Tactics for Whipsawing Markets
Many traders and investors are likely starting to feel like they’ve had their eyes glued to a marathon game of Pong. And if the most recent week of trading is any indication, it may be time to invest in some scotch tape to keep those eyes open a bit longer.
The back and forth in major global equity indices took on a new level of intensity in the second week of August 2019—at least compared to the relatively muted levels of volatility observed for most of the last several years.
The first major curve ball of the week arrived on August 13 when it trickled through that some of President Donlad Trump’s recently announced tariffs on China would be delayed until Dec. 15, instead of taking effect on the previously announced date of Sept. 1.
Equity markets (and many other financial assets) had been increasingly volatile since those tariffs were first announced on August 1, and the reaction on Tuesday followed suit, except this time the gap move was up.
On August 13, U.S. markets rebounded convincingly and pushed the S&P 500 back above 2,900. After all the whipsawing movement observed through the start of August, that meant the SPX was still only about 100 points below its all-time record high of 3,027.98 achieved on July 26.
Intriguingly, the rebound didn’t last long.
On August 14, deteriorating manufacturing numbers coming out of Europe and Asia catalyzed yet another gap move—this time convincingly lower. The main U.S. equity indices—the S&P 500, the Dow Jones and the Nasdaq—all lost roughly 3% on Wednesday.
The current rollercoaster in equities trading is starting to feel reminiscent of the last couple months in 2018, when trade war-related news developments similarly catalyzed a jump in market volatility.
And while some traders are likely welcoming all the market movement with open arms, others may be tiring of getting chopped up by a market that might best be described as a “whipsaw.”
In the trading world, the term whipsaw generally refers to an underlying that moves sharply in one direction only to reverse sharply in the opposite shortly after. That type of behavior certainly applies to not only a large number of stocks in recent weeks, but also many other financial assets (oil, gold, agricultural commodities).
Traders seeking to learn more about defending against this type of trading behavior may want to review a recent episode of Market Measures on the tastytrade financial network titled “Defending Against Whipsaws.”
On this particular installment of the popular series, the hosts highlight a couple trading strategies and tactics that traders may want to consider when positions start to whipsaw. Likewise, they also review some other important tactics that traders can use when forced by the market to trade from a defensive position.Additional information on whipsaws and defensive trading tactics are also available in the tastytrade LEARN CENTER.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.
