Traders, given the current price action and market environment, this week’s watchlist will differ in outline and focus from previous ones.
As always, I will outline my top ideas for the upcoming week, but the nature of those ideas will vastly differ from the norm.
We now find ourselves in an increasingly uncertain and fear-driven tape, with fear almost near March 2020 lows, and a heightened volatility environment, with VIX closing at the highs on Friday.
From a trading perspective—and it’s essential to differentiate between trading and investing in this market—it’s not a time to have a bias. We could bounce, we could continue to sell off further than we think—anything is possible. Of course, it remains a headline-driven tape swamped with significant uncertainty, so the trend and sentiment can change multiple times throughout the day, off one headline. Remember that. So too can my plans. That’s why it’s important to be nimble, and until there is greater clarity and certainty surrounding the most uncertain policies right now, it’s best not to be married to an idea.
Now, given where we are and where we have come from, here’s how I will approach Monday.
Thoughts and Plans for Monday
As outlined on Thursday in my IA meeting, during periods of a market selloff and elevated VIX, my go-to instruments and trading vehicles are SPY, QQQ, and VXX. I also have a basket of market stocks, such as AAPL, NVDA, and TSLA, for reactive trades to the market, depending on relative strength and weakness, and reactive trades to any outlier moves for a reversion. But for the most part, I am trading the overall market SPY / QQQ and VXX simply move2move.
Unless an outlier situation arises. Which brings me to Monday.
*Please note that the prices and other statistics on this page are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity, slippage and commissions.
Of course, this will depend on whether we open flat, gap up, or down. On average, after two consecutive days of negative 4.5% declines in the S&P 500, the market has returned 2.95% on day 3, based on a sample of 10 days in history, with 8 of the 10 days returning a positive return on day 3.
The highest probability trade that I see developing is if we gapped lower into Monday, flushed in the pre-market or off the open, and then put in a higher low, signalling capitulation and a potential intraday rebound. Given oversold indicators, market internals, and everyone calling for a ’87-style crash while the fear index is near 0, I am most excited about a potential capitulation and bounce trade intraday.
Similarly, we may open flat or slightly up, in which case the opportunity would be downgraded from an A+ to a B+. In that event, I would look to see how we trade near 2-day VWAPs and pre-market levels to determine whether or not I will go long on a higher low or a consolidation breakout intraday.
Here’s My Plan:
Historically, in similar situations (think COVID March), I outperform in VXX and SPY, so that is where my focus will be. I will look to be short VXX on either a capitulatory up move and only scale once a lower high is confirmed, or on a lower-higher / failed follow-through, along with the market firming.
*Please note that the prices and other statistics on this page are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity, slippage and commissions.
Similarly, once we have a higher low in the market following a flush, I will look to position long, initially targeting VWAP to take risk off, with a stop near LOD and HOD for VXX. It is important to note that I am not looking for a recovery in the market; I am just looking for an intraday rebound.
*Please note that the prices and other statistics on this page are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity, slippage and commissions.
I’ll have my basket of market-related former leaders (think Mag 7 stocks) on watch for any potential significant washouts that are followed by a snapback for long entries as well.
Several other scenarios exist that warrant different plans and thoughts. This is just one scenario I am most interested in and outlining. And it’s worth mentioning again—things can go further than you think, so unless there is confirmation by means of price action and internals, and my plan for action materializes, I will not be trying to catch a falling knife. That’s where you get burnt.
I’ll also be watching for breaking news relating to any of the significant countries with tariffs imposed, like Vietnam, the European Union, India, and China, and I’ll look to react to the related sector and companies it impacts the most.
I don’t have any small-caps on watch for the upcoming week. It remains strictly a market-related tape, a move-to-move traders’ environment, where the range and opportunity have opened up. Now is the time to perform if this is a market in which you can excel.
Remember that with an elevated VIX, you don’t need to size up and try to be a hero; the volatility increase is sizing you up naturally. Be aware of that, and as always, place the most emphasis on risk management and where you truly have positive expectancy. Let the trades fall into your lap.
Beyond one day, I cannot plan setups for the entire week, given the market that we are in, and how quickly sentiment and trend can change. So the above is my plan for Monday, the best-case scenario, but as mentioned, I’m not married to the idea. Anything can happen in this tape!