Retail traders just don’t know about this stock market.

There has been a steady recurrence of rips higher, gaps down, heavy chop, and then repeat.

Can traders find opportunities in this constant state of market volatility?

Key chart levels and proven trade setups help the Simpler Trading team identify a path through the whiplash of confounding market signals.

Hard sell-off hits market after inflation data

Equities sold off heavily Friday following hotter than expected inflation numbers and fears of the Federal Reserve (Fed) sticking to larger benchmark interest rate hikes.

The three major indexes closed on Friday with the worst week of the year. The Dow dropped to 32,816.92 points to fall 1.02% (dropping 336.99 points on the day). The Nasdaq dropped to 11,394.94 points for a 1.69% tumble while the S&P 500 crumbled 1.05% to 3,970.04 points.

This scenario playing out across the indexes is like a broken record but retail traders must be ready to play what the market gives.

Inflation data from the January U.S. personal consumption expenditures (PCE) price index, which measures prices paid by consumers for goods and services, was released Friday morning and is a focus of the Fed.

PCE inflation data notched higher than anticipated. This sent a signal to stock market participants that the Fed has more work to do in its fight against inflation. That fight is highlighted by a steady pace of raising interest rates that began last March as inflation peaked at a 40-year high.

PCE data from Friday, excluding food and energy, showed core inflation moved higher by .6% for January, and was up 4.7% from the same time last year, according to the Commerce Department. Expectations from Wall Street to analysts pegged those levels to come in slightly lower at .5% and 4.4%, respectively.

At the last Federal Open Market Committee (FOMC) meeting – a regular meeting of Fed central bankers – the voting members raised the federal funds rate by 25 basis points.

“What makes this challenging is we are still in an environment of a lot of confusion about where the FOMC is ultimately taking rates,” said Raghee Horner, Managing Director of Futures Trading at Simpler Trading. “In other words, where are they going to keep hiking rates and then stop?”

Prepare to defend against market ‘gyrations’

Since the last rate hike earlier this month the stock market has faced a string of “Fed speak” public events where several central bankers have called for continued and even higher interest rate hikes.

The most recent .25% increase was the eighth increase since March, 2022. This boosted the federal funds rate within the target range of 4.5%-4.75% and the Fed goal is to get core inflation down to 2%.

Each time the Fed raises rates or even speaks about higher rates, the stock market reacts.

“They could maybe be a quarter less or a quarter more and the markets are going to gyrate wildly,” Raghee said. “That’s the challenge we have as traders.”

Market gyrations include sharp gaps down and rallies higher that can be 100 points on the Dow in a single day. This is a difficult environment for traders.

Raghee’s strategy within this environment is to lengthen the time frame on her trade setups. The balance, she noted, against volatile moves sparked by FOMC actions is to look at charts on the hourly and daily time frames.

This view of the market – longer time frames – allows her to better wait for price movement ranges that require more of the ongoing move.

“We’re not just playing defense, we’re playing offense in a lot of situations,” Raghee said.

Technical analysis tackles FOMC ‘shenanigans’

As this market trudges along in a choppy, volatile range, Raghee continues to dive into volume, structure and volatility when setting up trades.

Despite price action to the downside, she still leans bullish on specific tickers that are showing strength despite losses in the overall indices.

Raghee takes a look at her technical analysis charts and finds ways to focus on the volatility to create an offensive, profit-targeting strategy.

She answers the question of how to trade this market with a question.

“How do we supplement our charts to add another layer of volatility on longer term time frames that is able to weather those FOMC shenanigans?” Raghee queried.

That is how she plays defense with offense.