STP Algo Trader - Market Insights

The last few months in the stock market have been absolutely brutal.

What had begun as a normal correction quickly evolved into something much more dramatic on the back of Trump’s tariff “Liberation Day.”

Now, the market is in the throes of a heightened volatility period that has dramatically changed the risk profile for trading.

At Signal Trader Pro, we have adapted our model and engaged our "Bull Switch."

This is the group of settings that drive our algorithmic trading model. We adapt to the stock market when it changes.

Now that we have enacted the switch process, the question becomes – what comes next for the stock market?

While every sell-off feels different and unique, the good news is that we have seen this all before in terms of stock price action.

In fact, several periods in the last decade look similar to where we are right now.

The first is back in 2018 and 2020. We saw a high volatility collapse both times, with the stock market trading well below the moving averages.

Here is a chart showing the price of the S&P 500 along with the 50-day, 100-day, and 200-day moving averages from 2017 to 2020…

Here is also the chart of the CBOE Volatility Index over the same period…

In both cases, we saw a material spike in the VIX. We measure this as a five-day movement of more than +100% in the value of the index.

In 2018, we saw the index come off an all-time in early September after a strong two-year run.

It then traded below the 200-day moving average in just a few weeks. From there, it churned violently around that average before plummeting at year-end and falling -12% during just December.

It bounced back violently at the start of 2019 but continued to trade with high volatility. The move higher was strong enough to trade back through the 50-day moving average in mid-January and the 200-day moving average in mid-February.

It continued to move higher – although with another sell-off to the 200-day moving average in June – and eventually traded to a new high in July. This was ten months after the previous high, although it tested this level in late April.

The 2020 period was VERY different with COVID, but the trading action was remarkably similar.

The S&P 500 hit a new all-time high on February 19 and plunged rapidly as the global economy shut down.

It bottomed out one month later and began a steep yet volatile recovery. It traded back through the 50-day moving average one month after the mid-March bottom and the 200-day moving average one month later.

There were several tests of the 200-day moving average from there, but the market returned to new highs by the end of August. This was a six-month period.

We see many similarities between these periods and today.

Most people will be preoccupied with a focus on Trump and what is going on with the trade war. We think that is a mistake.

Our experience has shown us that most of the time, the action in the stock market has much more to do with positioning and liquidity. That is why the patterns play out repeatedly.

Looking back at 2018 and 2020, what would make us believe we are back in one of those periods?

We would want to see the market continue to recover back to that 50-day moving average over the next month. The bottom in the stock market was on April 7 (intraday) and April 8 (closing), so we would look over the next three weeks to see if we continue to recover.

For our strategy, though, it doesn’t matter. We are now reset to be able to deal with a more volatile market environment.

This means that we are positioned to make profits even if we fail to rally and fall back down.

The volatility produces opportunities to buy the highest quality companies at extremely oversold levels. Then, when the market has its inevitable bounces (remember Wednesday, April 9?), we can make some quick and big profits.

If the market rallies back in one of these "V" patterns, we still benefit as our portfolio of high-quality ideas will go higher.

We then sit back and wait to see if the stock market can heal itself enough for us to put the “Bull Switch” back to the BULL phase.

The worst-case scenario is that we don't have as many new ideas with the lower settings for a while.

The way we are positioned, we either win if the market goes lower or win if the market goes higher. It's just a question of how much…

THIS is how you build a trading system.

Click here for more information and to sign up to Signal Trader Pro, an algorithmic trading platform.