Everyone and their brother are probably scrambling right about now, as they try to figure out the market direction. I want to take a few minutes to teach you three techniques I’ll use to attack the market.
If you found this market difficult to trade lately, you’re not alone.
Of course, one headline can change the course of action, which is why I’m preparing myself for once a bulk of the uncertainty is taken out of the picture.
You see, if I can time the market, then there should be INCREDIBLE plays.
So what am I doing right now?
Here are the three techniques I’ll utilize right now:
- Define critical support and resistance levels
- Identify reversal signals
- Develop a stock watchlist
I knew immediately this environment didn’t work well for swing trades.
So, I scaled back on my positions, focusing on day trades with my LottoX.
But this next run could be epic!
Now, I don’t want to guess when the market will turn and when volatility will drop.
That’s why I need objective ways to look at the market.
I want to walk you through which price levels I found, the indicators I use for market trends, plus a handful of stocks I like in the coming months.
1) Support & Resistance
When I look for support and resistance levels, I use major market ETFs.
For my trading, the Nasdaq 100 QQQ ETF is my favorite.
While it’s a tech-heavy ETF, it tends to follow along with the momentum stocks that I love to trade.
Here’s how I look for support levels for a market bounce.
First, let’s take a look at the weekly chart of the QQQ.
QQQ Weekly Chart
I start by looking at the 8-period and 21-period exponential moving averages. These often act as support and resistance.
Look at how the ETF interacts with this in the past to see what I’m talking about.
We’ve already pushed through the 8-period EMA on the weekly chart.
So, the next stop is the 21-period EMA.
That would be the next logical area I could see for support.
But is there some other way to confirm that might work?
Let’s try a Fibonacci retracement.
QQQ Daily Chart
When I use the Fibonacci retracement tool on the highest point in the Qs and the lowest point, $297.46 and $260.11 respectively, I get a 23.6% retracement at $268.92. That’s pretty close to the 21-week EMA.
And, if I assume that it may take another week or so to reach that level, the two might just match by then.
Now, that’s only one spot where the market might stop.
The next would be the obvious low point at ~$260.
Do I need it to stop on a dime at these levels?
No. I just need them show me signs of a reversal.
So what does that look like?
2) Reversal signals
Here’s a quick exercise I promise won’t take long.
Go back over the last 20 years in the SPY and look for bottoms in the market after severe drops.
Take a look at the volume.
Notice anything unusual?
You should see a large spike in trades.
QQQ Weekly Chart
I highlighted a few times when this happened over the last decade.
While these were more extreme examples, the same thing occurs on smaller timeframes.
To this point, we haven’t seen a lot of volume on the recent selloff.
Even though that doesn’t mean the market can’t bottom, it’s a signal that it might have.
This measures the number of put contracts to call contracts.
Generally, this sits at around 0.7-0.8. When it stays elevated for too long, chances are we’re about to see markets find a bottom and reverse.
In a similar vane, I like to see the VIX hit extreme levels.
Although it’s been relatively high the past few months, if I see readings over $60, chances are we’re headed for a bottom in the coming weeks.
3) Creating a watchlist
This is my favorite part of preparation. It’s like being a kid in a candy store.
When I look for stocks to trade off the reversal, I want ones with lots of relative strength.
These are stocks that performed better than the rest during the market drop.
Yes, the hardest hit often bounce the most. But as an options trader, those don’t work well for me.
Because that huge bounce is already priced into the options.
I’d rather go for a stock with a lot of short-squeeze potential that’s near all-time highs.
Stocks like Peloton (PTON), Chewy (CHWY), Tesla (TSLA), Carvana (CVNA), Wayfair (W), Zoom (ZM)…you can go through my past stock picks for each week and find a whole bevy of them.
I know I’ve given you a lot to digest.
That’s why my LottoX service is a great place to start your education.
Not only do you get my top trades for the week, but I lay out my full trading plan.
That includes what I’m watching in the market AND where I see it going.
So, if you’re looking for trade ideas and a great way to learn the market, then you’ve come to the right place.