Daily Gains Letter

How to Navigate Through This Chaotic Market

By for Daily Gains Letter |

Some Strategy Suggestions for Market ChaosIf you are a bit anxious toward the stock market, I don’t blame you. In fact, I have been through this type of scenario on numerous occasions, including the meltdowns in 1987, 2000, and 2008. The key is to not panic and immediately run for the exits; emotion in trading never works. This is also not the time to get too comfortable in the stock market.

It’s clear the stock market risk has intensified across the board after the sell-off on Tuesday that saw the DOW close lower for the ninth time over the last 12 sessions and fall below its 50-day moving average (MA). The index is now only another triple-digit loss away from negative territory for the year.

All of the four key stock indices are currently below their 50-day MAs and edging lower towards their 200-day MAs, which will be a critical point for support, based on my technical analysis.

Small-cap stocks continue to pose the highest risk with the Russell 2000 engulfed in a death cross. The index is down 11.73% from its high and showing a bias to the downside.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

Now the selling in the stock market may not be over yet as the S&P 500, DOW, and NASDAQ are only down less than three percent from their highs.

I still sense downside risk and feel a six-percent adjustment in the stock market is not out of the question. The S&P 500 could correct to below 1,900 if the selling continues.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

The key now is to move to the defensive and make sure you have a sound investment strategy that includes risk management. You don’t want to be sloppy at this time.

The most important tenet in trading is the preservation of your investable capital. You often hear about traders losing their capital due to excessive risk; you don’t want to be one of them.

You may want to sell into stock market rallies as the near-term bias appears to be to the downside. If you have losers, rallies may be an opportune time to sell and take the tax loss.

Do not chase the stock market higher on rallies. As shown on the charts, there appear to be multiple tops on the DOW and the S&P 500 looks a bit tired.

As for the use of stop losses, I’m mixed on these, especially in fast markets where your position can be prematurely taken out prior to a bounce.

Now, if you are risk-averse, you should move to the sidelines (if you’re not already there) and just watch for the time being. If the indices correct six percent or higher, then it may be time to jump in and accumulate positions.

Finally, make sure you use put options as a hedge against stock market weakness. Think of puts as holding insurance against potential losses.

VN:F [1.9.22_1171]
Rating: 6.5/10 (2 votes cast)
VN:F [1.9.22_1171]
Rating: +1 (from 1 vote)
How to Navigate Through This Chaotic Market, 6.5 out of 10 based on 2 ratings

Tags: , , , , , , , , , ,