Market Volatility - Traders Must Adapt Or Risk Losing Their Shirts
Summary
- Market volatility remains elevated and may be setting the stage for spikes even higher than we have already experienced.
- The NASDAQ peaked at around 3.1618% of its Covid 2020 high-low range the week of November 21, 2021.
- Especially in times like these, traders must understand where opportunities are and how to turn this knowledge into profits.
Galeanu Mihai/iStock via Getty Images
Market volatility remains elevated and may be setting the stage for spikes even higher than we have already experienced.
Global money is continuing to flow into the U.S. Dollar, making it one of the primary safe-haven trades. This may eventually trigger a broader and deeper selloff in U.S. stocks. As the USD continues to strengthen corporate profits for U.S. multinationals will begin to disappear.
It’s imperative to assess your trading plan, portfolio holdings, and cash resources. Experienced traders know what their downside risk is and adapt as needed to the current market environment.
If you still have money invested in Amazon (AMZN), Netflix (NFLX), PayPal (PYPL), or one of the many other stocks that are sinking fast, there is no easy way out. Your options are:
- Hold tight and “hope” for a rally to recover part of your money.
- Reduce some of your position to “limit your downside” in case the bottom really falls out, and then sell the balance after a bounce of 5-8%.
- Move to cash, “bite the bullet”, get a good night’s sleep, take a break, reassess, and live to come back and trade another day.
NASDAQ enters bear market territory
The NASDAQ peaked at around 3.1618% of its Covid 2020 high-low range the week of November 21, 2021.
- Then – the QQQ ETF’s first swing down was -21% over a 16-week period (4 months).
- Then – a brief 3-week rally, retraced around 61.8%.
- Then – resumed its downtrend by taking out its previous low.
Therefore – according to the -20% Bear Market Rule: QQQ – 23.32% from its peak and -21.27% YTD is in a bear market.
QQQ • Invesco QQQ ETF Trust • NASDAQ • Weekly
Amazon breaking down -35%
Amazon AMZN peaked at around 3.1618% of its Covid 2020 high-low range the week of July 12, 2021.
- Then – AMZN made a double top the week of November 15, 2021.
- Then – the first swing down was -28.91% over a 16-week period (4 months).
- Then – after a brief 4-week rally, retraced a little more than 61.8% of its initial downswing.
- Then – resumed its downtrend by taking out its previous low.
Therefore – according to the -20% Bear Market Rule: AMZN -35.74% from its peak and -25.39% YTD is in a bear market.
AMZN • Amazon.com, Inc. • NASDAQ • Weekly
Netflix plummets -72% in 5 months
Netflix NFLX peaked at around 2.382% of its Covid 2020 high-low range the week of November 15, 2021.
- Then – NFLX’s first swing down was -17% over a 5-week period.
- Then – a brief 3-week rally, NFLX retraced only 25%.
- Then – the second swing down was -43% over a 4-week period.
- Then – only less than a 2-week rally retraced around 33%.
- Then – resumed its downtrend by taking out its previous low.
Therefore – according to the -20% Bear Market Rule: NFLX – 72% from its peak and -68.40% YTD is most definitely in a bear market.
NFLX • Netflix, Inc. • NASDAQ • Weekly
PayPal drops -73% in 9 months
PayPal PYPL peaked at around 5.1618% of its Covid 2020 high-low range the week of February 16, 2021.
- Then – PYPL put in a double top the week of July 26, 2021.
- Then – the first swing down was -14% over a 4-week period.
- Then – a brief 4-week rally, retraced about 61.8%.
- Then – the second swing down was -39% over a 14-week period (3.5 months).
- Then – a 6-week sideways rally retraced only around 10%.
- Then – resumed its downtrend by taking out its previous low.
Therefore – according to the -20% Bear Market Rule: PYPL – 73% from its peak and -53.39% YTD is most definitely in a bear market.
PYPL • PayPal Holdings, Inc. • NASDAQ • Weekly
Drawdowns have a critical impact
We need to remember the larger the loss, the more difficult it is to make up. A loss of 10% requires an 11% gain to recover, however, a 50% loss requires a 100% gain to recover, and a 60% loss requires an even more daunting 150% gain to simply return to break even.
Recovery time also varies significantly depending upon the magnitude of the drawdown. A 10% drawdown can typically be recovered in weeks or a few months while a 50% drawdown may take several years to recover. Depending on a trader’s age, they may not have the time to wait on the recovery nor the patience. Therefore, successful traders know it’s critical to keep their drawdowns within reason as most of them this principle the hard way!
Prepare yourself for market volatility
Especially in times like these, traders must understand where opportunities are and how to turn this knowledge into profits. As technical traders, we follow price only, and when a new trend has been confirmed, we change our positions accordingly.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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