The Market has Changed – Has your trading?

It is clear that the market has changed.

Gone are the days of the last 8-9 years where “buying the dip” has worked without fail.  That has worked for anyone investing in the high-flying FANG stocks and any other myriad of growth and momentum plays.

This week just past, the S&P 500 dug itself out of official “bear market” territory of a 20% decline from its peak.  But just barely.  So while we aren’t officially in a bear market, it is clear that gone are the days of low volatility.

The market has become EXTREMELY choppy, with no clear direction from one day to the next.

One of the most amazing 2 day spans was Christmas Eve and the next trading day after Christmas Day.

On Christmas Eve, the S&P 500 dropped 2.7%…it’s worst day ever, beating a record set in the Great Depression.

christmas eve - spx 2018

The very next trading day, the market roared back over 1,000 points!

christmas - spx recovery - 2018

Are we entering a bear market?  Are we going onward and upward from here?  Heck if I know!

But what is crystal clear… the days of low volatility and a steady, upward climb are over (for now).

To shed a little light on things, check out this chart below…

vix and spx chart

Here you have the VIX (a measure of volatility) in blue, overlaid on the S&P 500 (SPX) index.  Look at that period that I highlighted  with the orange trend lines.  Over the last few years, the stock market overall has had a major, steady uptrend with very low volatility.

It was as if everyone was in agreement that there was one way to go…up.

Now we have these manic swings occurring, with major spikes in volatility coupled with an end to the steady uptrend of the S&P 500.

What does this change mean to me?

I can how I’m adjusting my trading

For the last 6 years or so, I’ve swing-traded stocks that have:

  • Been in a solid overall uptrend (above the 200 day moving average)
  • Have had a relatively sharp recent rise in that uptrend
  • And then had a relatively sharp recent decline to a logical area of support (often to the starting point of the more recent previously sharp move upwards
  • I enter that area of support, anticipating a bounce back up…and for the last 6 years, that uptrend has resumed.

Do I still take these types of trades?  Yep!

Have they gotten harder to find?  Have they become a less reliable trade?  Have I gotten lucky (and unlucky) due to the huge influences of overall market direction?


Take a look at my first criteria…a stock that is trending nicely, as determined by whether a stock is above its 200 day moving average.  I’ve got a nice chart below that shows you how much more difficult just that simple criteria has become for me:

percent of stocks trading above 200 dma - 1-19-19

What a cool ticker…the percentage of stocks that are over their 200 Day Moving Average.  To me, this chart is an eye opener.

Back in January, almost 75% of all stocks were above their 200 DMA!

Now look at where we are…after a grinding, steady decline, it hit a very recently low of 10 in January 2019.  Think about that…only 10% of all stocks were above their 200 DMA just a month ago!

We’ve since climbed out of that hole, right now at around 30, but the fact remains….things have changed quite a bit.

And that’s affected the majority of my screens.  There simply aren’t that many setups making their way from the top of the screens funnel because there aren’t that many stocks above the 200 DMA.

So what have I done?

I’ve relaxed The requirement that a setup has to be above the 200 DMA.

I’ve still been able to swing trade stocks that have had a recent sharp upward movement, had a decline to a logical support level, and are showing signs that a bounce is likely to occur.  There are still some amazing setups for stocks that have not been performing well over the last year, but still have had some nice, recent pricing action.  The main reason I prefer a stock to be above the 200 DMA is because it shows that the stock is in an obvious uptrend and therefore the odds that the recent temporary decline will stop and then move to higher highs.  The consistent buying will resume.

The “buy on the dip” mentality that has worked so well for everyone over the last 8-9 years.  That’s over.

I’ve been cautious and not trading so much. 

Simply by not trading during the recent sharp swings up and down, I’ve probably saved myself from one losing trade after another until I feel comfortable.  I wonder how many traders have gotten whipsawed over the last several months with the manic up and downs?

I don’t have anything to prove to anyone except for myself.  I’m not embarrassed to hold nothing but cash for a time.  Remember…cash is also a position! 

I’m starting to get more comfortable  with relaxing some of the screens that have worked so well for me over the last 6 years.

I have shortened my holding periods.

The less time you are in the market, the less chance of being sideswiped by major air-pocket market declines.

Where I used to sometimes hold a trade for sometimes up to 2 weeks, I’ve tightened up my stop-losses to protect paper profits.  Sure enough, I’ve been getting stopped out as the stock sinks back down and the stop-loss gets triggered.  I feel that were it not for a frothy, churning, choppy market, several trades would have continued to move higher, only to be dragged down by a sea of red.

Also, in the spirit of shortening my holding periods, I’ve come up with 2 new trading concepts that seem to have back-tested well and the trades I’ve tiptoed in on have mostly worked out.

So the next major thing I’ve done is…

Developed two new swing trade pattern/concepts that I’ve started to trade.

In the spirit of attempting to reduce the overall influence of the market, I’ve come up with 2 new concepts that seem to be working well.  I’ve had some trades that bounced way higher…on days when the market had MAJOR down moves.  That’s exciting!

Think of this analogy, wouldn’t it be nice to find a stock that had such powerful, emotional forces behind it that for the most part, the overall market (going up or down) was just background noise.  The fire igniting the stock higher is just too great to be doused by the rain of a down market.

These 2 concepts are still positive reversals, but the previous reversal higher is contained within 1 single day.

New pattern #1 – A huge Inverted Hammer

I want you to take a look at that huge inverted hammer.  Obviously some good news has occurred.

That is an inverted hammer is single-day candlestick pattern that has a smaller sized body in relation to the upper “wick”.  In these cases, the stock opened up the trading day and didn’t decline much below the open, then traded way higher on an emotional move higher, then sank back down to a level well below the high of the day, but still a good bit above the open.

I enter these type of patterns right at the end of the trading day on this huge candlestick, hold overnight, then sell the very next morning, or continue to move a trailing stop-loss up if the stock keeps moving higher the next day.

So why am I specifically interested in this single-day candlestick pattern?

In my mind, the key is in that upper wick.

In essence, I’m playing for a bounce higher the next day because the stock has proven to have traded a good bit higher, and those that missed out on the great news will be piling up to enter the stock the next morning.  I’ve bought at a “value” point, well below that high of the day.  What I am not doing is buying a stock that closed at or near the high of the day.  The risk is higher that the open the next day will be below that high.  Sure, the stock could continue its surge higher, but how can I be sure?

In essence, I’m following the exact same philosophy that I’ve used on my trading patterns over the last 6 years, it’s just that the previous move up and then down has occurred within a single day!  I’m playing for a bounce the very next morning, not waiting for days/weeks for the pattern do go my way (again, to reduce the market risk).

Sure the next day the stock could open a good bit lower, but here are some of the things I am ideally looking for in the pattern that seem to reduce that risk:

  • Huge volume.  If there is a stock that has a major spike in price, with the exact inverted hammer candlestick but did not have a major volume spike, I don’t take the trade.  It needs to be major volume compared to the past, where it grabs the attention of all sorts of traders and investors who want to get in on the action the next morning.
  • I ideally want the bottom of the inverted hammer (the open) to be near the prior day’s close.  An inverted hammer that opens with a huge, huge air pocket above the prior days close is certain to bring out sellers, maybe long-term holders who have been hanging onto a lazy, low volume stock.
  • Previous volume has been very low, almost illiquid.  What we have then is a unwatched, unloved company that has burst onto the scene with major news and an accompanying volume spike.  I think this helps with the follow-through the next day with a move higher because tons of people will be drawn towards getting into a relatively unknown, unloved stock that could be the next big…whatever.  It might go back to being illiquid in a week or a month later, but I don’t care, since I’m holding for a short period.

Notice how the first move of the second chart above (BIQI) is not what I am looking for.  It opened way higher, above the previous day’s close.  Also, that candlestick isn’t an inverted hammer, it had a body sitting smack dab in the middle of a big upper and lower wick.  Sure it had a huge volume spike, but it’s not an ideal setup for me.  Look at how the next morning, it opened lower and traded lower for about a week.  But the second spike is what I’m looking for.  I’ll take that trade…and I did.  BIQI didn’t show up on my screen for that first spike, because of the relatively large lower wick.  It wasn’t an inverted hammer.

New Pattern #2 – Trading against a huge, tall white candle

Take a look at these charts below…

The idea here is to follow what happens to a stock in the days AFTER they have had a major 1 day, upward move.

Follow the ones that retrace back down to a logical support area, and then when either a reversal candlestick pattern or up day occurs near that logical of support, along with technical indicators showing oversold, that would be the entry.

Again, this pattern is not too much different from the typical pattern that I look for, except the previous upward move was extremely sharp, on higher than average volume.

The news and euphoria were so great that the move was extremely sharp, occurring in that one single day spike.  The decline typically lasts only a 5 trading days or so, the selloff is overdone, the good news is still out there, and buyers come in at an area of support.

Often, this will be right near the base of the tall white candle, other times it will occur two-thirds of the way down, and sometimes a little below the base of the tall white candle.  I don’t try to guess where the turning point will be, but wait for an up day, after the decline that occurs on decreasing volume.

In many of these cases, the holding period does not need to be very long, since the previous move up (the tall white candle), the move down (5 days or so) and the subsequent bounce and holding period often doesn’t need more than a few days to show a profit.

I’m considering adding short sales to my trading

I haven’t sold shares short.  One of the reasons is that one of my trading accounts is an IRA.

Another is because over the last 6 years, I didn’t really need to consider it since my method has served me well.  Why mess with success?

But I am testing screens for patterns that are the exact opposite of my tried and true strategy.  I’ll keep you updated if I do start selling some trades short.

I’ve you’ve had experience shorting…could you leave some comments below about your experiences?

What changes have you made (if any)?

I’m curious…have you also made changes to your trading system and/or strategy recently because of the market changes?

Have you used tighter stops?

Reduced your trade size?

Increased your trade size?

If so, leave some comments below.  Maybe we can fill in the comments section with some back-and-forth to help each other out!

Good luck with your future trades!


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