How We Handled Swing Trading S&P 500 In A Bear Market

As the bear market worsens, our swing trading strategy continues to lean towards capital preservation. Recent market exposure trades provided a way to participate for fast moves in the S&P 500, Russell 2000, and Nasdaq 100. But it was the fast profit taking that made the trades successful and our overall low exposure that has led to outperformance versus the S&P 500 .




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The Rise Of The Resistance

A difficulty for progress this year has been the stickiness of resistance. The 10-week moving average line (closely related to the 50-day line) provided support for the S&P 500 throughout most of 2020 and 2021. But that support failed in early 2022. The breach of that level opened the S&P 500 later to a breach of its longer-term 40-week moving average (closely related to the 200-day line).

While July saw a strong rally in the indexes, the 200-day line once again acted as resistance with the S&P 500 quickly backing away after coming up to the line (1). This was also when we exited a market exposure position in the Russell 2000.

All the indexes started to lose ground as the bear market regained its stranglehold (2). We turned our attention to a short position in the Nasdaq 100. But even that short position didn’t last long. We took profits quickly and closed it on support at the 21-day line (3). One of the reasons was due to expected volatility on Jackson Hole statements by Fed chair Jerome Powell the next day (4).

The short position would have been much more profitable if we held it because the market indexes took another leg down (5). But our main goal during a bear market is for capital preservation and reduced risk. Statements by the Fed tend to add volatility and increase the likelihood of unfavorable exits.

A Bear Market Rally For S&P 500

The S&P 500 was due for a bounce after a punishing two-week drop heading into Labor Day. Our light exposure gave us a boost of outperformance and the flexibility to try and play the bounce (6). We opted for ProShares Ultra S&P 500 (SSO), a double-leveraged ETF on the S&P 500.

One benefit of an S&P 500 related ETF is the limitations on risk. We already had light exposure and the position in SSO wouldn’t do more damage than the S&P 500 would suffer should the trade not work. If the market rallies substantially, the double leverage gives us a foot in the door for participation. We would underperform in a rally due to the light exposure, but not as much.

Quick Profit Taking Saves The Trade

As the bounce unfolded, we still employed a quick profit-taking strategy, especially since we are still in a bear market. Once we had a 3% gain in SSO (7)remember it’s double the S&P 500, we took our first third of the position off to lock in the gain.

Our second third of the position got locked in after a 7% gain the next day (8). That also happened to be the near-term top in the S&P 500.

So when the S&P 500 opened below its 50-day line the next day (9), we already had a reduced position because of our profit taking. We exited the remaining position while we were still above our entry. The end result was a 3.75% gain for the trade in SSO in what’s been a horrible month so far.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at: @IBD_JNielsen.

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