‘Trader’s Mindset’ Needed For Choppy Market

Don’t expect any visions of a change in the stock market where everyone holds hands and enjoys a profitable upswing to become reality anytime soon.

This market continues to chop along, bouncing up, down, and sideways creating just as many chances for losses as wins.

Stock market participants must consider a “trader’s mindset” to navigate more of the same over the long haul.

Market not out of woods after indexes rebound

All three major indexes rebounded heartily midweek after two days to the downside to start the week.

In the market today, the Dow closed at 32,717.60 points to notch higher by 1.0% (adding 323.35 points on the day). The Nasdaq topped the indexes by rising to 11,926.24 points for a 1.79% gain while the S&P 500 jumped by 1.42% to 4,027.81 points.

The market has been stuck in a choppy, range-bound movement for some time with negative economic and world news affecting most of the sharp turns.

This environment has been difficult for traders to track any sustained direction. All the bad news affecting the market begs the question, “Why isn’t the market going down?”

“I don’t think we’re out of the woods,” said John Carter, Founder of Simpler Trading. “But I don’t think at this point we’re going to roll over and die. The general idea is that the stock market may not be falling apart here.”

Technology stocks continue to lead market

John pointed out that despite bad news and down days the stock market, key sectors and leading stocks have all held their own. None has fallen off a cliff.

As an example, traders are watching how the technology sector fairs in current market conditions. Harking back to pandemic and post-pandemic trading over the last few years, technology starks were once seen as the “never fail” darlings among investors and traders.

The old saying, “nothing ever lasts forever,” holds true with the technology sector performance over the last year. Still, leading technology stocks appear to be holding onto strength and working through the often harsh trading days of late.

John believes much of the recent struggles in technology stocks can be attributed to central bank actions.

“It’s just a reflection of interest rates,” John said.

The central bank has repeatedly raised the federal funds interest rate over the last year. This affects the profit margins of technology companies through their retail sales.

John keeps an eye on the technology sector for any overall upside momentum in the market.

“If we’re going to go higher, Apple, Microsoft and Tesla will need to participate,” John said. “Apple is one of the more important stocks.”

Apple, Inc. (AAPL) as an example has shown strength over time. The stock has looked good, according to John, across time frames on technical analysis charts.

Apple rebounded along with the overall market on Wednesday by 1.98% to hit $160.77.  At the beginning of 2022 Apple was at $179.70 and steadily declined to land at $125 to start 2023. Through the first quarter this year Apple has been on a steady rise in price.

Put/call ratio, squeeze show signs in SPX

In a volatile market like this John continues to watch the put/call ratio.

This indicator gauges how people are reacting to news and then acting and is considered a sentiment reading. The put/call ratio is the ratio of the volume in trading between the put options trading and the call options trading.

Taking a look at overall internal indicators John is watching for trade opportunities despite sharp price swings.

“Based on the put/call ratio, based on how bearish everybody is it makes sense that we do pop up,” John said. “Everybody gets excited to the upside, the market turns back, and we can do a swing short.”

John also makes sure to follow what the S&P 500 (SPX) might do next. He is watching a squeeze building on the SPX chart.

“Is this squeeze going to be able to build some momentum and go to the upside?” he asks. “And when that is done I would look for it to die.”

Market continues to hold up against bad news

Even with that outlook the stock market has shown resilience against a big collapse.

“With all the bad news we’ve had with banks, etc., the market hasn’t rolled over and died,” John said. “To me that’s telling us something. The thing that it’s showing me right now is that this market is very short.”

That’s where he sees many traders getting short and the market follows by positioning for a rally. This cycle creates a “nasty, range-bound environment,” John said.

And that is why traders must adapt their trading plans, not to what they want but to what the market gives.

“This is a trading market, not a trending market,” John said. “This is not your kind of, ‘Oh my gosh, let’s all just hold hands and make money and things are going to go up forever,’ market.”

To follow John and other members of the Simpler Trading team, check out the Simpler Options online trading community.