There is a way to trade all three possibilities.
In the first week of the year we have seen the markets drop with tech taking the brunt of the pullback. But if you simply looked at a 12 month chart without looking at the dates, it would look pretty typical. A consistent trend up, occasional pullbacks to a consistent level of support, then wash rinse repeat. So why worry now?
Well some key factors are shifting that could break up this rhythmic and predictable pattern. Inflation, interest rates, and the chronic uncertainty of how the world and economy will react to COVID.
For a little perspective, let’s look at a chart of the DOW from a period following a historic long rally and look at what happened next.
The red arrow marks the start of a new year following a great rally for about a year and a half. You can see the market got stuck in a range and bounced there for most of the year until a catastrophic event caused a crash. You can easily see that the rally was the dot com bubble and the horrible event was 9/11. What stands out is that sideways, range bound market. It is very likely this is what we are heading into.
Another possibility is that the market will continue the rally and this pullback is just the same pattern we have been seeing. This is very plausible. In fact, many very smart people have felt this market has been overdue for a big drop for over a year and it hasn’t happened. This market, like many others, loves to prove it will do what it wants, when it wants.
Of course, the third scenario is a crash. Markets don’t typically go down slowly. They go sideways for what feels like eternity. They go up for so long, everyone (including newbies with iphones and a fancy new app) thinks they are a great trader. But when they really go down, it is quick. These crashes are usually tied to some major event. 9/11, COVID, banks collapsing. Those events don’t care whether the market is going up or flat, they just yank the rug out and everything goes down.
But there are trades that can make all three of those scenarios bring in gains. Options offer the potential to generate income in flat markets. They also have the potential to produce profit when markets go up or even down. They do have risk, just like every other trade, but it is calculated and you are able to select a trade with a risk factor that you are comfortable with before you get in to it.
Chuck Hughes has been helping traders uses this potential to grab wins no matter what direction–up, down, or sideways–the market moves. Grab his free book, Options Trading Made Easy and check it out. See if that kind of potential is for you.
Keep learning and trade wisely.
Market Wealth Daily