Stocks to Trade During a Volatile Market
In the last blog post we talked about some of our tips for trading highly volatile markets we learned during the financial crisis and large corrections over the past decade.
This article will go over what is working for us in this extremely volatile market. What to look for, which stocks to trade and some examples of good trading opportunities we recently featured to customers.
Trading Bear Market Rallies
After the bearish market signal we shared with clients back in February in the Daily Alert, the writing was on the wall that we could be heading for a large correction in the weeks ahead.
When governments are forced to shut down air travel, shops and restaurants in many of the largest economies in the world, you almost guarantee a recession.
Limiting commerce will severely affect earnings and even the solvency of many businesses. It will also negatively affect the rest of the economy as well.
The exception may be those businesses that hold the solution(s) for battling what is ailing the economy. In this case, there are certain businesses that will actually see more demand for their products and/or services because they are needed now more than ever.
A company like Regeneron will be more likely to hold up during this severe correction.
Regeneron is developing therapies similar to the effective treatment they developed for Ebola. So its no wonder that the stock actually went higher since the start of the steep correction.
Grocery stores, Walmart and even Amazon are poised to do better as more people will be eating at home more and ordering groceries ahead. They are also stocking up on necessities at grocery stores.
Another great need right now is specialized software that helps people work and go to school from home.
A Bull Market within a Bear Market?
Zoom video is a company providing essential software to facilitate working and collaborating from home.
Its one of the few recent IPOs that were profitable when they went public.
With the best IPOs you often see a nice run into the first earnings reports and well ahead of the lockup expiration. After that, you often see a downtrend in the stock as more supply of stock is released to the market and investors wonder if they have what it takes to greatly increase the value of the company over the long run.
The best ones will bottom weeks or months after lockup expiration and then challenge the highs a year or so later.
A Good Example of a Stock for this Correction
Zoom was one of the those strong IPOs that was able to pull this off and make new highs again within a year.
Zoom was also one of the few long opportunities that reached our target entry point over the past few weeks. Again, we wait until the price reaches the technical entry point before considering a trade.
Especially in a volatile market environment.
Zoom Video (ZM) formed a large bull flag pattern but the consolidation was not quite strong enough to qualify as a high, tight flag – our favorite bullish pattern. However, it was very close which is pretty good given market volatility was more than 4 times the average.
We had a bit wider stop-loss due to the high volatility. The price reached our target entry point last Friday. Within 1 trading day, ZM soared over 20% higher and hit our target sell price. It then pulled back sharply the next day.
You have to be quick on the best opportunities with a great trading plan in a market like this. Otherwise, you could easily be sitting on a 20% loss or greater.
Again, trading just the best opportunities with a smaller position size during a bear market rally or consistent, overwhelming volume near the entry point is key.
Bear Market Bottom Patterns
As a bear market deepens and becomes extremely oversold, the Fed and Congress generally start to take actions to help alleviate the problems affecting the market.
Out of strongly oversold conditions, investors and traders begin to anticipate these rescue efforts and their impact. Once the market begins to rebound, you often see a rally into the news that the Fed and Congress have taken decisive action.
In this case, the market was at or near record oversold levels. A quick head fake took out some traders the week before but this week finally saw a relief rally into the passing of the recovery bill on Friday.
Before and during a market bottoming process, volatility tends to still be extremely high. The bear market rallies tend to be powerful, sudden and over with quickly.
This can be a good time to play a reversal pattern such as a 1-2-3 trend change or explosive bottoming pattern.
A Classic Bottoming Pattern for a Quick Swing Trade
Our top trading opportunity last week was INMD. INMD was developing a 1-2-3 trend change and is in the healthcare sector which will tend to be more popular with investors in the early stages of a recovery.
INMD reached the entry point the next day and soared 30% higher from that point within a couple days. It reached the nearly 20% profit target within a couple trading days.
With this level of volatility, we are looking to get in and out quickly. The market and the stocks we trade could easily turn over and retest the lows. Again, holding a swing trade that is 10% or more underwater is not where we want to be.
A real high standard for what to trade and when, a bit wider stop, a realistic target sell price and not overstaying our welcome are key in this market. We cannot stress price direction confirmation enough as well before getting in.
The Early Bird Gets…..
Eaten by the Owl!
Some like to jump in early on a trade which can be disastrous as we have seen over the past couple months for those ignoring this key principle when trading.
When trading, you want to be in one of the few stocks that has what it takes to break through a resistance level without being overextended on these shorter time-frames. If it cannot break the prior days high soon enough, then its likely not going to make a big move for us – at least not for a while.
We do not want to turn a trade into an investment either. For an investment, we want to do extensive research on where the company will be in a couple years given the current environment now and in the years ahead.
Once volatility subsides and the market confirms a new uptrend, a select group of growth stocks will form strong consolidation patterns, reach a good technical entry point and be poised to really soar with the fundamental characteristics and business momentum to support much higher prices.
An Example of Better Technical Entry Points During a Bear Market
On the subscription site, we will be publishing a video about how to better confirm price direction when volatility is this high.
We had a lot of top stocks that formed explosive bottoming patterns last week. This video will go over how to better pinpoint your entry point and help avoid more stocks that turn over quickly before the hitting the first profit target.
Win rates drop during higher market volatility but this little tip will help avoid more losing trades which is key.
When to Step in After a Sell Off
Many smart investors have started to scale into their favorite positions. Once you see a key support level give way in a deeply oversold market, it could be time to start a position with signs of a strong rebound developing on news.
Then they will add to it as we get more bad news and panic selling in the months ahead. Very gradually adding to long-term holdings.
However, this requires to hold during the volatility which means holding onto a large loss in many cases. When swing trading, we don’t do this. We cut our losses quickly and then wait for the next ideal swing trading opportunity.
The ideal opportunities generally come when the market is starting to trend higher and volatility drops. Once this occurs, we tend to have a better win rate even while using a tighter stop-loss. Our recent long trades featured to clients have gone well but we expect a lower win rate overall in this environment until we confirm a new market uptrend.
Some will say this past week was an ideal long opportunity.
However, the truth is that the market was very oversold for weeks and showed signs of a rebound and selling exhaustion on multiple occasions. Just before another large wave lower which requires you to hold onto a 15%, 25% or larger loss.
This the reality of a highly volatile market, especially for newer traders who have not experienced a severe correction.
Protecting Your Swing Trading Capital from Large Corrections
Most of our long opportunities featured in the Daily Alert ahead of the steep correction did not reach our target entry point. So, by using basic risk management rules, we stayed mostly in cash in our swing trading accounts that are focused on the tradetobefree.com strategies.
Especially when we have an overbought market and looming political and other risks, we want price direction confirmation by being patient until the price reaches a good technical entry point. Fortunately, the coronavirus outbreaks are likely to run their course in the weeks ahead and the platforms of the 2 presidential candidates will be known soon after.
During an election year, you often have a rally starting in the summer that runs into the election once the candidates are known along with their likely platform.
In this case, we could have a rally that runs into a coronavirus cure and/or vaccine as well.