How To Handle A Choppy Stock Market With “SOH Mode”

Since bouncing off last month’s lows, the NASDAQ and S&P 500 indices have been stuck in a choppy, sloppy range that has been keeping traders on their toes.

Increasingly volatile opening gaps, wide-ranged trading sessions, and sudden intraday reversals have become the norm lately.

Last week, for example, traders were even treated to the NASDAQ forming a convincing bullish reversal candle, which was immediately followed by an equally convincing bearish reversal candle the following day…all near pivotal support/resistance of the 20-day exponential moving average.

Recent trading action may have been great for daytraders who thrive on intraday trends, but for swing traders like ourselves, erratic price action from one day to the next has admittedly led to challenging trading conditions on either side of the market (click here for a comparison of daytrading vs. swing trading).

As such, we have recently shifted into “SOH mode” (sitting on hands). Read on to find out the technical reasons behind this, as well as how it affects our newsletter’s portfolio management…

All Eyes Today On The 50-Day MA

Despite a strong start to the week (as of mid-day on May 12), the NASDAQ Composite remains well below key, intermediate-term resistance of its 50-day moving average (50-day MA).

However, the NASDAQ 100 Index (large-cap brother of the NASDAQ Composite) is now finally testing resistance of its 50-day MA (after trading below it for more than a month).

If the index fails its current test of resistance, significant support should be found at the lows of the long-wicked bullish reversal candles of April 28 and May 7.

Below, this is shown on the daily chart of $QQQ, a popular ETF that tracks the price action of the NASDAQ 100 Index:

As explained in this educational blog post, we prefer to sell short weak stocks after they break down and subsequently bounce into resistance (rather than selling short as stocks are slicing through support levels).

In the case of $QQQ (and the NASDAQ 100), a probe above the 50-day MA, followed by a day or two of bearish stalling action, could present us with decent short selling setups in $QQQ and other tech-related stocks and ETFs.

As always, subscribing members of The Wagner Daily will be alerted to my exact entry, stop, and target prices for any stocks or ETFs that are sold short if the current bounce stalls out and reverses lower.

Bullish Divergence In Big Caps

Along with the popular, but narrow-based Dow Jones Industrial Average, the benchmark S&P 500 Index continues to hold the stock market together.

Unlike the NASDAQ brothers, both the S&P and Dow are still trading above their respective 50-day MAs, and are also printing higher lows within the choppy consolidation of recent weeks.

Even more interesting is that the S&P 500 is actually trying to break out to a new high today, all while the NASDAQ struggles below its 50-day MA:

Just a quick comparison on the daily charts of the NASDAQ and S&P 500 shows that traders have essentially been dealing with two completely different markets.

When divergence among the major indices becomes so apparent, it usually results in choppy and erratic market conditions while the bulls and bears battle for broad market dominance; this time has been no different.

SOH Mode – The Best Plan Of Action Right Now

With our market timing system now in “neutral” mode, there is no reason to load up on the short side of the market unless the S&P 500 joins the NASDAQ by breaking down below its 50-day MA as well.

For bulls, the long side of the market is still potentially in play, but the stock market has yet to flash a clear buy signal (accumulation and a follow-through day).

Further, our stock scans have not produced many bullish setups in small and mid-cap growth names, nor have we seen much action from ETFs (other than extended names forming late stage buy patterns that seem too obvious to work).

What all of this means is that we simply do not like much of anything right now (in the near-term), and feel it is best to remain in SOH mode (sitting on hands).

While this may be an unpopular choice with many new traders or subscribers of our trading newsletter who are unfamiliar with our system, we simply do not believe in (nor do we feel comfortable with) listing new swing trade setups on our nightly watchlist just for the sake of providing “action” to our clients.

If you’re just trading stocks for the thrill of the action, I suggest you head to Vegas and play poker or blackjack instead.

But if you’re truly serious about making consistent trading profits, regardless of market direction, you need an objective, well-defined trading plan and the ability to follow it month after month.

Since 2002, our goal has simply been to run a disciplined trading system that works year after year.

In doing so, we realize we eventually run into periods where trading is not optimal.

When this scenario occurs, the situation could last for a few days up to a week or two; it’s impossible to know the duration of SOH conditions.

Yet, one thing we do know is that we are totally cool with occasionally being in SOH mode because cash is a valid position too (don’t forget that).

Follow-Up On Former Leaders

On April 22, I wrote a blog post about Lululemon ($LULU) as a stock to put on your watchlist for potential short selling entry.

Prior to that, in this April 8 blog post, I highlighted Coach ($COH) as another stock that could be setting up for ideal short entry.

Fast forwarding to the present, let’s take an updated look at the monthly charts of both $LULU and $COH:

Presently, neither stock is actionable for low-risk short entry, but ideal short selling entry points may develop over the next few weeks.

Additionally, we continue to build our internal short watchlist with other fallen leaders (former leading stocks no longer in an uptrend that have broken clear support levels).

When leading stocks finally crack, they fall hard; commonly up to 75% below their all-time highs.

Stay Sharp

The fact remains that we are presently in SOH mode, but we know damn well that market conditions can change with lightning speed (especially after weeks of a tug-of-war between the bulls and bears).

In preparation for the possibility of upside trend resolution, we have also been building our internal watchlist of potential stocks to buy (those forming valid bases of consolidation while the broad market chops around).

If the NASDAQ suddenly gets its act together and joins the S&P and Dow near its prior highs, stocks with relative strength right now may become the new market leaders of the stock market’s next wave up.

Remain alert and prepared to trade on either side of the market in the comings days. Above all, remember to trade what you see, not what you think!