The biggest question in the market right now is where do we look to short?
We’re keeping a close eye on the Volatility Index (VIX) as it may be setting up for a big push and pave the way for our short opportunities.
On Friday, the VIX bounced off the 21 exponential moving average (EMA) and finished above the 8 EMA.
The VIX is printing a proprietary buy signal (green arrow) for the first time in two years. The last time we saw a buy signal on the VIX was Feb. 20, 2020, the day before the market rolled over on the Covid-19 news.
Any explosive move in the VIX could send the market much lower…
We’re continuing our game plan to short any strong bounces with the idea that the bearish weekly squeezes on the S&P 500 (/ES), Nasdaq (/NQ), and Russell (/RTY) will send the market to lower lows into March and April.
We’ll discuss the sectors and names we’re looking to short in the Sunday weekly watchlist video above, and we’ll see you Monday morning for live premarket prep at 8:45 a.m. Eastern.
We’re back at the January lows, which is reassuring the downtrending move we’ve been watching. We’re seeing sell signals across the board on multiple names, with the major indexes like the /ES not yet firing its weekly squeeze and the /NQ only 2 weeks into its squeezes. Typically we look for 5-8 weeks of momentum, so we still have the path of least resistance to the downside… Meaning our mentality is still to sell any potential bounces.
There are a few key catalysts, setups, and levels that I’m watching this week that could affect the overall market. We have some of the last few big names reporting earnings, and we’ll take a look at some that reported on Wednesday (Shopify, TheTradeDesk, Nvidia, Applied Materials). We had the Fed minutes released today, so we’re anticipating the last big economic event this week — Options Expiration.
What Changed After Relentless Short Covering Rallies?
A big gap down on Thursday saw the market trading below the January lows. Things quickly reversed to the upside with the strength continuing into the Friday close.
In a volatile, downtrending market, short covering rallies are explosive, sudden, and often relentless. The hikes continue until the market has satisfied the need to rid itself of holding weekly expiration puts.
The question now is has anything changed?
From our perspective nothing has changed about the bigger picture structure of the indexes.
Therefore our game plan remains the same:
Short the bounces into key moving averages as long as the indexes are under the weekly 21 exponential moving average (EMA).
SPY Weekly Chart
QQQ Weekly Chart
IWM Weekly Chart
Short in Strength, Not Weakness
The key to playing the market to the downside is to time your entries properly, which typically means we are looking to short in strength not weakness…
For the traders who got short on the gap down on Thursday, the rally that unfolded was likely a painful one to sit through. If instead you are placing shorts into strength, the bounce has likely been more tolerable.
For our current Russell ETF (IWM) short in the Compounding Growth Mastery, we initiated the position around $208 to $210. While seeing some open profits disappear this week isn’t fun, we are still profitable on the trade and continue to be in good shape should things continue trending lower into March.
Next week we’ll look to see if the S&P 500 ETF (SPY) and the Nasdaq (QQQ) can grind their way to their 21 EMAs. If so, we’ll be ready to initiate short positions with the idea that the current weekly squeezes will ultimately fire short and send the market into new lows.
That level sits near $440 for the SPY and $350 for the QQQ.
As for the IWM trade, we’d look to add to our current short around $208.
Volatility Index (VIX)
Another chart to focus on next week is the Volatility Index (VIX).
The VIX found support at the 21 EMA on Friday and is printing one of our proprietary buy signals, which we didn’t even see before the Covid-19 flush… Very interesting to say the least!
VIX Daily Chart
Enjoy your weekend, and we’ll see you at 8:45 a.m. Eastern on Monday for our premarket prep session on the Focused Trades YouTube Channel.
The biggest storm cloud hovering over the market is the tension between Ukraine and Russia. As of Wednesday night, Russia invaded Ukraine, causing a large gap down for the market.
The S&P 500 (/ES) dropped lower as the news worsened, but the market popped to close higher. We have to be ready as traders for these opportunities. Our job is to look for inflection points and learn from them.
The market is aware of the Russian-Ukrainian conflict, but the question is how does the tension unfold, who will speak on it, and what will happen next?
Now that the market is aware of the news, the indexes turned green heading into the end of day Thursday.
One level we want to focus on is the last stopping point from the most previous selloff at $4,212.75. This could be the next gap the market fills and our line in the sand.
If the /ES continues to hold above this key level, we can see some relief for the overall market. If it spends more time below that key level, we’ll look to roll back to the recent lows to the $4,100 level.
In the video above, we’ll lay out a compass of key levels going forward using the four-hour Ichimoku Cloud, moving averages, and point of control.
One of my favorite options strategies that can be used for any style of trading, whether you are a swing trader or a day trader, involves playing weekly options. I want to lay out a few simple but powerful tips I wish someone had told me when I first started trading.
The first thing I would focus on as a beginner trader is this simple, low-capital strategy that can provide life-changing opportunities.
Start with buying calls and puts.
There are many strategies you can choose from call credit spreads, debit spreads, butterflies, broken butterflies, etc. As beginners, it’s important to understand how to trade options in a “normal” manner by simply buying calls and puts.
One thing I stress for beginners is to trade bigger picture setups. The market is always moving but if you can remain patient and wait for larger picture setups to form, you’ll have more success than trying to trade the smaller setups.
In a high-volatility market, there are bigger picture setups every week that we can work to our advantage. It takes discipline to ignore the smaller moves and tempting little trades, but we want to focus on the larger moves.
This discipline can grow your profit potential, make your trades happen quicker in a bigger fashion, and allow you to trade with more confidence and an edge.
I recommend all traders focus on the squeeze.
The squeeze is one of the most powerful and straight-forward setups that you can start to wrap your head around.
As options traders, the squeeze is our best friend.
When price rips, options are exploding. When price chops and squeezes, options are cheaper. Once price rips or drops, the options explode – this is the squeeze releasing, up or down.
The squeeze can help you plan for larger picture trades.
The daily squeeze is a great example of a bigger picture trade in the overall market. We aren’t looking at a three-minute chart, hourly chart, etc. We are stepping back and looking at the bigger levels that will actually move price.
When the market starts to dump hard, any pop is a shortable opportunity. Understand that if you can catch the top of the bounce and the squeeze fires, you can make a big move and catch a lot of the drop.
Here is an example of shorting a market pop with a squeeze:
SHOP Daily Chart
SHOP is firing a daily squeeze to the downside, offering opportunities daily to short it and ride a nice easy wave of straight selling.
SHOP Example
On Thursday in Simpler Day Trading, we played SHOP on a rally from $2.40 to $4.20 for a 75% return, while leaving runner targets at $9.00+. This is what it looks like to hold this type of trade.
As a new trader, look for one good trade per day. Let it ride and have a good thesis for your setup. We are taking advantage of the gift that options provide – which is massive leverage.
Zoom out, look at the big picture, understand where you can get a good entry, and let the market work for you. If you build your plan on the bigger picture like daily and weekly charts, you can get a killer setup and grow your success as a trader.
As you get better daily, you can begin to explore the different trading strategies that fit your style best.
This is a question all traders should ask themselves because, truthfully, losing trades don’t have to be a painful experience.
Yet many traders live in constant fear of the next loss. Let’s break down “why” of loss and what can be done to mitigate emotional reactions to a normal part of the trading game.
View a losing trade as a mistake
Too often traders view losing trades as a “mistake,” thinking that because a trade didn’t work they must have done something wrong. When we take entries, exits, and trade setups that aren’t a part of our game plan, that indeed is a mistake that can be avoided.
However, when we stick to our game plan, take the right entries and exits, and focus on the proper strategy, a losing trade is never a mistake. If you took your entry based on your setup, that is simply good trading. Whether or not the trade works in your favor is just an outcome of the random distribution of this numbers game we play.
Losing trades are a part of the game and the sooner you can fully accept this reality as a trader, the sooner you’ll stop reacting emotionally to losing trades. Even the best traders tend to lose 30 to 40 times out of every 100 trades!
Taking too big of a loss
Taking a big loss is certainly painful, but we have to realize that this is a self-inflicted form of pain and a large loss is nobody’s fault other than our own. This can be a tough pill to swallow, but it’s the reality of trading. When trading options, our risk is defined before entering the trade, meaning we know how much we are risking before we pull the trigger.
The moment before entering a trade is when you have to be honest with yourself and your risk tolerance. Rather than day dreaming about the size of your profits should the trade work, ask yourself whether or not you are truly comfortable with the risk you’re putting on the table.
My advice to avoid painful losses is to pre-plan and risk only a set percentage of your account on each trade.
Personally, I only risk on average about 2.5% to 5% of my account per trade and limit overall exposure (all open positions combined) to no more than 15% of my account balance. Doing so ensures I will never put myself in a position to put myself “out of business.”
I only have cash at risk that I am comfortable losing.
For a more detailed view of how I manage my losing trades, check out my most recent newsletter explaining how I limit my losses with my win rate.
These are just a couple of tips but if you are currently struggling with painful losses. Shifting your mindset and your attitude toward risk management can quickly put you on the path toward better trading!
Trades coming against you is part of this game, but how you manage those situations can be what separates the profitable from the frustrated!
Position sizing, allowing for time, and mindset are all things we have control of as traders. Whether or not you use those to your advantage or disadvantage is up to you.
Still, there will be losing trades, so what do you do when a trade goes against you?
In this game, how you start is an important contributor to winning or losing.
Before you pull the trigger, make sure you properly position size. Proper position sizing takes care of a lot of problems. I typically like to risk about 2.5% to 5% of my account (net liquidating value) per trade. If you do this properly, you guard against digging yourself into a hole.
As a swing trader, I’m a big fan of giving my trades time, especially when shorting a volatile market. If you properly position size and a trade starts to move against you, then the trade in the short-term isn’t the end of the world. You also still have time to make up for it.
What we don’t want to do is sit and watch the market bounce against us. We look for clean setups and take action. One trade may be in the hole, but we can make moves that end up as profitable trades… That way we can make money on the upside (and vice versa if the market flips again).
Trading is a game of probabilities. We have to come to the reality as a trader that not all our trades will be winners.
We can be the top traders in the game and with a 70% win rate – if we are taking 100 trades – we can still expect 30 of our trades to be losses. The game plan is not all about avoiding losing trades, it’s about putting yourself in a position that if something moves against you, it isn’t catastrophic.
Position size appropriately, have a probabilistic mindset, and give your swing trades plenty of time. And in the meantime, enjoy the game of trading.
