Happy Friday, traders…
Jeff here.
Picture this: You find a great strategy or setup, consistent and repeatable. Everything in your trading is going well.
Until it isn’t…
You’re left scratching your head, wondering why your go-to setup doesn’t work as well as it once did.
Sound familiar? I’m sure it does. We’ve all been there…
The truth is that no setup lasts forever. The market always changes, meaning the effectiveness of setups, patterns, and strategies changes too.
This is especially true in the current market environment.
The major indexes have been unstoppably bullish for most of 2024, which has conditioned traders to buy every dip.
Some might even say we’ve been in a bubble…
And now that the market has entered a multi-week pullback, these perma-bulls don’t know what to do.
If you get caught too far on the long side of one of these corrections, you’re toast.
But if you can harness the volatility of this correction to your advantage, this environment can be incredible for options traders.
With that in mind, let me show you how to adapt to shifting market conditions…
Major Index Snapshot
First, let’s break down what’s been going on in the major indexes.
Unless you’ve been living under a rock, you’ve probably noticed that 2024 has been a ridiculously strong year for stocks.
Before the first red day of this correction on July 17, the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) was up more than 20% year-to-date.
Now, the SPY is down 6% since July 17. On Wednesday, July 24, the index had its first -2% down day in over a year. But it’s still up more than 14% in 2024.
Notably, this is the second such correction we’ve seen this year:
In April, we got a similar -5% correction before the market continued ripping to the upside.
But the macroeconomic and political backdrop is completely different now, just four months away from the general election.
I expect to see a lot of rebalancing and sector rotation as we move closer to November, making the following points even more critical to remember…
The Market Doesn’t Care About You (or Your Money)
Here’s a little secret I wish I knew when I first started trading:
The market doesn’t care about you or your money. If you’re looking for a fair fight, the stock market is not the right place for you.
You can’t compare yourself to everyone else or try to make excuses.
You have to understand what’s in your control (and what isn’t). Then, learn how to use what you can control to your advantage.
Most people don’t know how to do this. And to me, that says that too many traders don’t understand the reality of trading…
Trading is one of the most bizarre jobs you can have.
You can find the perfect setup with a massive news catalyst, enter the trade with an ideal chart pattern … and still lose money.
With most jobs, if you do everything well, you get a paycheck. You could even get a raise or a bonus for stellar performance.
However, trading requires a skill set different from any other job. It requires long hours of hard work with no guarantee of financial reward.
You must understand this harsh reality to succeed as a trader. You’ve gotta live for it.
If you approach your journey to profitability with a slow and steady discipline, the eventual rewards can potentially exceed anything you’d ever imagine working a day job.
And this slow and steady discipline requires that you harness another important skill…
No Trend Lasts Forever
Adapting your strategy is crucial to market survival.
If you haven’t noticed … the overall trend in the market has been shifting recently.
Extreme bullishness reversed into a correction led downward by tech stocks.
And as the market trend shifts, your trading strategy should change with it.
After all, the markets are cyclical. Trends come and go, just like they do in art or fashion.
But when a particular setup you’ve been trading stops working, you need to have another reliable pattern ready to go.
Are there any golfers out there? I love to golf.
Think about how professional golfers build a bag.
PGA tour pros carry a wide variety of clubs, knowing exactly which one to pull out for each unique situation on the course.
As a trader, you should do the same. Build out a diverse tool belt of strategies, or ‘bag of tricks,’ that can benefit from different market conditions.
Why am I saying this now? Because market conditions have been shifting rapidly over the past two weeks.
Whether this is the end of the secular bull market or simply another garden-variety correction remains to be seen…
But regardless, you should be adapting your trading system to fit the moment…
3 Tips for Trading Market Corrections
Hold Bullish and Bearish Positions
During uncertain periods in the market, I like to have both bullish and bearish positions in my portfolio.
It’s sort of like putting a straddle on in two different stocks. I lose some upside, but I’m able to hedge against disaster.
No one knows what’s gonna happen on Monday — and I want to be prepared for any possible outcome.
Be Patient
In market corrections, many traders will try to be a hero and “catch a falling knife.”
But I suggest being patient. Let the initial correction shake out. Don’t fall for false breakouts or pullbacks.
Only then, once a new trend starts forming, should you start to get more aggressive again.
Paper Trade Alternate Setups
If you’ve been dip-buying all year (and now need a new setup), start by paper trading patterns and strategies that you believe could work in this tape.
Don’t blindly risk your money on a new pattern you haven’t tried yet.
Prove that the setup works with paper trading before using it in your live trading.\
Happy trading,
Jeff Zananiri
P.S. Next WEDNESDAY, July 31 at 12:00 p.m. EST, I’m hosting a LIVE WEBINAR for the Burn Notice Alliance where I’ll be breaking down the most promising trade ideas I’m seeing in the options market right now…
Like my recent wins on…
Alcoa Corp (NYSE: AA)
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Gap Inc. (NYSE: GPS)
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Apple Inc. (NASDAQ: AAPL)
+70.35% in 24 hours*
Freeport-McMoRan Inc. (NYSE: FCX)
+45.97% in 24 hours*
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