Choppy markets are hard to trade.
Oh sure, the casual observer will look at the wild intraday fluctuations and conclude that this is a great time to trade.
There’s lots of volatility and back-and-forth action – which is just what every trader wants. At least, that’s the thought.
But the reality is a bit different…
For most folks, choppy markets chew up their accounts.
If they trade it perfectly – buying near the low and selling near the high – they can capture modest gains. But if they’re a bit too early to get into a trade, or a bit too late getting out, traders will often suffer a loss and slowly degrade their accounts.
For example, let’s say you bought the S&P 500 ETF (SPY) near the low of the day on Monday (around 427).
You probably felt good at the end of the session when the S&P popped higher in the final hour and SPY closed at 428.50. You felt even better by the opening of trading on Tuesday when the S&P 500 gapped up 35 points and SPY traded at 433.
But how did you feel mid-day on Tuesday when the market reversed and SPY dipped below $427?
Well, if you had traded it perfectly – buying at the low and then selling at the high – you could’ve pocketed a $6 per share gain on a $427 stock. That’s a 1.4% gain on an overnight trade.
Anything less than a perfect trade, though, and you’d be sitting on a loss wondering whether you should hang onto the trade as the market starts to weaken again.
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In this sort of choppy environment, most folks are better off taking a seat on the sidelines and waiting for the market to get through this choppy consolidation period.
So far, we’ve been waiting for three weeks. And it looks like we’ll still have to wait a little while longer.
Here’s an updated look at the chart of the S&P 500 I showed you earlier this month when we first warned of a choppy environment…
In early February, we warned that despite the sharp rebound from the January selloff, the various moving averages on this charge were spread too far apart to lead to a sustainable rally.
We argued the market would have to chop back and forth for a while to allow the moving averages to come together and build energy to fuel the next big move.
Now it’s three weeks later, and the moving averages are still too far apart. So, we likely have several more weeks of choppy action in front of us.
It’s worth noting that the S&P is once again quite extended below its blue 50-day moving average (MA). And, there’s positive divergence on the three momentum indicators at the bottom of the chart marked by the dashed lines (MACD, RSI, and CCI).
That’s a good sign that the downside chop we’ve seen over the past three weeks might be ready to reverse to an upside chop in the days ahead.
There might also be an opportunity for aggressive traders to make some money on the long side here. But you’ll have to be quick to take profits.
Any upside is still just going to be only in the short term. This chart is not in a position to make a sustainable move higher.
Most traders are still better off on the sidelines for now.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Jeff Clark Trader members Kevin and Danny share their thoughts on trading…
Dear Jeff and Eric,
I read each one of your analyses (like the current one on Charlie Munger & MMT) on gold whether it’s going up, down, or sideways. I’m soaking it all up and learning everything that I can so that’s why the subject of this email is, “keep on keeping on” because I keep learning. Kudos to both of you!
– Kevin S.
Hi Jeff,
There’s a lot to grasp, and I’d like to think I’m very conservative with any trades. I’ll sit on the sideline to look at what’s happening in order to better understand what’s going on before jumping in. I do think things are looking uphill from here. Thanks so much.
– Danny H.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].