Market Resembles a Roller Coaster

Jan 16, 2008: 1:03 AM CST

The US Stock Market has been whipsawing traders up and down over the last week, with the market moving 1% to 2% up and down per day. That translates into swings of 200 Dow Points up and down on back-to-back days.

It seems like when traders get a signal to go long, the market reverses 200 points against them, which triggers a short trade, and when they enter short, the market rallies 200 points against them.

I honestly don’t know of any major or popular ‘system’ or style of trading beyond intra-day that is able to capitalize on the violent reversals in price from one day to the next.

Swing traders often require a bit of movement in one direction before entering a position, but when they get their signal, the market gives them a small gain then erases it all and so much more the next day.

I suspect even position traders are becoming frustrated with market conditions, because the market doesn’t seem to be generating any long term buy or sell signals.

It “feels” like the market should be heading lower in the near to intermediate term, but buyers don’t seem willing to give up the ghost.

Reference this pure price example of the 15-minute price action over the last few trading sessions:

From late in the day on January 9th, the Dow bottomed at 12,500, breaking intraday support and likely triggering many shorts, but then the market rallied 400 Dow points by the same time the next trading day on the 10th.

Traders who took this opportunity to “get long” into the close or before, believing that the market had supported at a key support level, were treated with a 200 point vicious downside gap and a “trend day down” which brought the index down from 12,850 to 12,550 – a decline of 300 points in a day.

Traders who decided it was a great time to get short did so, and were subsequently treated on Monday (January 14th) to another upside gap and trend day up. Frustrated, they probably covered their short positions and some of them even decided to get long again.

Today, those same traders were foiled again with almost a 100 point gap and subsequent “trend day down” that took price to an intraday low of 12,500.

What’s a trader to do if he or she can’t stand aside and let the market develop a direction?

Realize that anything can happen in the market and place protective stops accordingly.

Refuse to give the market or your trade the benefit of the doubt. If your trade doesn’t work out immediately in these conditions, it may be best to cut your losses earlier than you usually do and move on to your next signal. You can’t afford too many losses of 200 or more Dow Points for most intraday or swing traders.

Take this opportunity as a learning experience and document as much information through your charts as you possibly can. Hopefully, these conditions will be rare, but you’ll be better prepared to exist in them profitably the next time they arise.

If you are a new trader and just getting your feet wet in this market, please be careful and trade with extremely small position sizes until the market returns to some sort of balance, or exhibits a clear trend in one direction or another. Choppy environments are extremely difficult for even the most experienced traders. Not only are current market conditions choppy, they are extremely volatile, with violent price swings in both directions.

Learn from it and try to have fun. Don’t traumatize yourself. The market will exist next week and next month if you don’t thrive in the current conditions. Take some time off if need be. Protect yourself as best you can.

2 Comments

2 Responses to “Market Resembles a Roller Coaster”

  1. jacksoo Says:

    Some sage words Corey – I first began option trading July last year and remember only to well Aug 16th – today has a similar feeling – early drop, news leaked prompting bounce mid afternoon, news breaks pre mkt tmrw causing big gap on the open – big short squeeze adding fuel for a rise back to around 13000 or so. Mid term I think the big problems still exist and ultimately a drop through 12000 is likely but not without these rallies on the way. Whatever happens however you are right to prompt to caution – I’m trading with tight stops at all times and closing out holdings before the end of each day. I’m learning – getting out of the trade at the right time is far more important than getting in.

  2. Corey Rosenbloom Says:

    Thank you, Jacksoo. I’m right there with you.

    These short-squeezes can be extremely devastating to newer traders and even intermediate traders who are overconfident and overleveraged when they occur. They often don’t know what to do. They hear all sorts of negative economic information, see classic breakdowns that trigger classical short-trades and yet the market screams violently against them. It’s almost mystifying.

    Tight stops are the key as well as smaller positions. I don’t recommend standing aside – there are plenty of opportunities, plus if you learn how to master these conditions, the rest should be easier. There’s still no guarantees, however.

    Take care.