From January of this year, until quite recently in late-May, we were no doubt in a low volatility, trending environment. The chart below of the S&P 500 really says it all. Just look at the daily chart once stocks broke out in the New Year and trended higher until the beginning of May.
The 50-day moving average (blue line) and 200-day moving average (red line) are clearly rising and upward sloping trendlines. Clearly, the longer-term and shorter-term trends have remained intact. There’s nothing “special”, per say, about the 50-day moving average, but maintaining awareness for this trendline will help to keep you on the right side of the market.
Now look at the below (daily) chart of the S&P 500 and notice how I have marked off the recent, new all-time highs that were hit on 5/22/13 (side note—all of this data is as of the close on 6/17/13). The 1,687 level on the S&P was the number needed to hit just over an 18 percent gain in 2013 alone—the market closed 2012 at 1,426. Since this level was achieved, there has no doubt been a more volatile, choppy environment. This has created a tougher environment for swing traders.
This final chart (featured below) is a 60 minute chart of the S&P 500. The vertical line marks off the day where 1,687 was hit on the S&P. Note the horizontal lines that are placed at roughly 1,660 and 1,625. From my perspective, the bulk of the price action since 5/22 has been in this range. With the market showing this sort of “whippy”, volatile action it has required swings traders to do things a little differently. Shortening holding periods has been a wise move at junctures like this in the market. Not only should trades likely be more short-term until things “clear-up”, but adhering strictly to stop-losses and managing positions carefully are both a must. Take some profits of the table if trades go your way and never hold onto a trade past your stop level with the hope that it will turn around. This new environment that we have been experiencing has certainly reinforced a trait necessary to succeed in any endeavor—especially trading. Discipline has no doubt been critical.
When things are tough like they are now, and trading becomes more difficult, it pays to sit back and reflect on what it is that you should be doing. I’ve quickly learned that frustrating times in the market will come often, but that you will walk away from them a better trader if you think objectively about what it is that is going on.
As always, good luck out there.