Be Careful This Week

Ok, so I know that some of you will not trade at all, but for the 80%+ of traders that are simply too degenerate to leave the markets alone despite the fact that Wednesday is Christmas, I have a few thoughts here…

NASDAQ 100 Could Prove Itself

So when I look at the NASDAQ 100 chart, the first thing that comes to mind about the markets is the way we rallied on Friday, after plunging before the market opened. This plunge suggested that we had further to go, and this of course would have culminated in a deep, or deeper, correction.

Ok, for starters, this is a NASDAQ 100 CFD chart on the daily timeframe. It is entirely possible that yours looks a touch different. However, the important part still is the size of the volatility and the fact that the market tried to recover 50% of the losses from the previous two sessions. This is important because not only did we bounce from a trendline, but I think we made a significant bottom that needs to be paid close attention to.

The market will often form significant bounces like this to tell us when the sellers are either exhausted or leaving altogether. While the holidays will drive down liquidity, and this is something that generally should be avoided, it might actually work in the market’s favor on Monday and Tuesday. I say this for one specific reason: Who in the hell wants to be short into the holidays? Imagine having a short position on, only to see it gap higher when markets reopen, to thin conditions. Not only would you have to worry about the gap, you might worry about the fill you get on your order. I suspect it is easier to at least be flat.

In summary, these are the things to notice:

• Will the highs of Friday be broken? If so, this means people are getting more comfortable in the market, or are at least not panicking anymore. (This is often the same thing when you think about it.)

• Will the lows of Friday be broken? If so, this means that we have seen a reacceleration of selling, and this could feed on itself with thinner markets. Also, it would be a breaking of a trendline that we have respected for months.

• Do we just go sideways in this range, as defined by the candle on Friday? If we do this, and I think it is a real possibility here, the markets will drift into the Christmas holiday. If we drift sideways, this is action a mildly bullish act. (At least we aren’t falling hard.)

The VIX has Plunged

One of the biggest trades that traders have been in, at least on and off, over the last few years has been “selling vol.” This means shorting the VIX, or the Volatility Index. It measures the volatility of the S&P 500 options market and can give you a bit of a reading on how many traders feel the need to “buy protection” in the options markets. This is a massive simplification of the VIX, but in the end it gives you an idea of how the stock markets, on the whole, should behave. As it drops after a spike, this means that people aren’t buying as much protection via the options markets. (Again, simplification.)

You will notice how far we fell over the last few days, especially on Friday. Because of this, many traders will look to “get long” the S&P 500. I know that I was talking about the NASDAQ 100 earlier, but let’s be honest here: US markets love tech most of the time, and most markets move in the same direction under most circumstances. If you have the opportunity to “short the VIX” at your broker, it is something I do most times it spikes like we have just witnessed.

There are Other Things You Could Do.

My first piece of advice as a fellow trader is to stay away from the markets. However, as it is my job to analyze the markets regardless, it is difficult for me to do so, and I know that many of you would ignore that advice anyway.

Here are some things to do:

• Trade on a simulator. Find a simulator that you can practice a new strategy on, or perfect your own.

• Read a book. Reminiscences of a Stock Operator by Edwin LeFerve is a classic that I always read this time of year. There won’t be a “magic indicator” or “fail proof system” in it, but it will get you to think about human behavior in the markets.

• Clean your trading computer. You’d be surprised how much shit you will find on your computer. Junk files, screenshots, etc. are all there. While it won’t change your trading completely, a little extra speed in your rig never hurts.

• Spend time with your friends or family. This should be the only choice. As traders, we often think we are going to be “trading to live”” but end up “living to trade.” I know all of you thought you would be pressing a few buttons on your laptop from Fiji, but the truth is a lot different, isn’t it? I have had 16-hour sessions in the past. I don’t recommend it at all.

Anyway, I hope this finds you well, and feel free to reach out if you need something. I am easily reached via my website thetraderguy.com and my various social media accounts.

Trade well,

Chris