When Russia invaded Ukraine, market volatility spiked higher.And as it’s Technical Tuesday, today I’ll show you two simple tools I use to do just that.That means it’s an exciting time for traders… Excitement, of course, can be either good or bad. For some of us, the excitement of a roller coaster is a terrifying experience. For others, that excitement is exhilarating. This same idea applies to traders. Some dread volatility, as it weighs on their stock prices. Others thrive in these environments, as volatility provides them ample trading opportunities. At the risk of tooting my own horn, I fall into the latter camp. And I’ll show you how I’ve been doing in just a bit. But if you don’t enjoy volatility and don’t trade well during it, it can help to stay focused on the trend. This helps avoid being distracted by large price moves and could help you stay in the trade.
Staying focused on the trend is simple.Wheat is a good example. Wheat futures prices jumped more than 60% in a month before pulling back. The chart below puts that move in context.First, determine the direction of the trend before the volatility began. Then, expect that trend to continue. In the past few weeks, commodities have been volatile.
Wheat broke out of a consolidation pattern the week before the invasion. So prices were in an uptrend before the spike that pushed wheat to a 14-year high.Prices have pulled back to support, but traders should expect another move higher from here. Support is shown on the chart as retracements of previous up moves (the red lines labeled 1 and 2). Prices don’t move straight up or down. There will be short, countertrend moves along the way. These countertrend moves are called retracements or pullbacks in an uptrend. In the 1800s, Charles Dow wrote in The Wall Street Journal that pullbacks typically retrace one-third to one-half of the previous move. He also wrote that if prices retrace more than two-thirds of the move, the trend has reversed. In the 2000s, many traders used Fibonacci ratios, which can automatically show these retracements on a chart. Fibonacci ratios plot points at the 32.8%, 50%, and 61.8% retracements from the local high. That’s close to the values Dow used. Either approach can be useful. For the chart above, I used Fibonacci ratios. Number 1 in the chart above marks a 38.2% retracement of the war-time rally. Number 2 marks a 61.8% retracement of the entire bull move. Wheat is at support defined by these levels and could be expected to rally. But the Fibonacci levels are just one half of the story on this chart…
At the bottom of the chart is a simple momentum indicator. It’s the 20-day rate of change in price.ROC is the most direct way to measure momentum. At its peak, it topped 60%. This is an unsustainable pace for any market. That explains why the pullback followed. Rapid changes in ROC like that are seen at the beginning or end of trends. It appears likely this trend is beginning, as long as wheat holds above its retracement levels. If you’ve read this far, you should now have a plan for trading the wheat market. And the way we walked through that plan could be applied to any market. No matter how you feel about volatile markets, it’s always best to take your emotions out of the trading process. Use the chart to develop a strategy and focus on the price action instead of the news. Regards, Michael Carr, CMT, CFTe Editor, One Trade
P.S. I mentioned earlier that I’ve been trading well amid this volatility.One Trade, my options research service where I recommend trades on just the S&P 500 ETF (SPY), once per week.Here’s a screenshot of our most recent closed positions in
31% in 2 days… 61% in 3 days… and 142% in less than a day. All since the Russian invasion began and the volatility kicked off.That’s exactly what we’re achieving in One Trade. However, there’s something far more important than all this. You see, one of my staff makes these same trades in an account I fund with my own money. And all the profits of this account go to my local animal shelter each quarter. This is going to be a great quarter for the shelter, and I couldn’t be happier about that. One Trade is a no-nonsense trading strategy that can take advantage of bull and bear markets, does best during times exactly like this, and all profits go toward a good cause. If that sounds like something you can get behind, click here to learn more about One Trade and how you can get involved.You may be looking at that 72% loss and saying, “well that looks like it stung.” You’d be wrong. Trading losses are part of the game. All that matters is that you’re winning more than you’re losing, and that your winners are bigger than your losers.
Chart of the Day:Bottomed Out?
By Mike Merson, Managing Editor, True Options Masters
I can’t help but think we’re nearing a bottom here on tech stocks.Today we’re looking at the Invesco QQQ Trust, a basket of tech stocks that has, surprise surprise, taken some heat in the recent volatility. It broke down from a long-term rising wedge pattern back in January, well before the Russia invasion spooked markets further. So it’s had a lot more time to fall. We’re right on a long-term horizontal support line. And, we’re seeing some iffy positive divergence on the Relative Strength Index. So, I wouldn’t call it my strongest idea. But I know that if a resolution is reached in Ukraine, some of these riskier names are going to bounce hard, and may even start a new uptrend. One to watch, not to trade… Regards, Mike Merson Managing Editor, True Options Masters