Chris’ note: Stocks got off to a rocky start this year. Inflation hit a 40-year high. And that was before Russia started the largest ground war in Europe since World War II.
Choppy markets like these make a lot of folks want to run for the hills. But not master trader Jeff Clark. At our third annual Legacy Investment Summit in Washington, D.C., last week, he showed attendees how traders tend to perform better in volatile markets than in calmer ones.
And next Wednesday, he’s unveiling a strategy that could have doubled your money nine times in 2020 – one of the most volatile years on record. It’s so easy to learn, Jeff will do a demo with his 22-year-old son, Grant, live on camera.
Make sure to secure your spot here. Then read on for more from Jeff on two essential trading tools you can use to navigate today’s volatile markets.
If you’re new to trading, chart analysis may seem intimidating.
You may even be skeptical at first.
I can’t tell you how many times I’ve heard it compared to “reading the tea leaves.”
I get that. But try thinking of it the way I do…
A chart is just an emotional picture of a stock (or a fund, or a commodity, or a crypto) at specific moments.
And our emotions are remarkably consistent. We tend to respond the same way to the same circumstances over and over again.
So when I look at a chart, I search for a time when investors’ emotions around a particular stock are similar to how they are today.
I then note how the chart behaved after that past emotional state. This gives me clues for what to expect now. And I recommend trading the stock in anticipation of a similar reaction.
Here’s a simple comparison…
When I first got married, I’d often come home from work, take off my socks, and toss them on the floor next to the living room couch. My wife would come home, see my socks on the floor, and get angry about it.
She’d have an emotional reaction to her husband leaving his socks in the middle of the living room floor.
This happened repeatedly.
Now, think of how this reaction would look on a typical stock chart…
It would start with a line trending sideways – my wife’s stable emotions before she knew about my sock habit. Then the line would climb as my wife got more frustrated…
A stock chart is no different. It represents millions of traders’ and investors’ emotions relating to a stock.
A lot of my trading strategy revolves around finding emotionally overbought and oversold conditions that are ready to reverse.
This is particularly important in today’s markets. As I told folks at the third annual Legacy Investment Summit in Washington, D.C., last week, we’re in for some turbulent market action this year.
Just look what’s happened over the last three months. We saw The Dow has dropped more than 6%… the S&P 500 is down 7%… and the Nasdaq-100 has fallen almost 13% since the start of the year.
In today’s volatile market, any extreme condition is likely to reverse. Likewise, any overly calm condition is likely to explode with energy in due time.
It’s really that simple… Times of high volatility always follow times of low volatility and vice versa.
That’s why I think of 2022 as a trader’s playground. The more volatility there is in the market, the bigger the opportunity for us to profit.
So today, I’m sharing two of my favorite chart patterns. They’ll help you spot extreme conditions likely to reverse.
Even if you don’t consider yourself a trader, looking out for these patterns will give you an edge over the countless investors who don’t.
A double top or double bottom signals a move beyond two repeated “support” or “resistance” levels.
Don’t be put off by the jargon…
A support level is a price where we expect buyers to enter the market. It’s a price an asset hasn’t fallen below in a certain time frame.
Resistance is a price where we expect sellers to enter the market. It’s a price an asset hasn’t exceeded in a certain time frame.
What I mean by a double is if a chart has a big run up to a resistance level, falls, and returns to the resistance level (forming two “tops” on the chart), it’s likely to head much lower.
See the chart of United Airlines (UAL) below. It reached two similar peaks (the blue arrows) near a strong resistance level (the blue line) and then broke down.
The inverse is also true. If a chart makes two bottoms at a support level but doesn’t break them, its next high will likely be higher than the previous peak.
On the same chart, note the double bottom UAL formed (the red arrows). After bottoming a second time at the same support level (the red line below the red arrows), the stock overcame its previous peak.
With a double top pattern, you should look to enter short trades after a stock starts to fall from its previous resistance level.
With a double bottom pattern, look to enter bullish trades once the price reverses from a similar support level a second time.
A wedge pattern signals a reversal as the trading range of a stock tightens as it rises or falls.
The two types – rising wedge and falling wedge – work similarly.
In a rising wedge pattern, the price of a stock is in an uptrend and makes a series of higher highs and higher lows. If the trading range within the uptrend begins to contract, the trend is likely to break down at the corner of the wedge, below the major support level.
See the chart of Hertz (HTZ) below for an example of a rising wedge pattern resolving to the downside.
In a falling wedge pattern, the price of a stock in a downtrend will break out from the pattern once a series of gradually lower lows and lower highs contracts.
Once the price of a stock that’s trending down breaks above the falling resistance line, the pattern resolves to the upside.
See the chart of General Motors (GM) below for an example of a falling wedge pattern resolving to the upside.
With a rising wedge pattern, you should look to enter bearish trades once the price of a stock breaks below the lower side of the wedge.
Likewise, with a falling wedge pattern, you should enter bullish trades when a price breaks above the upper side of the wedge.
As stock market volatility picks up in 2022, it’s an opportunity to double or even triple your money.
I know because in 2020 – one of the most volatile market years ever – you could have doubled your money nine different times using another of my favorite trading tools.
There’s nothing wrong with buying and holding. But with so much chop in the market today, you may have to wait a while for profits to show up.
With my simple trading tool, you can make money much faster.
It’s so easy to learn, I’m teaching my 22-year-old son, Grant, all about it in a live demo. I’m hoping to prove to you how easy it is to use this tool as part of your own wealth-building plan.
You can watch as Grant sets up his account and makes his first trade in the hopes of doubling his money. I’ll even give away a free recommendation you can use to test my technique yourself.
It kicks off next Wednesday, April 13 at 8 p.m. ET. And it’s free to attend. So clear some time in your schedule and sign up here.
Best regards and good trading,
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Jeff Clark
Editor, Market Minute