The markets are stuck in what we call a chopfest – moving up and down with out much real movement. Here’s what to do when conditions are this unstable.
During normal trading conditions, we expect markets to move up and down, fast or slow, in either direction. We study the charts to find patterns, and we place trades according to past experience.
As we all know, we are in very unstable market conditions right now. Chart patterns are much harder to decipher, because they keep changing. You may be wondering, “What am I supposed to do now when the patterns make no sense?”
That feeling of hopelessness is awful, and many traders and investors are feeling it.
When market conditions change, we need to change our trading approach. And right now, that means we need to figure out how to navigate the chopfest we’re in. Markets continue to move up and down – but barely. They are essentially moving sideways.
Markets stuck in a chopfest? Here’s what to do
Follow Jesse Livermore’s advice
First, let’s turn to the greatest trader of all time, Jesse Livermore, for advice:
“Keep the wind out of your face, and when the market hits the doldrums, getting nowhere, moving sideways, then get out, take a break, have some fun, go fishing. Come back into the market when the wind has picked up again, and the sailing is clear and good.”
In other words, take a break from trading. There is nothing wrong from stepping back and waiting for conditions to improve.
Watch the markets for a sign to get back in
Don’t completely check out, because we know market trends can change at any time. Pay attention to these four trend indicators:
- The MACD – it identifies price trends and measures that trend’s momentum. Look for it to turn green.
- The 200-day moving average – look for the price trend of an index (like the SPX) to move above this line – and keep going higher.
- New highs/new lows – we want to see a steady pattern of more new highs and fewer new lows.
- Bullish percent indicator – not a lot of traders use this one. It tells you how many stocks have a buy signal on a point/figure chart. A key level to watch is 50. A cross above that level is bullish.
Wait for the trend to be confirmed
Sure, you could jump back in at the first sign of a bullish trend, but the better approach is to wait for the trend to be confirmed. You want to see a few days of follow-through.
Could you miss out on some winning trades? Yes. That is always a possibility. Just remember: there is always another trade right around the corner.
When markets are stuck in a chopfest, trading is nearly impossible. I am playing it very safe right now, though there are some trades to be found (mostly in the energy sector of course).
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