Market Correction Or Crash?

Monday presented an unprecedented move in equity markets.

In the face of that move, I’d like to outline and share what I discussed with my trading room through the process to help with all the questions about “why did this happen?” and “what happens next?”

At the end of Monday’s move, I told the group a few small things…

  1. As of this moment, every trader is engaged. Engaged meaning watching, thinking, feeling, and buying or selling.
  2. When this happens, markets usually move, but ultimately move nowhere.
  3. Resist the temptation to turn to the internet for advice. This week will offer the WORST information you could possibly gather.

On Monday, I offered this:

That outline summarizes what happens to the market after a sharp decline.

If you start from the low, which was early Tuesday morning (I always use the /ES because I get 24 hour price discovery) the market walked its way up to Wednesday afternoon. After which we put in the second low today. (the video above breaks this all down).

Take a look… 

Most of next week should be fairly similar to this week, but the magnitude should slow down. This ensures everyone has had ample opportunity to get involved (buy or sell something). The way we’ll end this consolidation is usually with a bull trap and a bear trap as highlighted below. 

Once a couple traps have been set and both sides have been equally frustrated or knocked out of their positions, this paves the way for the trend to continue higher.

It should be noted that we finally had some negative sentiment extremes today in the “Fear Gauge” and the Put/Call ratio.

 

Market up/volatility up

In my Boot Camp this January I discussed a theme for the year being market up/volatility up.

What a tremendous call so far… but I would avoid shorting volatility at all costs here. That has been a tremendously crowded trade and is the reason why instruments are blowing up (which is why we specifically discussed shorting them).

The next two weeks will offer amazing opportunity if you play your cards right. This week I would highly recommend turning to the internet for information. Not for reasons, but look to see what the common point of view is out there. Buying a break of the lows? Shorting rallies? Use that for ammo to not just figure out the market, but to better understand and beat the crowd.

 

Weekly Watchlist

Here’s this week’s watchlist, many of which are covered in detail in the video above.

It should be noted that when these market situations happen, at times new leadership emerges. The Retail Index $XRT did not take out its lows this week, and since last week retail stocks have been trading very, very well. Last year I discussed accumulating some beaten up retail names for the long term, but I love a lot of them as trades here.

Let’s Discuss

Questions? Thoughts? Trade ideas… Let’s discuss.
Leave your comments below, I’m interested in your takes/questions.

 

Stay Frosty,

Jeff