What does today’s fragile market environment mean for your trading? We discuss this and more in this week’s market slice!
Fragile: Do not fold, spindle, or mutilate
Those of us who are old enough to remember when data was processed on punch cards rather than the cloud will remember this warning.
The idea was, if the punch card got bent, the data would be no good. What does this have to do with today’s markets?
Simply put, we are in a very fragile market. Any event which threatens to disrupt the economic or geopolitical situation holds the very real possibility of crashing the system.
The most important key to understanding the current market environment is recognizing these three factors:
- The difference between normal business cycles, and the extreme distortions we see now due to unprecedented monetary and fiscal stimulus;
- The dislocations caused by the pandemic; and,
- The highly volatile international situation.
Each of these categories of vulnerability taken alone would pose a serious threat to market stability. Taken together they form an “unholy trinity” of critical threats to your wealth. Here are the three questions you need to answer to protect yourself and your family:
- Monetary expansion has fueled an inflation that is on the verge of spiraling out of control. This has provoked the Fed into a hawkish stance, where some tightening of policy – meaning interest rate increases – is absolutely required. But even the talk of these increases has led to a selloff in the markets that could go over the cliff if the tightening goes beyond what is already priced in. What happens when the Fed’s tightrope act fails?
- Millions of businesses closed due to lockdowns, seismic changes in workforce composition and, more importantly, attitudes, and above all a permanent sense of uncertainty around the “new normal” mean that a normal boom and bust cycle – already distorted by massive government spending and giveaways – is impossible. What will happen instead?
- The Ukraine war will probably wind down at some point, but the supply chain issues caused by interruptions of production and trade sanctions – to say nothing of the liquidity crisis looming due to the financial warfare accompanying the fighting – may prove very difficult to resolve. And this isn’t even taking into account the possibility of a Chinese move against Taiwan, which would ratchet global tensions up to levels not seen since WWII.
There is a tendency among populations to remain complacent, even as major crises are brewing. Don’t allow the appearance of semi-normality to distract you from the heat that is threatening to cook your family frog!
FFR Trading is a research and due diligence firm that supports investors and traders with strategy recommendations and referrals to proven professional traders. Call us at 1-800-883-0524 for a free portfolio evaluation, and to discuss what today’s financial chaos means for your future.
The Making of a Bull Trap
Just because markets are moving in a certain direction, we cannot assume that profits are assured by being on the right side of the trend.
Recent parabolic spikes in the prices of several commodities led to gigantic selloffs, where late buyers – mesmerized by the vision of massive, rapid gains – jumped in at the top of the runup.
Here’s a 3-month crude chart. Notice how the price broke out after a long, steady gain, and quickly spiked to over $130 a barrel. Then, just as buyers were jamming in at the top, the selling began.
Traders who got in around $95, as we suggested a few weeks ago, were able to take profits even after the big selloff began. On March 9, Crude opened around $125 and closed at $108. Stops anywhere in that range would have locked in a substantial profit on a ten-day swing trade.
Smart traders were able to put this trade on because they don’t trade impulsively on sudden moves. The average trader arrived at the party too late, and ended up taking a bath.
Now, compare this to the long-term chart, going back to 2004:
As you can see, last week’s huge up-and-down move is not unprecedented… the last oil shock, in 2008, saw a runup from around $60 a barrel to $140, followed by a collapse to $40.
Factoring in inflation, supply constraints, and upward pressure on demand as air travel returns to full operation and shipping bottleneck solutions are found, there is every reason to remain bullish on Crude.By using news event modeling combined with technical analysis, you can stay ahead of the crowd, and continue to pull profits out of a trending market, without getting trapped by the pros who feed off naive retail traders.
Did you catch Ian Cooper’s News Event Trading Workshop last month? It’s available as a replay now on YouTube. Give it a look, then call your Strategy Team at FFR to talk about how to profit from news events in your trading. Call (800) 883-0524 to speak with a Strategy Team member, or click here to schedule a strategy call.
Profiting from Uncertainty
The world today is a very uncertain place. The fear generated by pandemic, war, and economic crisis can be a strong influence on your trading mind. It’s very important not to let that happen.
“All through time, people have basically acted and reacted the same way in the market as a result of greed, fear, ignorance, and hope. That is why the numerical formations and patterns. recur on a constant basis. – Jesse Livermore
Great traders like Jesse Livermore made fortunes taking advantage of the mass psychology of markets.
The charts we use to assess price changes encapsulate these factors of greed, fear, ignorance, and hope. Most traders react to market psychology. Winning traders anticipate it.
Let’s look at the 3-month S&P 500 chart:
Notice the series of lower highs and lower lows… this is the basis for our assessment that we have now entered a bear market phase. That’s fine as far as price action goes. But what is the market psychology underlying these moves?
When you look at price charts from this standpoint, you can see that the wild swings, particularly for the week of 2/21-25, reflect the wild uncertainly leading up to Russia’s Ukraine invasion. Here’s the intraday chart for the 30-day and 5-day period straddling the invasion:
We see that the market fell before the invasion, then reversed when the tanks started rolling… perhaps in relief that NATO did not immediately respond with force. This points to the old maxim, “buy the rumor, sell the fact.” In this case, the excessive fear preceding the invasion created a buying opportunity, and, as the position on the ground clarified and the broader economic situation reasserted its influence, the market resumed its secular downward trend. Please be aware that this assessment his does not constitute trading advice. Rather, we are demonstrating a method you can use to anticipate market moves and identify high-probability trading opportunities!
For help is figuring out what world events and economic developments mean for your trading account, contact your Strategy Team at FFR Trading. We are your partner in trading success! Call (800) 883-0524 or just send us an email at [email protected].
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