very long term in order to have enough time and money to be right … eventually.

A disciplined approach is necessary for success in any time horizon but this volatility has limited our tactics for the time being. Like the weather, if you don’t like the market right now, just wait … it WILL change.

Seeing The Wood Through The Trees / Or Seeing The Forest Through the Trees!

The data overload puts many traders stuck in the circular “here and now” when they actually need to be putting this unusual market activity into perspective. Sometimes it is impossible to have a big picture outlook if you’re too involved in minutiae.

Remember, the market is where it is now based on the information we have at the present time. The news tells us why we are where we are … BUT not where we are going.

The stock market as viewed by the broad S&P 500 index is essentially unchanged since the big August drop. Global drama comes and goes, with weekly price bursts proving to be erratic and unforgiving.

Most of the last four full months have seen price action between 1,250 and 1,100 in a 10%+ wide trading range. The short term rally above that level at the end of October and beginning of November was only met with mooted enthusiasm by the OVI indictor which only made a fleeting visit to positive territory.

Ready… Aim… Hold Your Fire

OVI Background

Remember from previous articles, the OVI measures options transaction data and plots it as a simple line that ranges between a high of +1 and a low of -1.

When the line is positive, we’re more inclined to focus on bullish chart patterns; and when it’s negative we focus the more bearish chart patterns.

We only use the OVI in combination with a chart pattern such as a consolidation or flag.
We never use it in isolation.

Patience Is An Asset

In periods of extreme volatility, directional trading should be limited. Trade Small OR Don’t Trade At All.

That said, we’ve had nice success with GS recently, which had a beautiful bear flag breakdown.

Ready… Aim… Hold Your Fire

One solution for extra uncertainty is to invest less on any given play, maybe half of the normal allocation. Also take your (first) profits sooner, as the trends are often much smaller in magnitude. This less aggressive position exposes you to less financial risk and positions for when the conditions are more suitable.

Position yourself for small gains and losses when the market anxiety is at a peak to preserve capital and confidence. The emotional cost of volatility in frustration is also sometimes very expensive.

Sometimes the best solution to guarantee against shark attack is to just stay out of the water.

Being out of the market is often very difficult for many investors. But the reality is that most of the money isn’t made predicting price turns, but rather in taking high probability positions in established trends.

Right now, the mixed signals and midrange trade need further development to make a directional call. The technology sector, QQQ, has been fluctuating wildly since August with its OVI also fluctuating uncharacteristically. This non-signal is a signal of the pervading uncertainty, and therefore a signal for caution.

Ready… Aim… Hold Your Fire

The next earning season catalyst is nearly six weeks away, with potential holiday chop on the calendar. When conditions change, the patient, disciplined investor will ready and able to take advantage and make money.

Rest your weary bones for the next market journey, and have faith … the market always comes back to reward those who have patience. This one will be no different.

Also remember, to not have a position is having a position in itself! There is no shame in not having a trade on … Better that, than feeling compelled when you’re not sure.

Remember, Plan your Trade and Trade your Plan!

Guy Cohen

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