TUTORIAL: Play tight after a major market reversal
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The market performance on Thursday, April 4th occurs a handful of times a year, if that. At market open, all indices were up by a significant amount — Dow Jones Index $DJX +216.46, Nasdaq $IXIC +141.14, S&P 500 $SPX +32.56. Since Monday and the start of Q2, the market has pulled back its gains from March, and Thursday seemed as if there would be a slight correction with traders buying up all the shares that were sold over the past three days.
Then, just before 11am PT, all indices reversed dramatically. At market close, this was the score: $DJX -530.16, $IXIC -228.38, $SPX -64.28!
It is unknown specifically why there was such a dramatic reversal today in light of no major cataclysmic economic events. There was no economic report that was revealed today. There was no global event that triggered the selloff. Unfortunately, we won’t ever know why the market sold off as it did. But, we can learn to understand what is happening by observing the VIX.
On a previous Sirens post, I wrote about the VIX and how it is used by traders. In short, the VIX calculates the price action of put and call options over the next 30 days. The options market is a derivative of underlying stocks and can provide leading and consensual insight to the direction of the market. Given the massive selloff, the VIX indicates that many traders established short or put options in the coming 30 days.
Of course, nobody knows if this bearishness on Thursday will hold. So, how can traders leverage the type of market reversal that occurred?
Develop your hypothesis. Will the market trend up, down, or sideways?
Play value ETFs. I’ve referenced the thematic ETF — $GGLL — which is indexed to Google. This is a 1.5x leveraged ETF, meaning it aims to outperform $GOOG and $GOOGL by returning 1.5x. If $GOOG and $GOOGL close the day with a 1% gain, $GGLL will close the day by 1.5%.
Buy into the position which supports your hypothesis and risk level. My hypothesis is for a sideways market and I will make a sizable trade knowing that a sideways market won’t return 30%, but may only return 6%. And because $GGLL is a value play, even if price drops 10% or more, I know this ETF will eventually recover. So, managing my risk translates into holding this losing position for longer until it recovers or selling at an exit price and taking a loss.
Play it tight. Especially after a day like Thursday, there could be several days of the market trading sideways with a slight downward trend. I need to play the positions tight which would mean entering $GGLL at $33 and exiting at $34. While the price difference is only $1, if your position represents 1,000 shares, then that’s a +$1,000 gain. Playing tight may mean collecting profits after 5 minutes, and then waiting to enter again at a similar price point.
Note: Please read this site's 24Hour Journal disclaimer regarding finance and investing information. Watch our tutorial on how to setup a TastyTrade Cash account here.
TUTORIAL: Play tight after a major market reversal
TUTORIAL: Play tight after a major market reversal
TUTORIAL: Play tight after a major market reversal
The market performance on Thursday, April 4th occurs a handful of times a year, if that. At market open, all indices were up by a significant amount — Dow Jones Index $DJX +216.46, Nasdaq $IXIC +141.14, S&P 500 $SPX +32.56. Since Monday and the start of Q2, the market has pulled back its gains from March, and Thursday seemed as if there would be a slight correction with traders buying up all the shares that were sold over the past three days.
Then, just before 11am PT, all indices reversed dramatically. At market close, this was the score: $DJX -530.16, $IXIC -228.38, $SPX -64.28!
It is unknown specifically why there was such a dramatic reversal today in light of no major cataclysmic economic events. There was no economic report that was revealed today. There was no global event that triggered the selloff. Unfortunately, we won’t ever know why the market sold off as it did. But, we can learn to understand what is happening by observing the VIX.
On a previous Sirens post, I wrote about the VIX and how it is used by traders. In short, the VIX calculates the price action of put and call options over the next 30 days. The options market is a derivative of underlying stocks and can provide leading and consensual insight to the direction of the market. Given the massive selloff, the VIX indicates that many traders established short or put options in the coming 30 days.
Of course, nobody knows if this bearishness on Thursday will hold. So, how can traders leverage the type of market reversal that occurred?
Develop your hypothesis. Will the market trend up, down, or sideways?
Play value ETFs. I’ve referenced the thematic ETF — $GGLL — which is indexed to Google. This is a 1.5x leveraged ETF, meaning it aims to outperform $GOOG and $GOOGL by returning 1.5x. If $GOOG and $GOOGL close the day with a 1% gain, $GGLL will close the day by 1.5%.
Buy into the position which supports your hypothesis and risk level. My hypothesis is for a sideways market and I will make a sizable trade knowing that a sideways market won’t return 30%, but may only return 6%. And because $GGLL is a value play, even if price drops 10% or more, I know this ETF will eventually recover. So, managing my risk translates into holding this losing position for longer until it recovers or selling at an exit price and taking a loss.
Play it tight. Especially after a day like Thursday, there could be several days of the market trading sideways with a slight downward trend. I need to play the positions tight which would mean entering $GGLL at $33 and exiting at $34. While the price difference is only $1, if your position represents 1,000 shares, then that’s a +$1,000 gain. Playing tight may mean collecting profits after 5 minutes, and then waiting to enter again at a similar price point.
Note: Please read this site's 24Hour Journal disclaimer regarding finance and investing information. Watch our tutorial on how to setup a TastyTrade Cash account here.