Signs Of A Cold Market

I’m back in the States and, just as the weather is starting to really heat up, the market has decided to go lukewarm.

After starting off the week basically flat with a mid-sized red day on Monday and a mid-sized green day on Tuesday, I was hopeful that I could at least find enough traction through the rest of the week to put me up a few thousand dollars. Unfortunately, after hitting my $5,000 max-loss on Wednesday and running into a lot of chop on Thursday, I’d be ecstatic if I can grind out enough profit on Friday to make this week a wash.

Of course, if I run up against the same market I’ve been seeing this past week, I’ll be content to walk away and fight another day. It’s not the most exciting attitude to take, but the summer months are historically difficult to trade since a good deal of volume is out on vacation.

This week has been a perfect example of that lack of follow-through, so I wanted to spend some time dissecting the types of patterns that have caused me and many other day traders so much grief the past few days.

False Breakouts

Something you often hear traders bemoan—myself included—is the reviled “false breakout.” Of course, different traders rely on different fundamental characteristics and technical cues when looking for a breakout, and therefore have different opinions about what does and does not look like a potential runner.

From my perspective, a true breakout candidate is a stock with a float under 10 million, good trading volume and, ideally, a history of strong price moves. When a stock like that gaps up on the open and looks ready to demolish its previous high, I’m ready to buy on the next green candle.

So for me, getting into a stock under those conditions only for the stock to collapse right before or just after bumping against that level can be devastating. I got caught in a false breakout on Thursday in my trade in Co-Diagnostics Inc. CODX, though I only stopped out for an initial -$300 loss (which I turned into a -$1000 loss by holding in hope of a bounce).

No Follow-Through

A correlated phenomenon to the false breakout that generally occurs in slow markets is a lack of follow-through or continuation of a generally reliable pattern or strong price move. Again, this might signify different conditions depending on the patterns and signals you rely on, but the experience is common when the market thins out.

For me this week, one of the strongest indications of the lack of trader enthusiasm was the anemic trading activity coming out of halts, which typically end with the halted stock resuming a similar trajectory as it had at the start of the halt. I experienced this wavering follow-through on Monday in aTyr Pharma Inc. LIFE, which flushed out most of its opening gains following a halt. 

Chop

Finally, one of the simplest signs that the market is on a cold run is chop, charts with erratic, sideways, stair-stepping patterns that lack a clear direction. While it’s possible to scalp the peaks of these moves while selling the troughs, it’s generally not worth the effort.

Another consequence of a choppy market is that, even in stocks that are edging higher, it’s difficult to retain a position while effectively managing risk. My trades in Guardion Health Sciences Inc. GHSI on Monday were just a series of surges and pullbacks that stopped me out three times before I threw in the towel.

As far as what to take away from this miserable roll-call of trader misfortune, Simply remain aware of periods where you find yourself constantly running up against problems like these. They might require you to trade with smaller size, rethink your strategy or simply take a few days to go to the beach and wait for the market to start behaving again.

Warrior Trading is a content partner of Benzinga