The market is whipsawing with major day-to-day and intra-day volatility. Just Tuesday, we saw the market swing from panic selling to panic buying. The next move may be tough to see, so it’s time to evaluate how to trade a very different market than what we’ve grown accustomed to.
The starting point, of course, is to evaluate the broad market with the S&P 500:
Testing the 200-Day Moving Average, pushing to trade higher, and then closing mid-range, the S&P 500 still doesn’t appear particularly bullish. But when I look at this relative to what happened in previous dips, it’s somewhat in line. We have seen major selling to test a key moving average with a bounce back, then this action has generally followed by a re-test of highs a matter of a couple of weeks later. We saw this pattern in August, September, Late October into the start of November, and recently in mid-January. The long-term trend is still cautiously up, even if it’s been very choppy along the way.
It’s very easy to get caught up in the emotional aspect of trading these markets, so I’m looking for ways to eliminate some of the volatility but also get a leveraged return. There may not be a ton of options that fit this goal, but they are still out there. And that strategy can help keep my mental stress lower while still experiencing significant upside if I can find the right stock at the right time.
So, what’s the right stock that fits my trading parameters? Starting from the sector level, I’m looking outside of the US, and focusing in on the Chinese stock market, looking at FXI:
FXI is certainly not immune to tariff conversations. China is right there along with Canada and Mexico as a target, but the key for me with FXI is that it’s holding up well and bouncing off the 20-Day Moving Average. This is a much shorter-term moving average within a bull market than what we’ve recently experience in US markets, and shows me there’s some stronger projections within China with or without the current tariffs.
If I want to get down to the stock level, what looks ready to work for me? One possible play is in Alibaba (BABA):
After filling the earnings gap on the pullback, BABA bounced back on Tuesday. It seems to be setting up a bull flag after earnings, with confirmation of this formation coming from a simple move above Tuesday’s high. That sets up for a possible re-test of highs, and possibly much more. Along with this trade, I have clear defined risk with a price move below Tuesday’s low telling me the timing isn’t right. When I can defined my risk to the downside and setup a bullish trade with a price target, the trade is almost perfectly designed for an options trade, and that always gets me excited with the potential leverage and defined risk embedded in options contracts.
If you want to learn more about utilizing AI for predicting dynamic markets and the incredible opportunities that can be captured utilizing state-of-the-art technological advancements in trade recognition, send me an e-mail and I’ll be sure to get you all the information you need!
As always, please go to http://optionhotline.com to review how I traditionally apply artificial intelligence, technical signals, volatility analysis, and probability analysis to my options trades. And if you have any questions, never hesitate to reach out.
Keith Harwood
Keith@OptionHotline.com
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