How to Trade During Market Selloffs and the Power of Support

The one key element for traders looking to "buy the dip" is support. Support levels are powerful because this is the level where we see buying interest due to previous buying, trend lines or moving averages.

Even during market selloffs where the drop seems to have no floor, support can have a powerful impact. Let's study these momentum stocks during the current selloff. Notice that all of these bounced at previous lows or key moving averages. 

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Remember, we are always trying to make the complex simple, and nothing is simpler than buying at support levels.

SPY bounces off October '14 low

GOOGL bounces off pre-earnings breakout gap level

CMG bounces off 200 dma

UA bounces off 200 dma

These charts are great examples of the power of support and how to trade during market selloffs.

Next week I will present a webinar on swing trading and handling market selloffs. Keep your eyes peeled for info from www.bullsonwallstreet.com

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If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.

Chart of the Day: How to Trade VIX

At the first sign of a market sell off or correction, my eyes leave my well developed focus list and turn to the CBOE Volatility Index, otherwise known as VIX. During market selloffs, it is crucial that you learn how to trade VIX.

Why do I love trading the VIX during sharp selloffs and corrections?
 
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It's because the VIX smells fear and acts accordingly with wild spikes. Okay, so in truth an insane calculation that some Ph.D wrote is used, but I like to think of the VIX like a shark smelling it's prey, attacking with a mad rush, enjoying the spoils of it's victory, then settling down.

In other words, the VIX will spike up when the market sells off, hang out at the high for a short period, then ramp back down as the market settles down.

Study this chart of VXX (VIX ETF) to understand the last few times VIX has made huge moves. We are talking 30-100 percent moves in 1-2 weeks. Notice that they always correspond to SPY selloffs.

Here you can see that when volume spikes, so does VIX. We are currently in the midst of a big volume spike and VXX has ramped up from a low of $17 to $21.35. Studying recent volume spikes, it looks like we still have some room to run.

In the Trade Report, we are currently up 10 percent, as we entered VXX at $19.30 and are still holding. Once the spike is over, we will reverse and "short" VIX using invese ETF XIV.

Watch this short video on trading VIX during volatile markets and using pair trading with VIX as a strategy to profit without knowing which direction the market will move. If you like the video, please hit like on the youtube clip!

https://youtu.be/avpW0l1NhMU

Subscribe to The Market Speculator by Email and never miss a post! 

If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.