Daily Gains Letter

How to Profit from Chaos When It Soon Hits the Stock Market

By for Daily Gains Letter |

Stock market CrashLooking at the stock market, I can’t say I would’ve done that much last week, as the current action is somewhat dull for my liking. The way I see it, as a trader, I need a major unexpected event.

Why Stock Market Chaos Can Be a Good Thing

I need another currency collapse like what we witnessed with the ruble in Russia that ultimately led to a broad sell-off in Russia’s stock market, from oil to technology to steel. This selling wasn’t a surprise, given the massive collapse in the ruble means imports become much more expensive. But with the chaos in Russian stocks, I saw aggressive trading opportunities to make some quick money, primarily via the use of near-term call options that give me added leverage.

Of course, the most recent chaotic event for the stock market was the plummet in oil prices. First, we saw prices break below the $80.00 level, followed by $70.00, $60.00, and $50.00. The near-term futures contract fell below $44.00 at one point, prior to edging higher. Now there appears to be some base buying established at around $43.00. I would be looking for trading opportunities to buy call options on an oil-related exchange-traded fund (ETF) or some of the numerous battered oil companies in the stock market. If you are unsure on the timing, you could always look at LEAPS (longer-term options) as a calculated trade. The good news is that you have time for your strategy to play out; in fact, investors may be able to go out as far as two years.

First-Quarter Earnings Season to Deliver Trading Opportunities?

At this time, the focus is on the first-quarter earnings season, which will pick up steam this week and hopefully give us some good trading opportunities in the stock market.

Alcoa Inc. (NYSE/AA) reported last Wednesday and warned of a global supply build-up this year. I’m not sure what to make of it at this time—whether it is due to lower demand or ample supply in the global economy.

The reality is we really need to see how bad earnings and revenues for the first quarter are. The stock market is discounting an earnings contraction. Any major upside surprises will surely drive buyers to bid stocks higher. It’s still somewhat of a surprise that the stock market is holding up as well as it has been, given the expected lackluster earnings season.

Other than the upside surprises, I will also be looking at situations where companies post disappointing results that crush the stock price. What I want to monitor are the top companies, such as those on the Dow Jones Industrial Average or the S&P 500. These companies are solid, but they may be facing some short-term hurdles. Any sell-off would be a trading opportunity for a bounce. If I’m wrong and my maximum loss is breached, I would just move on.

Stock Market Chaos Key to Profits?

The key for making money in the stock market is chaos. Heck I’m still waiting for a 5%–10% stock market correction for an opportunity to trade or buy. I haven’t seen one of these bigger adjustments for a while, but the way the stock market is trading, it may very well be on the horizon.

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