Trading Plan Necessary For Market Uncertainty

Positive price action to start the week was dumped midweek after the U.S. central bank raised interest rates once again.

But this resilient stock market bounced back the day after with the technology sector leading the way.

Expect more of the same – pop higher, drop lower – for the days ahead and have a plan in place to target profits.

Technology sector picks up pieces after Fed

Technology stocks boosted equities after a losing day midweek as the stock market digested the latest Federal Open Market Committee (FOMC) interest rate hike of 25 basis points.

In the market today, the Dow held on to hit 32,105.25 points to rise .23% (adding 75.14 points on the day). The Nasdaq jumped to 11,787.40 points for a 1.01% spike while the S&P 500 was above flat by .30% to 3,948.72 points.

“The Nasdaq remains in an uptrend with semiconductor stocks continuing to outperform,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading.

The positive Thursday was welcomed by traders after the stock market took a solid beating – the Dow dropped 530 points – on Wednesday.

If this market holds true to recent weeks, and months, anything could happen on Friday. 

“We’d continue to tread lightly into these markets as volatility may remain in the face of investors processing the central bank’s possible path going forward,” said Mary Ellen.

No clarity from Fed, indexes drop, pop

With drama Wednesday and bounce back Thursday in the rear view mirror, traders are facing a continuation of uncertainty in the stock market.

Remarks from Federal Reserve (Fed) Chairman Jerome Powell didn’t help matters much. While the FOMC minimized rate hikes at .25%, Powell was dodgy in committing to cease further rate hikes. This despite an ongoing banking industry crisis with multiple failed banks in the last few weeks.

“We’re kind of still in limbo,” said Bruce Marshall, Senior Director of Options and Income Trading at Simpler Trading. “I was very hopeful we would get a little more clarity out of the Fed and get a little more direction.”

This ongoing infusion of uncertainty from the Fed has made trading difficult for all experience levels of traders.

“The market went bonkers after the Fed meeting,” Bruce noted.

All three major indexes on Wednesday reversed from a slight uptick to breaking quickly to the downside. All three closed down by more than 1.5%.

“It’s very hard to get on the right side of this market for very long,” said Bruce. “The intraday swings just continue. Intraday swings might be up to 80 points from top to bottom.”

More economic data will be released in the next few weeks. Important data each month includes the U.S. Consumer Price Index (CPI) and the U.S. Producer Price Index (PPI) reports. The Fed skips April before holding its next regularly scheduled meeting in May.

Multi-leg trade setups navigate dicey market

Bruce, who has been trading for more than three decades, isn’t one to back away for too long when the market gets dicey.

He is always analyzing market direction and developing a plan to target profitable trades.

In this environment he continues to take advantage of short-term, multi-leg trade setups such as credit spreads, debit spreads, calendars, iron condors and butterflies. These setups require an elevated skill level.

“It’s a lot more work and watching trades closely,” Bruce said. “That’s the way we have to play it until we get a little more clarity.”

Bruce encourages traders to diligently manage trades and work trades with limited capital risk that sets up for a higher reward potential. The key is having options for trade setups based on market direction.

“We have trades, strategies that we can use to our advantage whether we go up or down,” Bruce said.

He anticipates that conditions may develop into a more trending market in the fall with a continued choppy environment where the market ebbs and flows based on the economy and Fed actions.

Vital for traders to prepare, execute with plan in place

In this market traders must stay focused on preparation and trade execution.

“You have to really get your trade concept together, your idea,” Bruce said. “Get a plan together, what you think is going to happen. Does it match up with the charts? Do all the levels agree with what you’re doing? Then, what kind of trade will you use like a credit spread, a debit spread, a calendar or whatever makes the most sense? What gives you the best risk-reward? And then, what do you do if it goes wrong?”

He encouraged traders to always watch volatility on stock charts. As example, volatility was excessively high prior to the Fed announcement which signaled a dicey market ahead.

“When you get all that put together, then you have a great trade,” Bruce said. “Maybe it works, maybe it doesn’t. If it doesn’t you already know what to do going into the trade because you’re going to defend it or pull the plug.”

Bruce said he couldn’t stress enough the importance of preparation before making a trade.

“It’s really important in this type of market to be extremely aware of those parameters that you put around a trade and what you’re going to do to manage the trade,” Bruce said.

Despite lack of clarity from the Fed and uncertainty ahead, traders can put together a trading plan for this market.

“Don’t let this market get you down,” Bruce said. “It’s still a tradable market.”

Ready to work on your trading plan? Join Bruce for live-trading during market hours.