Happy Friday, tradersā¦
Jeff here.
Picture this: You find a great strategy or setup, consistent and repeatable. Everything in your trading is going well.
Until it isnātā¦
Youāre left scratching your head, wondering why your go-to setup doesnāt work as well as it once did.
Sound familiar? Iām sure it does. Weāve all been thereā¦
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 weāve been in a bubbleā¦
And now that the market has entered a multi-week pullback, these perma-bulls donāt know what to do.
If you get caught too far on the long side of one of these corrections, youāre 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 conditionsā¦
Major Index Snapshot
First, letās break down whatās been going on in the major indexes.
Unless youāve been living under a rock, youāve 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 itās still up more than 14% in 2024.
Notably, this is the second such correction weāve 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 rememberā¦
The Market Doesnāt Care About You (or Your Money)
Hereās a little secret I wish I knew when I first started trading:
The market doesnāt care about you or your money. If youāre looking for a fair fight, the stock market is not the right place for you.
You canāt compare yourself to everyone else or try to make excuses.
You have to understand whatās in your control (and what isnāt). Then, learn how to use what you can control to your advantage.
Most people donāt know how to do this. And to me, that says that too many traders donāt understand the reality of tradingā¦
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 ā¦ 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. Youāve gotta live for it.
If you approach your journey to profitability with a slow and steady discipline, the eventual rewards can potentially exceed anything youād ever imagine working a day job.
And this slow and steady discipline requires that you harness another important skillā¦
No Trend Lasts Forever
Adapting your strategy is crucial to market survival.
If you havenāt noticed ā¦ 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 youāve 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 ābag of tricks,ā 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 seenā¦
But regardless, you should be adapting your trading system to fit the momentā¦
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.
Itās sort of like putting a straddle on in two different stocks. I lose some upside, but Iām able to hedge against disaster.
No one knows whatās gonna happen on Monday ā and I want to be prepared for any possible outcome.
Be Patient
In market corrections, many traders will try to be a hero and ācatch a falling knife.ā
But I suggest being patient. Let the initial correction shake out. Donāt 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 youāve 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.
Donāt blindly risk your money on a new pattern you havenāt 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, Iām hosting a LIVE WEBINAR for the Burn Notice Alliance where Iāll be breaking down the most promising trade ideas Iām seeing in the options market right nowā¦
Like my recent wins onā¦
Alcoa Corp (NYSE: AA)
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