Trading Market Volatility In ‘3 Dimensions’ Of Time

In this article:

• FAANG stocks weaken in a bear market
• Trading in dimensions of time
• Plan now for trading volatility

For more than a decade the market was on a steady climb higher, allowing bulls to enjoy the run.

Now the bears are biting back as the market sends out sell signals showing a possible sustained downturn.

Many traders have never seen this type of choppy, indecisive market and must pivot or risk losses. Traders must work the market in front of them and not the market they want.

One way to pivot is to start trading market volatility in “3 Dimensions” of time.

Tech stock strength weakens

The last few months have revealed a drastic change in the market.

The last 13 to 14 years have been a bull run that cemented the technology sector as the face of a skyward march. This run created the FAANG stocks which now hold more valuation than most other stocks combined. FAANG refers to technology companies that include Facebook, Amazon, Apple, Netflix, and Google (now Alphabet).

These companies are highly-recognizable among consumers and traders have targeted these tickers for profits for years.

If the FAANG stocks jumped, traders gleefully focused on how high these tickers would spike. But now FAANG assets stumbled, and the weakened sector has been exposed to suffer the fate of the overall market. In certain spots within the sector there has been considerable losses.

What took the bite out of FAANG stocks?

Across the market interest rate hikes in a tightened Federal Reserve monetary policy have influenced traders as seeing technology stocks as expensive growth stocks. Within the sector some stocks, such as exercise and streaming services, have seen considerable drops in stock price.

This shift in influence, along with continuing market pressures, have created a noticeable signal on trading charts.

Charts have shown all buy signals for years and now there is a sell signal not seen in more than a decade.

The easy move of just “buy and hold” – the market traders want – appears to be over.

This is the time to adjust trading plans.

Trading in dimensions of time

One way to navigate this market that has shifted away from the bull run is to trade in “3 Dimensions” of time.

Every day traders follow technical signals on stock charts using time frames – hourly, weekly, monthly.

Think of the time frames as three dimensions when charting a target stock:

• Long term – Focus on the weekly or even monthly time frame.
• Intermediate term – Consider this as the daily time frame.
• Short term – This moves quicker on the hourly time frame.

For technical analysis, the best trade setups occur when all three time dimensions present positive signals at the same time.

Keep in mind that for more than a decade, the monthly charts revealed bull market signals. This was supported on the daily charts and thus the long, constant run higher in the market.

That combination isn’t holding up across the market in all the uncertainty of interest rate hikes, supply chain issues, inflation, and European war.

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Adding another trading dimension

Outside of time frames, what is the focus for Simpler’s traders?

Learn and understand central banks across the world.

British and Australian central banks were set to release reports Monday followed by British and Canadian dollar consumer price index reports today. What happens across the globe may seem distant to most people, but traders should consider staying alert on how these bank actions trickle into the U.S. stock market.

The powerhouse that affects markets worldwide is the U.S. Federal Reserve (Fed).

Because of Fed meetings and events today, the stock market midweek may become unbearable for some traders.

The Federal Open Market Committee (FOMC) were set to speak at various events today and the market awaits the ensuing reaction. While the day of the meetings may not be affected, the market the day after any Fed event is what to watch.

Strong reports from the retail and factory sectors helped boost the market higher today. 

The Dow closed at 32,654.59 points to gain 1.34% (adding 431.17  points on the day). The Nasdaq spiked the highest of the indexes to 11,985.74 points for a 2.77% rally while the S&P 500 shot up 2.02% to 4,088.86 points.

This “relief” rally (as some would label it) gives rise to caution the day after – Wednesday. In a bear market, the pullback following such a rally could be ferocious to the downside (especially considering what might be announced at the various Fed events).

As discussed previously in Simpler Insights, leading into this week, technical signals on stock charts were showing a common pattern – a weekly hammer candle, large volume, positive hourly momentum divergences – often at key longer term levels.

Add into the mix of the relief rally and the chart pattern, and the Fed events this week may lead into a harsh pullback midweek. As in any trading example, there are no guarantees. Simpler’s traders work through the signals to develop “best case” setups ahead of market movement.

Like any day in the market, momentum can shift and price action could take off or fall off without warning.

Traders need to develop a balanced plan that can work through any direction the market reveals. Remember, this market is not about what the trader wants, but all about what the market gives.

Seasoned traders use specific tools and resources that can deliver an edge on which chart signals to watch, stock market earnings reports, and upcoming “market influencer” events such as Fed announcements. Experienced traders will have carefully structured trading plans in place to target profit opportunities.

A trading plan defines the trading journey.

A disciplined trading plan helps:

• Avoid losing total account value
• Keep from repeating the same mistakes from losing trades
• Know what trades have been working to continue the “rinse and repeat” guideline

Without a defined plan it is easier for undisciplined emotions to flow into trading decisions and effect losses.

A trading plan is the key to managing a “check” on emotions when the market acts up and it will act up. Traders can get overly excited when things are going their way or get overly frustrated when on the wrong side of a market move.

A pre-established trading plan is a map showing the discipline and structure needed to stay focused on trading within set boundaries and avoiding uncertain pitfalls.

Trading can be easier with a plan in place to face the market with an intentional pathway to opportunity.