In this article:

• Is fear driving the stock market toward a crash?
• Simpler’s traders anticipated the gap down
• How our traders use chart indicators, “fear” indexes for direction

How bad is it going to get in this market? Is the market crashing?

It bears repeating that this stock market continues to digest economic and geopolitical issues that hit hard against traders.

The market was queasy Thursday as the Nasdaq was down 4.52% at midday, and the Dow (down 3.29% midday) and S&P 500 (down 3.37% midday) were feeling ill as well.

If the market drops 7% in one day, trading is halted.

None of the indexes could stop the bleeding before the session ended.

The Dow closed at 32,997.97 points to fall 3.12% (dropping 1,063.09 points on the day). The Nasdaq dropped to 12,282.88 points for a 5.26% tumble while the S&P 500 crumbled 3.78% to 4,137.43 points.

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

Is the market crashing?

Simpler’s traders were reading the warning signs early in the session, including an alert from John Carter, Founder of Simpler Trading.

“The market action is turning crash worthy,” John said. “Ten-year interest rates are exploding and are at new highs as the VIX (Volatility Index) pushes above 30. We are setting up for a possible crash here. Watch AAPL. If it breaks, the market will accelerate to the downside.”

The open session Thursday was filled with signals revealing extreme concern throughout the market.

The $TICK was heavily below zero (extreme selling). This is an index showing the number of New York Stock Exchange (NYSE) stocks rising compared to the number of NYSE stocks falling. Also, the Volatility Index (VIX) (known as the “fear index”) spiked up 29% to reach 32.89.

These indexes signal significant fear in the market. (The Simpler Trading team alerted traders to these signals early in the day in Simpler Options.)

Is market history repeating itself?

The market was halted under similar conditions during the pandemic in 2020. Is this how bad this market will get?

No one can predict the exact outcome ahead, but what we can do is follow a trading plan that relies on market analysis using indicators and stock charts.

These basics can be early warnings of sharp turns in the market (reversals, gaps down, rallies higher) that negatively impact trading efforts.

As an example, TG Watkins, Director of Stocks at Simpler Trading, was ahead of market reaction to the Federal Reserve interest rate hike announced on Wednesday.

Early in the week TG was watching internal signals and alerted traders of possible pitfalls going into the Fed announcement of a .5% interest rate hike.

As TG anticipated, many traders took short positions and were hit with a short covering rally after the Fed report.

TG followed the chart indicators showing how all the market needed was a “little spark” to spur the rally and go against short positions. While TG remains bearish on this market, he anticipated how this rally higher would leave the bears screaming at the negative move against them.

“I think way too many people got short thinking that we were just going to implode from right there and that is not what was going,” TG said. 

How did TG see this coming?

He looked at the higher time frame on the S&P 500 – the weekly vs. the hourly – and the chart showed an undercut of the previous low. 

This showed a potential double bottom possibly emerging. Add in earnings reports causing individual stock prices to fall and this would entice traders to go short.

Enter the unknown of the Fed announcement and the likelihood of a 50 basis point increase. TG realized there was a high probability that the market would not support the double bottom and would actually snap higher.

“So we got a big bounce and what we can also see is the market was just super oversold,” TG said. The bounce then prompted the short covering rally.

“Not only did we have that positive divergence, I was telling the Moxie Indicator™ subscribers that this was a weak setup,” TG said. “We were expecting the market to pull back, and it did, but it was weak because the Moxie Indicator™ was still showing that the move was not strong.”

Also helping with this heads-up assessment before the Fed report was TG watching the ProShares Ultra VIX Short-Term Futures ETF (UVXY). Assessing the UVXY can be tricky, but insightful.

“I was looking at this and expected at some point sooner than later – I talk about this in the Simpler Options chat room – we should be seeing price come back down here at some point.”

The UVXY wasn’t signaling a change from the downside pressure.

“If the UVXY was going to go down, then the market was going to go up,” TG said. “That was kind of my ace up the sleeve as far as how we were playing the market at that point. Great trading on this one and nailing the setup.”

Despite the harsh gap down on Thursday, traders are optimistic for trading opportunities ahead.

“I’m very excited for the rest of May because I think we’re going to be having some pretty big plays,” TG said.

When all the bleeding closed out the session Thursday, the market was sick.

The Dow closed at 32,997.97 points to fall 3.12% (dropping 1,063.09 points on the day). The Nasdaq dropped to 12,282.88 points for a 5.26% tumble while the S&P 500 crumbled 3.78% to 4,137.43 points.

Determine next steps trading through volatility

How can traders work through this drastic volatility?

Catching profitable setups in a market with such unexpected, if not unpredictable, moves is difficult for traders at any skill level.

One trading option to consider is staying out of the market when the market is more chaotic than predictable.

A wise person once said, “Cash is king.”

Simpler’s traders know the urge to “be in the action” can overwhelm traders at times (FOMO – Fear Of Missing Out). For those struggling in this market, it may be wise to take a seat on the sidelines.

Staying in cash – and not losing money – means the trading account and capital are not in a position to lose money. That is a positive marker on the profit and loss statement.

When traders learn to recognize dangerous market signals and step away from the computer screen, they don’t get in over their heads. Consider it similar to a mini-vacation – enjoy a beverage and some treats and take in a few refreshing breaths outside the trading arena.

As TG would say, “When I’m in cash, nothing can hurt my account and there is zero stress.”

Review past trades to plan next trades

Cash is a trading strategy. This position offers time to take an objective look at market conditions and dive into more overall observation.

Take time to review past trades to learn the good and bad of the setup, and how to apply that knowledge to future trades.

This is not the time in the market to give in and let FOMO take over, especially with increased uncertainty and heightened risk.

Traders have experienced many “worst days” of the week, month, year, or decade in the past two years.

Traders who want to thrive in days like this where the market goes into freefall and changes everything need to be prepared. Learn to target profits no matter how ill or healthy the market appears and not expose the trading account to higher risk.