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October 2, 2020

How to Prepare for Heavy Volatility to Come

Frank Cabibi

Late last night, news came out that President Trump tested positive for COVID. He began taking quarantine measures immediately, and soon after, futures tumbled by over 1% in a matter of minutes. Today's choppiness tells us something about what direction the market will head in the short term.

The best way to prepare for what is about to happen is by managing risk. Although there is a lot of uncertainty, it does not mean that we should be taking big bets on either direction. If you plan on preserving your capital, the best way to trade is through small lots relative to your account. There's no way to predict what can happen, and patience is required to stick with whatever trade is going on.

Here's what the market choppiness is telling us:

Taking a look on the hourly chart with nothing drawn, you can see that not much has happened in the passed few days direction-wise. If you longed or shorted on the 29th of last month, you'd be near breakeven had you stayed in. This is purely a traders' market in the short term which means the market cannot decide on a direction.

When price looks uncertain, that's usually an indicator that a big move is on the horizon. With today's additional choppiness, we have to consider a couple of factors:
1.) Trump's positive test will mean a delay in presidential debates, causing further uncertainty on who is going to pull away in the election.
2.) Unemployment drops to 7% which is the lowest we've seen since March. This is a good sign of economic recovery.
3.) Investors and analysts have been saying for a while that the economy and the market are at a disconnect, so economic news doesn't really matter.
4.) Biden tests negative.
5.) Risk-off sentiment increases.

There's too much going on right now to gauge what is good or bad news, and what news outweighs other news. The overall theory I have is that the market will have to decide which direction it wants to move. And I personally think that starting today or next week, the market will be headed lower with Trump's health in mind. If he continues to have no symptoms, things will likely float upward. But in the meantime, it's too soon to know. Next week will definitely be a decision point.

Conclusion

In our community, we're encouraging traders to keep lot sizes small. We also mention that it is time to be patient with each trade.

SPX500 4H chart

Right now, it looks like a potential head and shoulders pattern in the making on the 4H chart as price fluctuates up and down. At the time of writing this, we're an hour to close, and price is moving heavy in either direction. This is why small lots are important. Whether you are long, short or in between, remember to keep an eye out for price movements and behaviors in the week to come as well as some heavy volatility.
Hope everyone is trading safely!


Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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