The last time I spoke with you folks, I told you about three different things that you could do – and that I'm definitely doing myself – in the midst of a world crisis like the coronavirus:
1. Risk less – around the office we have a saying, "Trade small, trade often," and there's a reason for that. Trade small basically means small risk, but also, trading often means we're able to diversify ourselves into many different things, both bullish and bearish.
3. Exploit volatility when it comes to options – boy, have we got volatility here now.
Now, I wanted to take a few minutes with you to show you how I assess these markets. I look at the markets every day and I do an overview.
I divide the overall market into four grids because wherever the overall market is going, chances are, your portfolio's being affected in one way or another. So I watch four key areas – the "four corners of the market" – to tell me what's going on, and the right action to take…
The Four Corners of the Market
Not only have the last couple of days been historic, but we're talking about taking away the last three-plus years of gains within the last three weeks.
So when we take a look at what's going on here, for stocks I'm looking at SPY – the ETF that follows the S&P 500 – and I just want to look at the day events here. A week ago, we were trading at 281 and then recently came down to a low of 228. That was in about six trading days.
That's a big, big move down.
Four Corners of the Market
Typically, when we get into what we call the red area, very seldom do we turn around and go back above into the green area. So I've seen very few days where we go from an outright bearish day to flipping over to a bullish day.
Now, what happened to the S&P 500 on this particular day is that we came down and crushed through the area of support, and this provided some really good selling opportunities for short-term traders. Now, eventually we came back, did a pullback, and ended up in what I call the neutral zone.
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.