How to Trade a Market Sell Off

In this video Steve discusses how to make the necessary adjustments to be profitable when volatility increases and how to trade that increased level of volatility.

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people are back after labor day there’s
some fireworks in the in the market
sometimes people get a little bit
frightened when volatility picks up
in today’s video we’re going to talk
about making the necessary adjustments
to be profitable when volatility
and how to treat that increased level of
volatility those topics interest you
stick around
hi i’m steven spencer i am a partner at
smb capital we are proprietary trading
in new york city where we trade stocks
and options so i just got back from a
vacation i’m sure a lot of you i’m
talking to have also
took off second half of august or the
week before labor day
took some time off and the market
actually going into labor day weekend
there was a shift
and that shift happened pretty quickly
and it’s continued in these these few
following labor day as well and what
we’ve found over the years
is we see traders struggle most
when the market conditions change we
like to call that
how a market is behaving a certain
regime i got that actually expression
from dr steenbarger who works with our
certain market regimes require certain
types of trading setups
certain types of risk management and
certain types of trades if you look at
this longer term chart
on the s p via the spy chart
what you can see is after the crash in
march of 2020
we had that recovery period volatility
started to contract a little bit
and then about two or three months
that rally volatility had another
contraction again
and if you see on the right side of that
spy chart
kind of after where i’ve marked it up in
the middle there with a bunch of support
and resistance lines
it got the ranges compressed compressed
and we started to grind higher and
higher and
in that type of regime what we’re
looking for is very different
than when volatility is expanded and we
have larger intraday ranges
when the market was just grinding up
like that in june and july
the types of trades i would look for
even in the spy itself were very
for example as the market was grinding
higher if we would gap down in the
i would simply look for a support level
from the prior afternoon or the prior
put in a bid get long and look for it to
close at the high
and that basically was really the only
type of trade
for the most part that i was doing in
the spy when the market was like that
now remember when the market’s grinding
that is not an invitation to actually
get short the market in fact
generally people who try to do that will
lose so much money
trying to catch the top as we’re
grinding up then we finally do get a
change like we’ve had in the last week
they won’t even make back the money
they’ve lost when the market’s grinding
we’re not looking to lay in on the short
side we’re actually looking to trade
that bigger picture trend
but at the same time when the trend
starts to accelerate to the upside
we will look for some sort of top and so
my timing wasn’t great this year in
terms of vacation because we had
actually started to accelerate
to the upside got to around 350 352 on
the spies
i thought that was a spot to look to buy
some puts and if we had a change
in an intraday change what does that
look like that looks like a one percent
down move maybe on a 30 minute chart or
something like that
one plus percent down move in an hour
something very
different and if we actually zoom in
what you can see is
here’s the multi-day chart and you can
kind of see that uptrend channel
started to accelerate towards the top of
that channel pushing through the top of
the channel
and then there was a change and i’ve
actually labeled the 30 minute for you
here so i actually want to go through
some of the thought processes when the
market does change how to think about it
from playing it on the short side and
then eventually potentially looking for
a balance
and so as i just said my timing wasn’t
great i actually was on vacation when
that change happened
and i didn’t really check in
with the market so much and so i was not
short when we ran from 352 to 358. did
catch my attention and was talking to
one of the senior traders on the desk
last thursday night at 3 58 and we kind
of joked like probably just should buy
some puts in the morning
because of the acceleration of the trend
so remember you’re moving higher you’re
moving higher
the trend accelerates to the upside um
at that point we don’t blindly get short
because there is an uptrend channel but
what we might do
is look at that acceleration from 352 to
358 and say
if we do turn how much could we pull
back over the next
two to three days general rule of thumb
is you’ll look for like a quick three to
five percent pullback
and so for if we topped out at 358 five
percent pullback from there
is the low 340s so in that case the next
morning when it gaps
lower to 356 i might buy some 345 puts a
few days out
345 346. and then if it pulls into the
low 340s
i can either get along the market um i
could take off half of the puts i have a
lot of a lot of things that i can
i can do there now accelerates to the
upside that’s part of
what we’re looking for in terms of
putting out a play position the next
thing that we would like to do
ideally is see a gap down in the next
morning so for example i’m just looking
here at the chart
if 358 was the high in the spies and we
gapped down the next morning i’m not
exactly sure where we got to on friday
but let’s say it’s in the 350 6 357 area
if i’m buying puts you know for this
um 345’s they’re going to be extremely
cheap because again it’s a small gap
we’re still in an uptrend channel but
we’ve gapped lower and the reason why we
want to buy the puts is the number one
they’re cheap
we also know that the priority is high
is an area that would if we get above
we can take those puts off and we can
also use that as a level
potential to watch to see if it fails so
that’s on the option side
i’ve labeled four points for you here
the first one
is we gap lower we have that hard down
move i’ve talked about in that first 30
minutes to the first hour of the morning
i want to see that one plus percent down
and then i’ll look for a level to
retrace so the first hard down move
actually took it
into the mid 340s so that’s actually
pretty extreme
um so in that case what i’ll do is it’s
come off about eight dollars
i’ll look for like a four dollar
retracement and from an intraday
i’ll look to short that and what i’m
always thinking is anytime the market
has a large leg down
is will it retrace 30 to 50 percent on
the time frame that i’m looking at
and i will look too short into that
retracement and the key there is
shorting into that retracement is
because there’s a change
when we look at that uptrend channel
each pullback
was modest it was inside the uptrend
channel it wasn’t until
friday when it actually broke down to
the first time
and remember one of the things that will
when we have this first potential of a
regime change we don’t know
this can sometimes be a one day wonder
if you go back over the last three or
four months
sometimes you’ll just have that one day
hard down the next morning you come in
maybe it gaps down a little bit
boom or right back up and it resumes we
don’t know on that first day
if this is going to lead to a week’s
volatility or two weeks of volatility
all we know at this point is with the
market was behaving a certain way
and in the first 30 to 60 minutes
something changed
and i want to take advantage hopefully
you know on the gap down you threw in
some flyer puts
um you know three to five percent lower
you got them cheap
when we actually go down as much as we
did there on that first leg
perhaps you’re going to take some off um
because they’ve quadrupled in value or
something like that
take off 25 percent it pays for the
trade and then we’ll see over the next
couple of days
is the more downside follow through the
second point that i’ve highlighted in
on the multi-day here in the 30 minute
is when it came into a support when the
market kind of came into a support area
that i was looking at going back over
the prior couple of weeks and so
one of the things that i always look for
is when the market breaks down on day
and then on day two comes off really
hard the next morning i’m always looking
for a balance
and again this in this case this is the
last day of my vacation
i wasn’t trading i can tell by looking
at the chart that most likely i would
have been buying one to two dollars
before that morning low
i’m just based on the psychological
psychological levels coming into that
that that area and based on the prior
support now this is this can be very
tricky because
just looking at the way that the balance
happened it was
crash into support vertical move there
those are the hardest moves to capture
generally speaking that next morning
when it comes down
you want to see a one to two dollar pop
in the spy
either a sideways consolidation a retest
of the morning low
or something like that that gives you
something to trade against as traders
we always want to have levels to trade
against in the same way that i talked
about putting on puts
on that initial gap down on day one i
know the level that i’m thinking that
i’m trading against is the high from the
prior day
where i can take those puts off on day
two after we’ve had one day of down in
the gap lower
in the morning yes i’m looking i’m going
back over the last week or two looking
for a support area to buy
that’s how i’m doing it but the more
conservative approach is once you put in
that morning low and you start to bounce
we want to see some type of
consolidation in under a dollar range
even under a 50 cent range on the spy
and then some type of balance that
looked like it was pretty
pretty tricky there but the good news
was kind of the next morning
we actually gapped down from a bigger
picture perspective the next morning
when you gap down
you want to look to buy into the
priority is low or you want to flush
through the prior day’s low in a quick
so the next morning what i’m looking for
and then you can see in the in the
we actually did have a decent bounce it
was it looks like a couple of dollars or
in the free market um and then when the
market opens at the level holds
it actually goes up a few dollars but
then in the afternoon it takes it out
um closes at the low this is bigger
bearish for the market the idea that we
broke the trend on day one
came off hard day two we were weak and
then bounced and on day three we took
out that low and closed below it
now i’m starting to think wow we close
the day too low even if we bounce the
next couple of days
i’m thinking out over the next week to
two weeks
we could have another down leg in the
market and that’s just because
the sellers weren’t satisfied um after
that you know move from we went from 356
to 334 over the course of a couple of
days you would think that
after we have a big bounce like we did
on day two
that worst case we would come in we’d
get a re-test we’d close strong
and so that’s point number three is what
i highlighted which was we closed at the
we actually went down to 3 30 in the
after hours we went down another three
dollars from the clues
so my thought process there was take
some overnight
because even if we had another down leg
into the 320s
we’re going to to to have some sort of
was i thinking we were going to bounce
the next day back above 340 absolutely
markets just don’t go up and down they
go don’t it’s not go up or down they go
they’re going to go up and down so even
on a day like today
there was some strength in the morning
we came off really hard in the afternoon
we had a couple of one to two dollar
bounces i think as we closed
i think we’re probably going to close
maybe a dollar and a half off of the low
or something like that
and so what we’re looking at now is
today’s chart this is the intraday
and you can see yesterday we had this
big bounce we gapped up above 336
we went all the way back to 342. and the
reason why i tweeted
if you wanted to short the retracement
this would be a good spot to short at
is because based on the the action that
we just discussed
we broke the trend a few days ago we
came off really hard the second day
after we had a bounce
on day three we failed um to hold those
levels from day two
and we closed at the low so my
expectation is we’re going to have some
sort of retracement
from the low 330s maybe back up to 340
to 342
based on prior support resistance i
don’t look at multi-day review ops i
don’t look at bollinger bands
and i don’t look at moving averages so
the 342 level was strictly based
on looking at the size of the down move
the the
size of retracement you would spec
expect from that that down move
um you know approximately
a you know 30 to 50 percent retracement
from the
from that that three day down move and
using levels
um based on the the the uptrend channel
that we had over the last
couple of weeks and so we got 342
and so i tweeted out you know if you
wanted the shorter retracement thinking
maybe we’ll retest the recent lows maybe
we’ll go into the 320s
which seems like a very good possibility
over the coming days
um this is a good risk reward spot to do
it and
one of the biggest mistakes you’ll see
when the market gets volatile like this
and the market comes off from the 350s
down to the 330s
and we gap up the next morning to 336
is less experienced traders won’t give
the market a chance to bounce
think about how larger players are
thinking and institutions are playing
wow the market just sold off from the
mid 350s to the low 330s in a few days
i should put some money to work we’re
gapping up this morning we’re above 336.
seems like the selling’s done and then
you get this move
a lot of people are thinking that so
instead of us gapping from 333 to 336
and going up another dollar or two we
end up going up
six dollars because a lot of
institutions a lot of larger players are
thinking the same thing
we came off from all the way from here
to here we’re gapping up this morning
selling’s probably done let’s start
buying a bunch of people buy
we end up going up two percent we
overshoot to the upside
so there’s a good restaurant you’re
shorting at 342
your risk is a dollar or less and if we
end up
failing at 342 and holding below 340
maybe we’ll come back down to the mid
so if we look at the right side of this
chart here i’ve circled i’ve
circled three points for you so i want
you to think about this
what we talked about in the morning
meeting today was okay
342 failed yesterday we came off two
three dollars
it’s a good pullback we don’t know like
if that’s going to be it we pulled back
to 338 in the pre-market
nice it was actually a pretty good
pullback let’s see what happens when the
market opens we do the morning meeting
we’re at 3 39 and a half 3 40 something
like that in the morning meeting
let’s see if 342 fails again this
if it does fails to hold above 342 we
can try this short
and if we start to hold below 340
maybe we will have a pullback do i know
if we’re going to pull
did i think at that point we’re going to
pull back to 334
no what i’m thinking about is the
pre-market low
so i circled that first spot there
what’s the pre-market low it’s in the
that’s the first down leg you saw on the
market it’s not a coincidence
that it pulled back to the pre-market
low and balanced
so if we have a four dollar pullback
like that
what did i just say earlier about bigger
picture percentage of retracements
it replies on every time frame whether
you’re trading on a 30-minute time frame
or a multi-day time frame or a
multi-week time frame
um markets move in waves so that first
weave was about a four dollar down move
so i’m going to look for a dollar fifty
to two dollar a pop
um back up and i’m gonna look to short
into that dollar fifty two dollar pop
back up
and then when the second wave happens
i’ve circled that in the middle there
and goes back down and makes a lower low
i’m gonna look for a retracement again
it’s not a coincidence that it retraced
again um
and you had a good entry there on the
short and then i’m going to look
on the third leg this is really
important on the third leg
um does it actually hold the prior low
on wave 2 and if it does
trail a stop tightly because maybe we’re
going to go right back up or if it takes
the second leg then go back to the prior
couple of days and look for some support
and you can kind of see this is this is
actually the chart the 30 minute chart i
use for the morning meeting
so you can kind of see it’s marked up um
we actually went all the way down to
support range on the third leg um it was
a big leg that third one i think it was
even bigger than the first one
where then we caught a bid we bounced
and we actually went below that range
before you can kind of see
i don’t know where we closed but we
moved kind of back up to the top of that
and so no one’s going to feel confident
about being along this market
unless that that range that’s
highlighted there that if we close above
that and start to hold above that again
i think that’s probably around 3 35 and
so that’s going to be the level that i’m
watching tomorrow morning
can we start to hold and consolidate
back above 335
and if we can maybe we’re just in a
range here from the low
340s to the low 330s and that’s going to
be this little this volatile range
until we break one direction or the
other and so just to kind of recap it
for you
we were in a certain type of regime i
was not focused on trading the spies if
anything if there was a gap lower in the
morning i’d just throw in a bid at a
priority support
boom that’s that was the trade in the
spices most focused and in play names
not the market overall again our desk
in that regime when there’s a strong bid
in the market
we are finding the most in play names
whether it’s tesla
nikola um restoration hardware whatever
whatever has a strong news catalyst
that’s what we’re talking about in our
morning meeting
if you want to find the process to pick
the best stocks go to
two hours i spend 30 minutes explaining
what the best stocks are to be trading
in a regime like we’ve had for the last
few months
trading the top and play names that’s
where you want to go
those are going to give you the best
risk reward i’ve found over the years
that if i’m in those stocks rather than
in the market being
a 50 50 chance of making money it’s 80
plus in fact the two months before i
went on vacation
i only had one negative day and that was
the day that tesla had earnings i had to
leave the desk early to get ready for
and so if you are using our stock
selection techniques
to to trade the best in play names you
are going to
be positive on most days once you
develop trading skills
this is a different regime and so in
this regime i’ll trade the spies i’ll
trade the queues
i’ll trade um the vxx all these things
that put things in play
that we talk about in the two-hour
workshop um we talk about how to get the
right stocks
how to get the the top of the three
setups we use on the desk these things
are very
relevant for most times and every once
in a while
volatility expands and we can look to
trade the market
and then we kind of move a little bit
away from the in play memes
if the vix gets over 30 35 40. hopefully
you learned a little bit something about
trading the market here
the main thing i want you to take away
from this is when the market changes you
have to change the type of setups that
you’re looking at
you have to change your approach and you
have to recognize it
pretty quickly because what we found
over the years is younger less
experienced traders when the market
that’s when they lose the most money and
they dig themselves a hole
you need to be every morning when you
come in what is the market been doing
most recent weeks most recent days are
things different
what would i need to see to actually
adjust the setups that i’m looking for
adjust the risk that i’m taking etc and
if you’re doing that every day
when the market changes you’re going to
be aware even if you don’t
immediately change everything you’re
doing you’re going to be more in a
defensive posture
and not rip money up and understand that
you’re going to very quickly be more
consistent because of that recognition