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How to Stay on Your Toes in This Choppy Market

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Recent patterns, a high level of headline risk, a couple of minor failed bounces, and a cluster of distribution days all mean that we need to be mentally prepared to move quickly at the first sign of real trouble.

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One comment theme over the past couple of years is how difficult it's been to mentally "get behind" this market. While there's no doubt that the economy has improved and the specter of imminent financial Armageddon is long past, it's been virtually impossible to reconcile a market that nearly doubled in 23 months.

The other aspect that has been virtually inconceivable has been the one-sided nature of the action. A steady diet of strong earnings and positive outlooks has helped, but there's little doubt that the largest driver in that span has been the Fed's printing presses. That's made a large number of traders, including myself, feel as if the market's been "manipulated" and has created a huge sense of disconnect between what's happening on Wall Street and what's been happening on Main Street.

Even if you fully appreciate the power of quantitative easing, you can't help but understand that cheap money is a double-edged sword, and that there have been several instances in recent memory where investors have been left holding the bag as a result of loose monetary policy. Nonetheless, the traders who have done the best are those who have been able to tune out those doubts and nagging concerns and just pay sole attention to the trend.

All of that, of course, leaves us in a very familiar position. Social unrest in the Middle East has helped to significantly increase volatility and has left the indexes in a potentially sticky situation from a technical perspective. The question, of course, is if waiting to see how the action plays out along key support levels will again leave traders scrambling to add long-side exposure as we rocket back to recent highs in a couple of days.

As I've stated on several occasions, I don't approach this as a game by making outrageous calls in an effort to garner marketing material. My objective is to talk about the market in a way that addresses the concerns of individual investors and highlight an approach that has worked for me over the years, which is to focus on emerging opportunities that choppy action like this can produce, but make sure that I am doing everything I can to keep my account near highs amid uncertainty.

The bottom line here is that there are key areas that we need to be watching, and that there have been several signs that the character of this market may be shifting. From a technical perspective, the action that we've recently seen has gone a long way in giving this market a much needed change of pace. However, the indexes, and most of the major S&P sectors, are in potentially sticky situations from a technical perspective as they develop short-term bear flags.

Those patterns, a high level of headline risk, a couple of minor failed bounces, and a cluster of distribution days all mean that we need to be mentally prepared to move quickly at the first sign of real trouble. For now though, the overall uptrend remains intact. I am being extremely selective and am trading small, but as long as support levels hold, I'll continue to hunt on the long side.


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No positions in stocks mentioned.
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