All traders struggle when the market goes nuts.
“Nuts” isn’t a technical term. You won’t find it in any stock market glossary. But you know what it means.
It describes an environment in which stocks go through large swings – both higher and lower – in no consistent or predictable pattern.
There’s really no better way to describe the current market environment than by calling it “nuts.”
The problem most traders have is that we want to be involved in every big move the market makes. It’s hard for us to watch from the sidelines as the S&P 500 rallies 30 points in a day. It’s worse to be on the wrong side of the move. We want to be active. We want to take advantage of the increased volatility.
The problem is… these moves are nuts.
Nobody in their right mind was looking to buy stocks at the end of the day Wednesday. The stock market had reversed from a HUGE move higher and was in the midst of a sharp decline. The S&P 500 lost 47 points in about 47 minutes.
But, if you didn’t buy into that decline, you missed out on yesterday morning’s HUGE gap higher.
Then, as the S&P was powering higher above the 2730 level, nobody in their right mind was thinking about shorting stocks. The computers were firmly in “buy” mode. Shorting stocks into that sort of momentum rarely pays off.
But the S&P dropped a quick 20 points from that level. Traders who didn’t step up were left wishing they had.
In this sort of “nuts” environment, traders will do well to remember one thing… You’re not going to catch every trade. And if you try, you’ll likely end up taking losses.
It’s a far better strategy to take a step back. Map out a plan for where you think the market is headed over the next few weeks. Then… ignore the short-term swings and stick to that plan.
The stock market’s job is to shake us out of positions. It’s going to test our thinking. It’s going to make us second-guess our well-thought-out plans. In short, the market is going to make us nuts.
But, if we step back and look at the bigger picture… if we avoid the temptation to profit on every short-term move… then we can ignore the “nuts” moves. We can stick to our strategy and hopefully profit if/when we’re proven right on the trades.
For example, when the stock market moved lower earlier this month, I told subscribers the three levels at which I was looking to buy into the S&P 500 – 2650, 2595, and 2535. I used technical analysis to determine those levels well ahead of time. And, as the stock market sold off, I was buying stocks at each of those points.
It almost killed me to do so.
Just like almost everyone else, I was shocked when the S&P traded below its 200-day moving average at 2535 two weeks ago. Nobody was looking for that large of a pullback off of the highs. And I was taking on plenty of heat from the long positions I had purchased at 2650 and 2595.
But here’s the thing…
When I set those price targets, I did so while the S&P 500 was trading well above those levels. There wasn’t any emotion in my decision. I simply thought, “Wouldn’t it be nice if the S&P would pull back to these points and I could use it as a chance to buy stocks.”
We got the pullback and I bought at those levels (to be completely honest, my assistant bought for me at those levels. I told him how much money to put to work at each level and I said to ignore me if I changed my mind. His job security was based on him following those instructions. He earned a nice bonus based on those trades.)
Then, as the stock market bounced, I once again used technical analysis to determine the upside levels at which I would look to sell those positions and maybe even establish short trades. Based on previous similar corrections, I figured the S&P 500 could rally to between 2680 and 2730. So, I started taking profits as the market hit those levels. And I told subscribers to add short exposure as the S&P reached 2730.
In the meantime, there have been all sorts of wild swings back and forth. The market has pushed higher. It has fallen lower. It has done everything possible to shake traders out of their positions.
But when I set the target for our current short position, I did so based on similar previous conditions. Those conditions suggested that a move above 2754 on the S&P would mean we’re wrong on the trade and we ought to cut our losses at that point. Otherwise we could look for a move back down to retest the closing low on the S&P at about 2581.
So, no matter what sort of wild swings we see in the stock market, I’m only looking to close our current short trade on a move above 2754 or a move towards 2581. Whatever action we get in the middle of that range is just “nuts.”
We can’t try to profit on every move the market makes in this environment. That’s just too hard.
But we can set our price targets. We can place trades according to where we project prices to be a few days or weeks from now. We can pinpoint the levels where we’ll admit we’re wrong and take a loss on the trade. And we can identify where we’ll take a profit.
And we can ignore everything that happens in between.
That’s really the only way to profit when the market goes nuts.
Best regards and good trading,
Today, a question about a good problem to have.
But first, a few letters of praise…
Jeff, your thoughts on short-term and intermediate-term trades puts things in perspective. Well done on your hard work and analysis. Thank you.
Very excited to read your Guide to Technical Analysis this weekend. Thank you so much for the effort! A quick skim impresses me with its polished format. Reminds me that I probably want to go back and re-watch a couple of your training videos, now that I know more, to fill in any knowledge gaps I don’t realize I have.
Thanks again for all the education! I sleep better, invest better, and trade better because of your service. We’re just beginning an exciting year in the markets. I’m now realizing why volatility can be our friend.
Thanks for your service!
Do you have any suggestions or resources that we can use for income tax planning? I have been a lifetime subscriber for the past couple of years and fortunately I have had considerable success which has created a significant income tax obligation. This is a great problem to have but I would like to keep as much of my money as possible away from the Deep State. Any suggestions are welcome!
P.S. I am 56 years old and employed in the financial services industry. I have always enjoyed trading and seeking the knowledge in order to do this full-time. There are services that will provide trading suggestions; however, you provide an education in addition to your recommendations. I am convinced that this education is “teaching me how to fish” so I can feed my family for a lifetime. I look forward to a continued relationship and growing with you. I will keep you updated on my progress.
Jeff: Hi Jim, thanks for your question.
I’m sorry to report I don’t have an easy fix for this. Since we trade options, all of our gains are short-term and therefore subject to ordinary income tax rates. And as much as I’d like to not have us feeding the government beast, I don’t know of any way around the situation.
Your tax advisor may have some suggestions. For the most part, though, all I can offer is the counsel my late father used to give me when I complained about taxes… “Son,” he would say, “It’s far better to have a tax problem than a money problem.”
Dad would almost always follow on to that comment with the following… “Remember, money won’t solve all your problems. But once you get the money problems solved, you can get to the rest of your problems in style.”
Thanks to everyone for the valuable feedback, as always. Keep it coming right here.