Good day Rookie bloggers! If you have been watching the markets recently and I know you have been there has been some interesting action. We have big swings in intraday volatility and all-time highs in just about all the indexes. In addition to that, we have broken some support levels and tested several moving averages. So, what does this all mean? That is the question and that is the question everyone is asking right now? Which way do we go next? We will endeavor to answer this question as best we can this week.

Check out this chart of the S&P 500 futures, you can see all the things I mentioned above.

First, we can see that this index made an all-time high just over two weeks ago, and then the index started to fall and was able to close above the 20 MA which is the blue line although during the day it took a quick ride down to just above the 50 MA which is the green line. That pullback took only five days to fall and then the very next day was a very strong green candle and had the feel of an index that looked like it was headed back up to another new high. Doing a straw poll of the traders I spoke to after that green candle that was exactly the sentiment I heard. Just a good ole fashion garden variety retracement. Fast forward two days and we had another violent push down to the 50 MA. From this push, we broke the first key support level at 3860. After this level was violated more questions arose? Will the 50 MA hold up? Is this the start of more than just a garden variety pullback? All these questions can be summed up as one of two things, is this a “buy the dip” situation or a “sell the rip” situation?

To answer this question we have to understand a few things. First, we need to understand how the market functions. There are really only three things that can happen when the market swings like it is. It can go down, sideways, or up? Or it could be said in another way, the market can go into consolidation, start a new trend in the opposite direction or continue on its merry way to new highs. The key is figuring out which is which and what to do in regards to whatever move comes next.

To figure out what comes next we need to put our ear on the markets and listen to what they have to say. The market will leave us a trail to follow if we are patient enough to watch for the signals. The signals come in the form of broken support and resistance levels and higher highs, higher lows, lower highs and lower lows. It is these levels and these candles and the pivots they form that tell you whether you need to buying the dip or selling the rip.

If you look at the chart above you can see that levels are being violated to the downside and that the candles are showing the lower highs and lower lows. These are sure fire signs that we are starting to change from buying the dip to selling the rip. These market conditions seldom change instantly and instead gives the astute trader time to recognize the subtle changes and then we can make changes to our positon in the market to match what we see. This can mean reducing positions that are opposite of the new changing trend or it can mean reducing the overall delta of the portfolio.

So when you see the markets changing, whether it be changes in direction or changes in volatility this is our opportunity to listen close to the markets and heed its call. We can then make sure that we are as in tune with the markets as we can be and this will ensure that our inevitable portfolio drawdowns stay as miniscule as possible.

Happy Trading,

Coach “Old Money” Holmes.