We all saw what happened in the market on Monday, unless of course you’ve been living under a rock,
Maybe just like, And this 617-point drop continues to wreak havoc on investors’ confidence, with everyone now making bets on what the next big move will be…
Let them.
Because I’m going to take the guesswork out of it for you and show you exactly how to secure your next profit – whether the market’s up, down, or sideways.
And it all boils down to this one little “canary…”
Imagine this…
The leaves are falling, and the birds are singing on a sunny autumn day. Your stock portfolio is strong. After all, it’s October 2018, and the markets have just set the record for the longest bull run in history.
You’re feeling great and all is well…
Or is it?
Because a look at one of the simplest indicators would have revealed that, in fact, a storm was a brewin’!
And that indicator is volume.
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Volume is the number of contracts (or shares for stock positions) traded in the market for the day (or other specific period of time). An increase or decrease in volume could also indicate forming or reversing trends in the market.
And like a canary in a coal mine, this string of distribution days show what would be an 18% correction in the markets, thanks to a massive drop in volume, as you can see in the chart below:
To understand the true value of volume, it’s important to consider that most of it is derived from institutional money. The big money players account for 70-80% of the volume. If volume spikes, it’s typically because of institutional investors.
If a stock drops on high volume, it’s a sign that institutions have a high level of conviction to the downside… at least on that particular day. Think of it as institutional conviction because institutions have conviction in what they believe a stock will or will not do.
Take a look at the chart below on the SPDR S&P 500 ETF (NYSE: SPY)…
What you’re looking at is a string of four distribution days where the volume spiked up higher than normal coupled with a down move.
Now, you may have heard the infamous saying “a canary in a coal mine…” This goes back to the coal-mining days, where miners would carry caged canaries as a way to alert them to detect toxic gasses, like carbon dioxide, essentially warning them of any potential danger ahead.
And when it comes to the stock market, that “canary” is volume.
So, why am I telling you this now?
Take a look at the SPY for 5/13/19 below:
Five of the last six days have been distribution days, which is the same pattern as early October…
The market has been bullish for about 10 years, which happens to be the longest bullish run in duration and percentage move in history. But the current developments coming out of Washington paired with this singing canary is telling us one thing – we are way overdue for a major correction like we saw in 2000 and 2008.
Now, the market could certainly recover and move back up but when we’re seeing this kind of distribution, it’s best to put a protective plan in place.
So, here’s two options…
If you’re a stock trader, consider moving out of stocks into cash or bonds. You can also protect your stocks with put options or, better yet, collars (cheap insurance). Collars allow you to protect yourself against big losses but also limit your gains.
But for option traders – the last thing you want to do is head to the sidelines. This uncertain market is a time to profit. And this can be done with the power of puts and spreads. These two setups allow you to play the downturned market for the biggest gains.
So, listen closely to the “canary,” and prepare your profit protection plan.
And I’ll be keeping you updated with any new developments that hit the market.
Until then,
Tom Gentile
America’s #1 Pattern Trader
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