Surviving the current market volatility requires traders to adjust their strategies, trade smaller sizes and ignore the buy-the-dip crowd, reports Jeff Greenblatt.
There’s an old adage in this business, you can be a hero, or you can make money. Chances are you won’t do both. This is a market that requires lots of skill and the ability to tune out the noise. I’m not going to mention any names, but I can’t count the number of times I’ve heard the talking heads in the business media suggest this could be the time to start buying. Let’s be clear about one thing. For this or any market to stabilize, shorts have to start covering to create the environment for real buying to materialize. That hasn’t happened yet.
Here’s an old story about how I got my start publicly. There used to a show on KFNN 1510 Financial News radio in Phoenix called Money Making Mondays. The host was an expert at the small cap Russell 2000 stocks, I’ve never seen anyone better at picking penny stocks that would turn into gigantic winners. But his luck ran out when the Internet bubble popped. At 10% down stocks were on sale. At 20% down it was the red light special. At 30%..., you get the picture.
So, one day I decided to call in and I told the small cap expert and the old dean of Financial News radio Sinclair Noe that I knew when the bear market would end. Of course, nobody knows when the bottom would materialize so they laughed and got interested in what I had to say. I told them the bottom would hit when the small cap expert turned bearish. Sinclair started laughing for real. He turned to his partner and said the caller is right, you’ve been bullish the whole way down.
As it turned out, the small cap host of Money-Making Mondays got so angry I could see his face turn beet red right through the phone. Then something strange happened. He challenged me to a debate on the market and I would be his guest on the show the next week. The rest is history.
Why am I telling you this story? Despite the fact the Cboe Volatility Index (VIX) went through the roof, I haven’t seen the kind of fear from the usual suspects turning against the market that would indicate a real market bottom. But here’s what I have seen. Yesterday there was talk about reducing the number of hours the market could trade. Treasury Secretary Steve Mnuchin said, “Everybody wants to keep it open; we may get to a point where we shorten the hours if that’s something they need to do.” The logic of shortening trading hours would be to curb losses. When I got done meditating on the stupidity of it, I realized this is likely an extreme contrary indicator to show sentiment must be at an extreme point. On a weekly chart, the market is trying to put in some kind of near term low. The calculations are there, and they could be waiting on that massive stimulus package we hear so much about. That stimulus package that would pay every American is the manifestation of fear. It’s unprecedented and we could be close.
What concerns me about the big picture is a condition we discussed a few weeks back. It was reported by multiple sources the subprime auto loan market was in trouble as defaults were rising. The reason being hedge funds looking for greater yield because of the historically low yields they could get elsewhere.
With the world shutting down, don’t you think multitudes of people who are going to have trouble making their car payments (without stimulus)? The people who would get hurt the most are those with marginal credit to begin with who will now end up without work. To talk about buy and hold bottoms right now at the very least is irresponsible. As I said, with millions set to lose paychecks in the next couple of weeks, it would be Godsend if they do follow through on sending every American a check to tide them over. Before you get mad, I get it, they can’t keep printing money this way and not ultimately end up like the Weimar Republic. We are in an unprecedented situation. What happens if half the people in your neighborhood can’t pay the rent in two weeks? That’s a whole different discussion.
What do you do with a market like this? We are seeing moves in the Dow Jones Futures (YM) at more than100 points a minute. In some instances, quick reversals net over 200 points in two minutes. If you are trying to pick tops or bottoms, you have to be better than good and nobody is that good. Why? It’s hard enough to pick a top or bottom and if you trade any time frame larger than a one-minute chart, you could be looking at hundreds of points away from where you should put a stop loss. A stop loss needs to be places at the point in the time where your logic (or edge) for the taking the trade didn’t work. If you make one mistake where the risk/reward is out of whack, you could be working to get out of that hole for the rest of the week. Psychologically, that’s not a good place to be. In a market like this you want to be able to string a series of wins together if for no other reason than to build your confidence. That’s why it’s really prudent for E-mini traders to engage the micros. Yeah, you aren’t going to hit the lottery, but you will survive to trade another day.
So, what should you be doing instead of picking highs and lows? The most reliable setup right now is the polarity flip. In this example on the YM five-minute chart we see a 47% retracement and as we scale down to the one minute, its accomplished in 45 minutes (see charts below). The margin of error is two which is acceptable. The odds of catching the move and being on the right side is much greater on a polarity flip than it is for picking tops and bottoms.
It’s just you and the computer. There’s nobody else there to stop you so you have to be disciplined to stop yourself from going on wild goose chases. Wild goose chases (taking a flier on a hunch or mediocre setup) might work in the kind of friendly bull we had last year but no longer works right now. If you are serious about doing well right now, this is the time to tighten up the ship and pick your spots.
Seasoned traders know this, but the intermediate level trader usually learns by sticking their fingers on the hot stove and getting burned. You get burned enough times and what ends up happening is the market burns into the neuropaths, so you don’t go on fishing expeditions or goose chases. This isn’t the time to learn that lesson. You need to survive another day.
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