Tricky Stock Market Lies Ahead For Traders

A mixed bag of price action once again fueled a choppy stock market as traders face more “hurry up and wait” scenarios.

Stock market participants were nervous after the chief central banker’s testimony yesterday and today. Price action proved the anxiety as the Dow dropped 200 points before recovering much of the loss into the close.

What lies ahead for traders is more of the same choppy, tricky trading environment that requires discipline.

Fed, Powell presence looms over stock market

Chief central banker Jerome Powell, chairman of the Federal Reserve (Fed), continued his hawkish testimony to Congress today.

The highlight of his comments is the continued focus on fighting inflation by raising benchmark interest rates. He is on the record saying that higher and possibly more than expected rate hikes are in play if the economy keeps powering along.

“Over the past year, we have taken forceful actions to tighten the stance of monetary policy,” Powell testified. “We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do.”

The three major indexes were mixed in performance today with Powell’s words looming over the stock market.

The Dow closed at 32,798.40 points to slip .18% (shedding 58.06 points on the day). The Nasdaq rose to 11,576.00 points for a .40% gain while the S&P 500 notched higher by .14% to 3,992.01 points.

Powell hinted that the federal funds rate could top out as high as 6% which is more than market watchers previously estimated.

The central bank most recently raised the federal funds rate by .25% – or 25 basis points. This was the eighth increase since March, 2022. This boosted the federal funds rate to a range of 4.5%-4.75%. More and faster rate hikes could get that rate to 6% by the end of the year.

This is significantly higher, said Raghee Horner, Managing Director of Futures Trading at Simpler Trading, noting that the stock market likes lower interest rates.

A higher federal funds rate translates to higher interest on consumer loans which affects sales profits for publicly traded companies that sell to consumers.

“Cheap money is what stocks like,” Raghee said.

Are there long plays in this choppy market?

Traders still have more “wait and see” events to digest from this week.

The stock market is still digesting data from the Automatic Data Processing (ADP) national employment report and the Job Openings and Labor Turnover Survey (JOLTS), both for February, released today. Traders are also watching the nonfarm payroll report set for release on Friday.

To trade through continuous market chop Raghee turns to her proven strategies and tools.

Despite a strong sell-off yesterday and sketchy market levels today, Raghee remains positioned bullish within the chop and looking for opportunities to buy oversold levels or dips.

She looks for short-term trades, and maybe long positions in certain stocks such as Meta Platforms, Inc. (META). The parent of Facebook has been rising, closing at $184.97 today, up by .25%. Year-to-date META has climbed from $124.74 at the start of 2023.

Raghee describes her current strategy as short-term swing trading – working trades for a handful of days to just more than a week.

“There are a number of long positions that are viable,” Raghee said. “This is my 2023 game plan. We’re going to start to be far more active in the short-term swings. Not day trading, but still quite nimble.”

Raghee tracks daily price movement range in her watchlist and puts together realistic trade targets in what has been a topsy-turvy market.

“Stay more nimble,” Raghee said. “Focus on structural support levels – mean reversions and volatility support levels.”

Predicting direction in the current stock market environment has been difficult for traders.

Often the answer for where to turn is to draw a “line in the sand” and let the market dictate next steps.

Kody Ashmore, Director of Weekly Options Strategies at Simpler Trading, has developed a point of control (his line in the sand) based on the price where the most volume and transactions have occurred. He bases his levels on data, primarily the volume-weighted average price (VWAP), from the last two years of this bear market.

His line in the sand is at 3,973 on the E-Mini S&P 500 (ES) index futures. Above this line the market looks bullish and below the line is bearish.

“My plan is to just day trade through this chop until a decision is made,” Kody said.

By a decision he considers a move back above 4,100 as potential for bullish plays and if below 3,900 he can work bearish plays.

“I’ll let the market tell me which direction to take because it’s in a very particular and tricky spot,” Kody said.

The market has shown that it can quickly shift from a rally – like at the end of last week – to a steep sell-off on a catalyst event like the Powell testimony before Congress.

“It’s tricky out there,” Kody said. “Be patient. Be disciplined and follow your plan.”

Traders who want to follow Raghee or Kody during market hours for live trading can look into the Simpler Central trading room.