Market Volatility: Traders Must Adapt Or Risk Losing Their Shirts

2022.05.02 19:48

Market volatility remains elevated and may be setting the stage for spikes even higher than we have already experienced.

Global money is continuing to flow into the U.S. dollar making it one of the primary safe-haven trades. This may eventually trigger a broader and deeper selloff in U.S. stocks. As the USD continues to strengthen, corporate profits for U.S. multinationals will begin to disappear.

It’s imperative to assess your trading plan, portfolio holdings and cash resources. Experienced traders know what their downside risk is and adapt as needed to the current market environment.

If you still have money invested in Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), PayPal (NASDAQ:PYPL) or one of the many other stocks that are sinking fast, there is no easy way out. Your options are:

1. Hold tight and hope for a rally to recover part of your money.
2. Reduce some of your position to “limit your downside” in case the bottom really falls out, and then sell the balance after a bounce of 5-8%.
3. Move to cash, “bite the bullet,” get a good night’s sleep, take a break, reassess and live to come back and trade another day.

NASDAQ Enters Bear Market Territory

The NASDAQ peaked at around 3.1618% of its COVID 2020 high-low range the week of Nov. 21, 2021.

• Then, the Invesco QQQ Trust (NASDAQ:QQQ) ETF’s first swing down was -21% over a 16-week period (four months).
• Then, a brief three-week rally, retraced around 61.8%.
• Then, resumed its downtrend by taking out its previous low.

Therefore, according to the -20% Bear Market Rule: QQQ – 23.32% from its peak and -21.27% YTD is in a bear market.

QQQ • INVESCO QQQ ETF TRUST • NASDAQ • WEEKLY

QQQ Weekly Chart.

Amazon Breaking Down -35%

Amazon AMZN peaked at around 3.1618% of its COVID 2020 high-low range the week of July 12, 2021.

• Then, AMZN made a double top the week of Nov. 15, 2021.
• Then, the first swing down was -28.91% over a 16-week period (four months).
• Then, after a brief four-week rally, retraced a little more than 61.8% of its initial downswing.
• Then, resumed its downtrend by taking out its previous low.

Therefore, according to the -20% Bear Market Rule: AMZN -35.74% from its peak and -25.39% YTD is in a bear market.

AMZN • AMAZON.COM, INC. • NASDAQ • WEEKLY

Amazon Weekly Chart.

Netflix Plummets 72% In Five Months

Netflix peaked at around 2.382% of its COVID 2020 high-low range the week of Nov. 15, 2021.

• Then, NFLX’s first swing down was -17% over a five-week period.
• Then, a brief three-week rally, NFLX retraced only 25%.
• Then, the second swing down was -43% over a four-week period.
• Then, only less than a two-week rally retraced around 33%.
• Then, resumed its downtrend by taking out its previous low.

Therefore, according to the -20% Bear Market Rule: NFLX – 72% from its peak and -68.40% YTD is most definitely in a bear market.

NFLX • NETFLIX, INC. • NASDAQ • WEEKLY

Netflix Weekly Chart.

PayPal Drops 73% In Nine Months

PayPal PYPL peaked at around 5.1618% of its COVID 2020 high-low range the week of Feb. 16, 2021.

• Then, PYPL put in a double top the week of July 26, 2021.
• Then, the first swing down was -14% over a four-week period.
• Then, a brief four-week rally, retraced about 61.8%.
• Then, the second swing down was -39% over a 14-week period (3.5 months).
• Then, a six-week sideways rally retraced only around 10%.
• Then, resumed its downtrend by taking out its previous low.

Therefore, according to the -20% Bear Market Rule: PYPL – 73% from its peak and -53.39% YTD is most definitely in a bear market.

PYPL • PAYPAL HOLDINGS, INC. • NASDAQ • WEEKLY

PayPal Weekly Chart.

Drawdowns Have A Critical Impact

We need to remember the larger the loss, the more difficult it is to make up. A loss of 10% requires an 11% gain to recover, however, a 50% loss requires a 100% gain to recover, and a 60% loss requires an even more daunting 150% gain to simply return to break even.

Recovery time also varies significantly depending upon the magnitude of the drawdown. A 10% drawdown can typically be recovered in weeks or a few months, while a 50% drawdown may take several years to recover. Depending on a trader’s age, they may not have the time to wait on the recovery nor the patience. Therefore, successful traders know it’s critical to keep their drawdowns within reason.

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