Ep 109 : Preparing for Uncertainty & the Market Risks

November 3rd, 2016

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Today I'm going to share with you some political risks. Also, we'll take a look at some uncertainty in the market conditions.

We'll talk about some stock charts such as like:

  • Starbucks
  • Apple
  • Amazon
  • Netflix
  • Facebook

I'll share with you a few quick charts as well as some news and announcements. And we'll take a look at what you can do when there's uncertainty on the table in the market. You'll also see what the market is currently doing.

Disclaimer

Before we get going and taking a look at some of the charts, remember that trading involves a lot of financial risks. It's risky, especially if you don't know what you're doing. All the examples, the topics, and the strategies that we discuss it's strictly for informational and educational purposes.

It's there to give you some insight. That is also because you might be reading this post at some time in the future. Also, prices may have changed. It's crucial for you to contact your local personal financial advisor before investing or trading in anything that I discuss.

I think most of you understand that by now. But I wanted to make sure and be clear about that up front.

Some Quick Announcements

The options course preview is available, and you can take a look at that, and I will share with you some sample lessons from that course.

Go to Rise 2 Learn website and then scroll down there's the options mastery business of options and training verticals. If you go there, you'll see that the video is long about an hour and 12 minutes. It's going to share with you sample video lessons directly from the course.

Options Mastery #2: Business of Options & Vertical Spreads

The other thing that I'm looking to do is the critical charts and videos were also posted. Go to Traders Fly website, and you can see that I've done a couple of videos.

What we will probably do is create more of a live-based seminar or webinar series for these videos as well. That way, as I do the charts, you can also ask me questions. It might only be once a month for getting started to see how people are interested in it.

Take a look there, and you'll find your point of interest. The longer that you've been a member, the bigger the discount I will probably do on the upgraded membership there.

Those are the main things that have been in progress lately.

Going Through Charts

I'm going to go through some charts quickly first. And then I'll give you some insights into the market. It's about preparing for the uncertainty we have the election coming up. Wherever you stand is, it doesn't matter to me. It comes down to what's possible and how the market is behaving.

And we have to see why it's behaving the way that it's acting. First I'm going to go through a few quick charts some of the more prominent companies. Then we'll talk about the political risks and what's going on.

I'm going to get into it as far as a retail trader is concerned. Or what you should be watching out for as you're trading on this market or what you could potentially expect.

There're two outcomes. The market can go down, or the market can go up or go sideways. But it's going to either go down or up depending on who wins and depending on the political risk.

Facebook Situation

Let's go through some charts. I have facebook here that had some earnings. If you look at this, we have a significant sell-off.

Overall the market is acting weak, and this one has a nice sell-off from those high. That's simply due to earnings - the words that they used. And this happens. For me, it wouldn't be a surprise for this stock to come back down.

If you take this stock and the run that it's had, I wouldn't be surprised if it came down to 88 or even 75. I wouldn't because look at that run and expansion.

  • What could happen?

Well, if you did an A to B and B to C pattern, we could have a B to C and then a C to D into higher legs. A pullback could happen. I don't know.

We're going to see. This is the first day after earnings, but you can see it's having a problem within the stock. And of course, overall market conditions could continue to accelerate that stock even further.

You want to pay close attention to how a lot of things are moving. Not just one thing. You're not looking at one specific thing. You are looking at how overall everything is moving. That will give you a bigger picture of the market.

What About Amazon Situation?

If you take a look at Amazon, you can see the same concept with earnings. These things have to be nearly perfect earnings. And you can see we had this forty point sell-off and then we had a little pop. We would get the popup to this price level and then roll over to fill the gap.

But we didn't get there. We got up, and now we continue to roll over due to market conditions. If you look at this stock, where would I say is a good value - may be 675, somewhere around that price level.

You can see that because of some of the swing points. That's why I say even coming into this 50-day moving average you can see that moving average.

Coming back to there would be a pretty good value buy. I wouldn't chase it right now and try to catch it on the dip or anything like that. You don't know how far it's going to pull back.

Here's What Tesla Is All About

This one is set up for lower prices, especially if we break. You could see some serious lower prices. There are your support points right there, break here could take it 150 price level at least.

And then we'll see where it goes from there. But that's pushing to the downward end. It kept trying to break it. And so far it hasn't, but if it does, you'll probably see it accelerate lower.

Apple Situation

This one it's acting a little weak. It's getting into that 1/20 price level, and it can't get above it. If you take these resistance lines over you can see that range right there it's rejecting prices right at that price level.

Excellent value for that stock would be somewhere around this price level. If it breaks that price level, it wouldn't surprise me.

I mean, it's Apple. People love it, but I don't use their products. It's not my favorite company that I deal with business. But the stock is loved. A lot of other people love the products. And I mean you can't deny the revenue growth that it's had.

However, at this price point and this juncture that 120 is the problem. If you can get above that 120 to level that's a reasonable price. Or if you get into this 92 price level and it bounces that could be an excellent value to get into the stock as well. That's if you're looking for a longer-term play.

This Is How Starbucks Stands

I mentioned this one multiple time for months. We've talked about this in the critical charts. When you look at it, this was our support breaking right there. Volume picking up, market acting weak right now.

For me, I would expect further lower prices. If you look at the daily, you can see the way that it's playing. Broke at first, they tried to get back above it and then it couldn't do it - follow-through day a heavy wide price spread for a stock like this.

In general, it's not that much. For this type of stock, dollar weight is pretty big. There is fear and selling action. There's worry triangle pattern, overextension - it's the way things move.

Netflix Situation

Stock is overextended. How fast can you go?

  • Are you going to be a rocket to the moon?

Probably not. This one is exploding like a rocket ship after earnings.

  • Do you think it's going to break through?

No, probably not. It's not real, and it's not realistic. You can see right there pulling back a bit.

  • Could it pull back right here and then breakthrough?

Yeah, it could. It takes time, and it's not going to do it all in one day. That's why I said a little too far too fast and too quick.

That's the thing you want to be mindful of these explosive run-ups.

Take a Look at Disney

It's similar to Starbucks. If you look at it, you'll see it set up for lower prices. That's not a good sign because if this one breaks that could send the market also going lower. The main reason is that it's tied into Dow Jones, S&P and so forth. It's tied in a pretty big way.

Take a Peak at Nike & GMC

It's the same thing here with Nike. You can see this one breaking these levels. It's breaking these key stocks which are fueling this market.

And then, CMG. I've mentioned in the critical charts this one. It's horrible. This the stock is toast. I would expect this stock into the 200 price level.

We'll see what happens. You might get some value buyer stuff in 280, 285, 240, but somewhere in the 200 is where it's going to go.

I'd step aside. There's too much heavy volume picking up into that stock. It's way too much.

Preparing for The Uncertainty & Risk

I've talked about the political side of things in my critical lessons in the past. I've also mentioned it about trading politics (episode 104), and a lot of people were not happy with this episode.

Their political views for me it's irrelevant. It doesn't matter what your political views are because I'm looking at the market the way it behaves and reacts. And I'm looking at statistical probabilities. I'm looking at numbers specifically.

The question is what's going to happen and what's happening. There is no room for the issues. You can vote whatever way you want.

If you review that video (looking at trading politics), you'll know that I've spent a great deal of energy looking at the statistical chance or the probabilities of the market.

Democrats typically do better in economic situations. That's the numbers and figures. You can go out and do your statistics and research on the economic Bureau of Statistics. Go ahead and break apart some of the charts in this season so forth.

But in general, the market doesn't like volatility. That's the simple point behind it. When things are more volatile, unexpected, and unsure of what's going to happen, the market is going to sell off.

When you look at the SP-500 at what's been going on, I've mentioned that regardless of the candidate, I expect that a slight sell-off. I would expect a more massive sell-off if Trump gets elected.

Looking at this I've mentioned that we're already at top levels. We're at all-time highs if you look at this. You can see this rounding action right there.

  • What happened here, and what was going on?

There was, of course, a few different actions:

  • there was the Federal Reserve
  • there was that oil pipeline that burst

There are a few things that have been happening, but in general, Trump took the lead in some of the polls. Things have been getting a little more even on the political front. So when this happened, the market started to see this and started to sell off.

As a snowball effect that continues to accelerate things. When this starts to accelerate things, it continues to move. And as you break critical levels, that continues to accelerate it even further.

People step in not getting out of positions, but now they think that they should short the stocks. That continues to create further selling action. You can see the volume picking up.

We're going to have this political headwind until the election. Now, there're economists that project that we'll probably get a 5%-10% correction if Trump gets elected.

The next day the market will sell off. Anybody who has 401K, 403B - all those retirement packages that you have with your employer pretend that you're going to get a pay cut if Trump gets elected.

That's what the economists say. If you look at it a 5% from here if we draw it down would put us down about 105 points.

That's from here. If we continue to go lower and 5% from there - could put us right at the 1980 price level. We were at 2000 during Brexit. And that wasn't even our country.

We can get into this 1865 level. And why is that? Well, I mention that it's due to uncertainty with a character and behavior that's a little more volatile with unpredictability. The market doesn't like predictability or unpredictability.

It's just like when you have the Fed reserve, and they'll probably raise interest and continue telling that. They're telegraphing things.

What Could Happen on The Market?

But with Trump, you can't telegraph. You can't see what's going on and that's why people are worried. The market itself feels that with a Hillary Clinton there's a more even pace to what's going to happen. There's more calmness to it.

Of course, there're scandals all over the place. But as far as the character, the personality, the policies the market overall is more worried if Trump gets elected. With that in mind, if we look at the market, we were already at a top level or higher prices.

If he gets elected, I would expect the 5%-10% pullback like some people say. It wouldn't surprise me. For me, I'm a little more cautious about my positions. I'm lighter on my positions.

But what you also need to be mindful is that if you get some unexpected result and Hillary Clinton wins you could get a massive pop as well.

That way, it could change your risk profile picture, which means if you're positioned for the short side and all of a sudden Hillary Clinton wins you need to be very quick to change your positions.

That's because if the market skyrockets all of a sudden, your positions could be in deep trouble. Especially on the short side. In this scenario, you have to be prepared for a double direction move. You don't know whether Trump is going to move the market to the upside. Or Trump's going to move it to the downside.

Maybe Hillary's going to move it to the upside. Whether it's to the downside. Regardless we have more volatility because there's uncertainty.

What do you do in this situation?

Well, you can do one of two things. The first thing that you can do is pretty much lighten up on your positions. You can go to cash.

The second thing that you can do is you can be lighter on your short side. If you have a lot of positions to the upside, you could neutralize some of those positions.

For example, if you bought the SP-500 and you purchased it somewhere over here or even over here.

It doesn't matter where you bought it. But you're positioned long let's say 500 shares.

You could take a look at something like the SDS which works well when stocks go down. You can see this has been climbing to the upside. And you can buy it for a hedge for a couple of days during the election after the election results. That's what you could do.

The Small Cap 3X Bear

There are other vehicles like a TZA. This is another vehicle that you could do. But you could see this is the small-cap 3x bear ETF. These you do not hold for a long time. These are hedging vehicles. They get recalibrated.

If you look at it, it's been heading lower. The market has been heading higher - they get recalibrated. You can also see the stock splits that take effect.

In general, these are not things you trade for an extended period. There's fear coming in the market, you get into it, hold it for a week or two, and then you get out.

That's all they're all about. You get into it, fear is coming in, and then you're out. That's what you do with these types of vehicles.

There're TZA, VIIX, and SDS. In either case, these are the vehicles that you're looking for. However, these are a hedge for a small period. These are not for long term holdings. When you look at the SPX, we're probably going to get into this price level right there.

That price level will be right around 2040 - give or take a few points. If Trump gets elected, you'll probably see it come down to test this if it breaks through probably come to test 2000.

If it breaks this now, you start looking into some other previous points. With Hillary, I still would expect a slight sell-off. It's probably going to be less. And that is in part still due to the overwhelming top levels that we've had in the market.

I'd still expect maybe one or two-day pullback, but you might see a rally to the upside after a few days. That's what I'm looking at as far as the political risk.

Pro tip: You need to look at the hedging possibilities of what if this goes against you. Rather than looking at how much money you can make or the political outcome.

If you're looking at it from an economic standpoint, you're looking at it in terms of what if this goes against me and what is the uncertainty.

That's what people are looking at, and that's what are the risks. You're looking at the dangers on the table, and that's what investors talk about.

Pay Close Attention to The Risks

The risks on the table right now are these more or less political risks. And as you continue to get closer to the election, the market continues to go down. If we start coming into this level and there's some nervousness in the marketplace that happens all of a sudden 5% to 10% from this level becomes a much larger and a bigger deal.

10% would bring us back into 1860. That's where you'll probably get some support.

  • Can it happen?

There's no question about it.

Take a look at some of these bars. Probably won't happen in a day, but it can happen. It could happen like we had a massive 40 point down day. Now we've had massive multiple days a sell-off only due to the uncertainty and risk.

That's what's on the table. You're always watching what if it goes against me.

Right now that's what you have. You have uncertainty and risk, and you need to hedge for it. Or you don't trade and wait until after the election. Things will stabilize, and now you have a more stable environment.

Those are some of the significant big risks. The reason for that is when you start looking at a VIX above 20 that's some severe nervousness in the market. A VIX is above 20. We haven't had too many extremely high VIX levels, but now we're starting to get there.

We could get into the 30s if more nervousness panic selling starts kicking in. And other retail traders who have the 401K for 3B. They could take a pay cut on their retirement. But that's what I'm looking at in the economic sense.

  • What am I doing?

I'm setting up, selling some calls on the upper side at this price level. That way Theta decay also works against me because there are 14 days in the November option. You could sell some premium around this level. More than likely that's going to expire. It allows me to hedge for some of the upside positions that I have - rather than taking them off.

Of course I'm pairing some positions, but in general, I'm hedging in case there's a significant down risk that comes down either to this 1850 level or even 1750.

The time will tell, but you do have a few support levels before they're like 2042. And 1900 or 1860.

Watching those levels, that's what you're looking at in these stocks. If you view all of these other stocks and if you start seeing Disney, Starbucks, Nike breaking down, you have an event where many things are working together to go against the market.

That's where get some heavy selling, and it creates a lot of buying opportunities as well. As you look at the IWM and you start seeing the overall market picture we're also got into the highs. Then we're rolling over.

In part, the market was overbought. It was a little too high and to toppy. But that also means any little uncertainty and anything a bit volatile it's going to move this market in a manic way.

That's what you're seeing right now when it comes to this market and why we've had so many of these days. Fifty-five points within the last 9 to 10 days.

Getting out and being careful. That's what's happening. If there's nervousness or major panic that comes in you'll probably see one big massive bar. I don't want to scare you because it may not happen.

But that's what people are preparing for. If Trump gets elected, that's what they worry about. There could be massive catastrophic problems within the economy. That's what may happen.

You're watching the market and risks. Taking a look at some of these stocks that we covered they're going to create great buying opportunities - like Facebook. That's the case, especially if it comes down to 75, 60, 85 would be high buying points. It's on the first day.

It's the same thing with Amazon. If it gets into let's say 680, it's going to be an excellent buying opportunity. Allow those setups to set up. For you being an active trader, you're going to have nice setups if those things come back and pull back. But if not, then, by all means, you'll still get that bounce probably. And then things will keep moving.

We'll see how things play out. Nobody knows on the election. The polls aren't always accurate. You never know, but as far as economics go when the market is more nervous, then the market sells off.

There are that uncertainty and the risk, and you need to hedge it by reducing your position or hedging it in some way.

Ways like getting either the SDS the TZA or some bear fund or the VIX. Or sell some upside options to hedge for a potential down move. The same thing goes in reverse. If we went down 200-300 points in the last week, you'd do the same thing on in the opposite way for a long position.

If the market keeps selling, it's probably going to bounce soon or with time.

Final Word

You can't have a super emotional mindset when it comes to preparing for uncertainty and market risks. You need to be clear minded, and you need to think out things logically.

And look at it on a what's possible, what's your risks and what can happen. Also, look at what's the distance or spread of that movement in a situation.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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