Two Rules to Trade By In a "Too" Volatile Market

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This “Too” Shall Pass.

Too, one of my favorite homonyms, is a word I see too often on Twitter. Too has two meanings.

Adverb-

1.to a higher degree than is desirable, permissible, or possible; excessively

2. in addition; also

“The market decline is too orderly. The bottom is too clean. Oil is too cheap. Interest Rates are too low.”

I begin by asking myself, “What’s too anything about the market?”

When traders use “too” as a barometer to judge what’s desirable, permissible, possible or excessive, they pigeon-hole themselves into a mindset that may not serve them well.

Folks said the market was too rich in 2013 but the rally continued. Others say this decline is too orderly and needs a panic flush. I’ve heard over and over again that oil is too cheap, destroying any chance of a recovery.

Furthermore, there is a prevailing sentiment that besides a panic flush, we must dismiss any chance of a “too” clean bottom as a good signal for a bottom.

Too much “too” begets judgement and myopic thinking. Yet, the need for rules is totally understandable and necessary.

Currently, we have seen a fair share of humongous volume days, new lows and potential reversals that haven’t confirmed. Additionally, the market hasn’t had any real sustainable rally.

When it does, the risk to the lows will increase while the potential reward will decrease as the market is in a bear phase with lots of overhead resistance.

I have two (homonym) rules to follow.

First, I have been writing about the January 10-day Calendar Range low. The low, as measured between January 4^th and the 15^th, for any instrument you are interested in, must be trading above that level.

So if the JCRL was 15.05, the instrument must be above 15.05.

Secondly, assuming the instrument is above the JRCL, the next criteria is that it must be trading above the prior day high.

If we look at the Russell 2000-my go to index- the JRCL is 97.51. Tuesday’s high was 101.20, which it could not clear on Wednesday.

However, for Thursday, if IWM is above 97.51 and clears Wednesday’s high of 100.32, then we have a decent risk either to Wednesday’s low, 95.06 or the JCRL depending upon the type of trade-day, miniswing or swing position.

Remembering that you do not want to risk “too” much compared what you expect to profit, make sure the ratio makes sense or pass and wait for a better opportunity.

One thing is for certain: when the market is “too” hard to figure out or “too” volatile for your blood, best to wait for the ideal conditions.

S&P 500 (SPY) January Calendar range low (JCRL) 185.52. Today’s high 187.49. Huge range makes a clean trade trickier but using the info to help determine if a bottom is in place is useful nonetheless.

Russell 2000 (IWM) JCRL is 97.51. Today’s low 95.06. The high 100.32. That’s not out of the question for a mini to swing trade setup

Dow (DIA) 158.23 the JCRL. (couldn’t clear) 157.35 the 200-week moving average (closed just above). High 158.88

Nasdaq (QQQ) 99.51 the JCRL. 97.25 today’s low. The high 101.83

XLF (Financials) 21.13 JRCL. 20.53 today’s low and high 21.19

KRE (Regional Banks) 35.81 JCRL. 34.78 today low. High 36.25. Will watch the prodigal son

SMH (Semiconductors) JRCL low 46.14 Today’s low 46.01 and high is 47.59-pretty clean if confirms bottom

IYT (Transportation) JRCL 117.67 today low 114.91 High 120.32-this too is clean enough with risk. But caveat have to believe the market can rally to at least 129.

IBB (Biotechnology) Got real close to Tuesday high. 289.90 to clear with risk either to JCRL or today’s low

XRT (Retail) My fave-38.65 JCRL. Today’s low 37.80 high to clear 39.70

IYR (Real Estate) Leaving this one out as the range was ridiculous

GLD (Gold Trust) Has to clear 106.09 now to continue

SLV (Silver) Unconfirmed recovery phase. Needs to confirm

GDX (Gold Miners) Inside day to yesterday’s huge sell off range

USO (US Oil Fund) At least it seems the market is separating from its oil addiction

XOP (Oil and Gas Exploration) Only one in this group to recapture the JCRL

UNG (US NatGas Fund) 7.65 is a good level to watch hold

TAN (Guggenheim Solar Energy) Over 23.33 I like this since it’s my fundamental analysis on a mega trend trade

TLT (iShares 20+ Year Treasuries) If the market is to rally, this has to break 126.42 and close below

UUP (Dollar Bull) Inside day above the 50 DMA

FXI (China Large Cap Fund) If it gaps over 30 that would be interesting