In this article:

• Tough bear market with no end in sight
• Run into earnings season has changed
• Market pressures are expected for months

At this point, traders should not be surprised that the market struggles to sustain any bounce higher.

As noted previously in Simpler Insights, this market is flashing signals of a painful gap down before settling on the bottom.

The plan going forward – which may sound like an old song – is to trade cautiously and ride out any drastic selloffs that could put trading accounts at risk.

(Check out the free video, above, for insight into trading this changing market.)

Follow economy to stay on top of stock market

This stock market is in a down trending rut that teases traders with bounces while maintaining a downward spiral.

Market action Thursday exemplified this pattern as the day opened positive and by noon the three major indexes were shifting to the downside. The indexes eventually rallied into the close.

The Dow clawed its way back to 30,677.36 points to gain .64% (adding 194.23 points on the day). The Nasdaq led the rally, rising to 11,232.19 points for a 1.62% leap while the S&P 500 climbed .95% to 3,795.76 points.

Last week the market gapped down heavily and quickly for the worst week in more than two years. The S&P 500 pushed further into bear market territory, losing 5.8%. The Nasdaq also lost last week down 4.8%, as did the Dow, losing 4.8%.

Following the Monday holiday, the rally Tuesday didn’t recover losses of the previous week. All three major indexes have fallen into bear territory since the first of the year.

Simpler’s traders aren’t expecting a reverse of course anytime soon.

“This continues to be a tough market to read,” said Bruce Marshall, Director of Options and Income Trading at Simpler Trading. “We have to read the data every day to stay on top of market action.”

Wild price action, Congressional testimony from the Federal Reserve (Fed), inflation, and rising interest rates continue to pressure the market with no relief in sight. A “soft landing” doesn’t appear to be in the works for the economy or stock market, according to Fed Chairman Jerome Powell.

“It is going to be very challenging,” Powell told Congress. “It has been made significantly more challenging by the events of the last few months.”

Making heads or tails out of this “challenging” market will require traders to adapt to what the market gives.

“From a trading standpoint, the market is not going to start acting better until the economy starts acting better,” said Bruce, who expects this environment to last for months as the market adjusts.

The Simpler Trading team has no intention of getting in the way of economic issues affecting a market that is expected to gap down, possibly to a shocking degree. Some analysts have pegged the benchmark S&P 500 to lose another 20% before hitting a bottom in the middle of a recession.

The immediate plan is to read the charts carefully and not chase aggressive setups.

Market action Wednesday that showed promise of a bounce before fading and closing with a down session, was an example of why traders maintain a cautious trading plan. Price action looked promising early, but the charts didn’t support the movement.

“I’m watching the charts, and I just didn’t get a good feel for (the S&P 500),” Bruce said. “It didn’t look right. The charts weren’t lining up with what I was seeing. The levels and pricing didn’t look good.”

The temptation was to tap into the apparent bounce, but Bruce’s 30 years of experience kept him away from the risk. The market then faltered into the close.

Simpler’s traders continue to shorten time frames on trades (less swing trading and more day trading), limit risk with smaller capital exposure with each trade, and taking profits without holding for maximum gain.

How to find a trading mentor

If you are looking for a trading mentor who has “been there, done that” then consider getting to know more of the team members at Simpler Trading. Each has a unique style and strategy with a focus on reaching financial freedom.

You can get to know our team members through our community of like-minded traders. Gain access to live-trading sessions and real-time stock alerts while learning how professionals operate in this market. Give it a try today.

Keep watch on 2nd quarter earnings reports

The second quarter closes next week with the end of the month, and traders can target run into earnings trade setups as companies begin to report in mid-July.

This earnings round will happen in the shadow of the first quarter where earnings reports were strong, but the market didn’t like the results. Trading first quarter earnings changed from previous seasons as the environment shifted strongly into bear market territory.

In past bull market earnings seasons, traders could focus on bullish, upside moves into earnings reports that beat expectations, followed by positive price moves post-earnings.

“That entire scenario is completely dead in the water at this point,” said Danielle Shay, Vice President of Options at Simpler Trading.

Bullish expectations have been replaced with apathy toward most tickers, Danielle stated, leading to disappointment over earnings reports as investors take into consideration weak guidance from companies moving forward.

“Even though stocks may appear ‘cheap’ right now, that doesn’t mean that it’s time for them to go higher,” Danielle said. “I’m anticipating that the indexes continue to go lower into July and August due to the upcoming earnings season and the results, particularly weak guidance, we are likely to see.

The market has to digest ongoing macroeconomic conditions, Danielle said, including record-high inflation, debilitating gas prices, supply chain shortages, which places earnings reports dead center in a critical phase of the market.

“Right now, it’s critical for investors to pay attention to the data as it relates to key companies that are reporting earnings because they are going to foreshadow what ends up happening as we get deeper into the core of earnings season,” Danielle said.

The housing sector is a focus for Danielle, including companies such as Darden, Accenture, and KB Homes. Technology is another sector worth following.

“While I’m bearish on this market and I continue to look for more opportunities to get short, I’d be happy to be wrong on this, but I think Q2 earnings are just going to be another nail in the coffin of the Nasdaq,” Danielle said. “I don’t think the downside is done yet, and I think earnings are going to be the key place to focus our attention.”

Finding earnings season trade potential

There are three phases traders should understand when trading earnings season.

Here are the key phases:

• Before earnings
• Earnings report
• After earnings

Each phase has advantages and disadvantages for traders working toward the highest potential for a winning setup. While earnings season is still in play, traders can learn to follow all three phases and develop a profit-focused strategy.

Learn more about trading earnings season during this active time period.

Plan to handle market ‘chop fest’

Handling the “chop fest” of this volatile market will take work and commitment from traders.

The key is understanding how to take advantage of the sharp moves up or down, and then working within the sideways chop that leans into the downside market momentum.

Simpler’s traders are making sure their trading plans are updated, and they plan to follow these without chasing wild moves.

 

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