Is It Safe to Countertrade Extreme Moves?

Panic and pandemonium have incited some of the biggest moves ever in many sectors and commodity markets. Recently an average day range for stock indexes covers about the length of an average week. On some days we’ve seen ranges that span the length of an average month. A year and a half of hard labor by bulls has been retraced in a just few weeks. Thus, there are severely oversold issues for many stocks, particularly the energy sector due to the Russian conflict with the Saudis. Meanwhile, fixed income markets such treasury ETFs are acutely overbought.

The question on most traders’ minds is whether it is safe to countertrade these extreme moves. When bottom fishing or top picking it is a good idea to focus on the relationships between stocks, commodities and currencies. Over the past one-and-a-half years we’ve seen a few major moves. In Q4 2018 crude oil saw a rapid decline and stocks followed soon after. Then in December a recovery commenced for oil and stocks that lasted through Q1 2019. The point is these two markets tend to shift together. On the other hand, treasuries and precious metals frequently move in opposing directions.

As of Friday morning, it appeared the equity indexes and oil had dipped low enough to entice bulls. At the same time gold and treasuries had softened. Normally markets go through a period of very choppy trendless trade when easing overbought/oversold issues. A lower extreme appears to be taking shape for stocks and oil, and an upper barrier may be forming for metals and fixed income. Markets move the length of an average week almost every day. Many traders are forced to be speculators during such volatile times.

If you prefer trend following systems, these are not ideal times for you. Agility is key because big reversals frequently occur every two to three days after markets reach such extreme speeds. Countertrading systems and option spreads tend to work well in this environment. Long option strategies are probably best if you can find relatively cheap ones. The reason for this is risk. I had a friend tell me this week he was recently up a bunch of money on a futures trade that he held overnight. He entered a protective stop and went to bed. The market gapped through his stop. Instead of making $1000, he lost $2,000. The lesson is that stops are not guaranteed to get filled at your price. However, in volatile times long options allow you to define risk and sleep better at night.

John Seguin, Market Taker Mentoring

Trader Education