Yesterday’s market action was quite a sight to behold…
As the consumer price index (CPI) report came in cool — with U.S. CPI at 7.1% vs. a 7.3% estimate — the market reaction wasn’t what most traders expected.
The S&P 500 ETF Trust (NYSEARCA: SPY) was surging in Tuesday’s pre-market, briefly touching a high of $414.
But as soon as the opening bell rang, the rug-pull began…
From 6:30 to 9:30 a.m., the index tanked from its pre-market high all the way down to $399, erasing 2.5% gains in three hours.
Anyone who bought calls at the open got absolutely wrecked, and anyone holding calls from Monday saw their gains decimated rapidly (if they didn’t sell at the open).
I can feel the pain in the markets. A lot of retail traders clearly got overexuberant piling into bullish positions yesterday.
That said, I wasn’t surprised by the price action at all. I even tweeted about how skeptical I was on Monday…
JPM trading desk saying SPY rally if CPI comes in at 6.9% ….. look what happened last time they gave us a prediction 👇 pic.twitter.com/kx21KLxHHj
— Mark Croock (@thehonestcroock) December 12, 2022
My weariness came from experience. I’ve seen this kind of rug-pull move so many times before.
All in all, there are some important lessons traders can learn from days like yesterday.
Keep reading and I’ll tell you all about them…
Special Announcement!
Before we get into our lessons, I’d like to remind you that time is running out on a once-in-a-lifetime trading opportunity…
TOMORROW, Thursday, December 15 at 8 p.m. Eastern … Tim Sykes will finally reveal a little-known secret.
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Now that you’re signed up, let’s get back to our regularly-scheduled programming…
Avoid Crowded Trades
Yesterday was a reminder to not enter crowded trades.
In general, the more retail traders pile into a trade … the more that setup will be manipulated by institutions.
It’s a simple truth of the stock market that ‘main street’ is usually left holding the bag.
Yesterday was a perfect example of this…
I can’t think of a more crowded trade that’s happened recently.
These ‘Fed weeks’ create an options-trading hysteria, with six-figure open interest on every close-to-the-money SPY contract.
The more open interest in the options chain, the more motivation market makers have to manipulate the share price.
And that’s exactly why I didn’t try to trade SPY options into the CPI report.
Think about how SPY options traded on Tuesday…
Unless you bought puts right at the open, any position entered on Monday probably got destroyed throughout the day.
If you bought puts on Monday, they were down considerably at the open. You would’ve had to trust your gut, holding a losing position all day (something I don’t recommend doing).
If the share price chops around all over the place intraday, it’s very difficult to trade short-dated options without getting smoked.
It takes a lot of experience to take on the most crowded trades.
For anyone newer to the markets, I advise you to avoid crowded trades entirely.
Trust Your Gut
Scanning social media over the past few days, you’ll find a bunch of clueless newbies pretending to be macroeconomic geniuses.
But self-sufficient traders need to tune out this noise.
Here’s how YOU can do that … by trusting your gut.
Intuition is priceless for traders. If you have a strong feeling, it’s important to consider acting on it.
Will your gut always be correct? Of course not. No one has a 100% success rate in the stock market.
But as you gain more experience studying and trading, you should notice your gut predictions becoming more accurate.
This is an example of skill and experience combining with your intuition.
It’s a major breakthrough for many traders and what I’d like every Evolver to aspire to.
Just look at my top student, Jenny Smith. She’s a perfect example of exactly what I’m talking about, and now she’s enjoying the fruits of her labor…
Traded $CRM twice and this was the last hoorah. Glad I focused on CRM after I traded $TSLA. #OptionsTrading @thehonestcroock @EvolvedTrader https://t.co/sCFYuKUuJN pic.twitter.com/AGc5SJ7Iob
— Jenny Smith (@jpsmith5804) December 1, 2022
If you can take a page out of Jenny’s book and combine your data, technical analysis, and intuition into an airtight game plan … you’ll be potentially unstoppable.
On the other hand, if you don’t trust your gut or have confidence in your convictions … you’ll probably become part of the 90% of traders that FAIL!
Final Thoughts
I hate to see traders get caught flat-footed by moves that they could’ve seen coming.
Work to avoid this by steering clear of overcrowded trades and trusting your gut when your conviction is strong.
I hope to see you all at Winter Glitch tomorrow!
