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The Standard and Poor’s 500 Index (SPX) closed yesterday at 3298, up 52 points or +1.6%. That sounds great if we stop there, but SPX barely recovered Monday’s opening at 3286, so we were only up 0.4% for the week. Of course, we should be thankful for that. With all of the turmoil going on in this country, market volatility is to be expected. The June 8th high at 3232 provided support on Wednesday, and Thursday and Friday’s trading built on that base. However, we have yet to recover the 50-day moving average (dma) that was broken last week. The S&P 500 is now trading in a channel defined by the June high on the lower edge and the February 
pre-correction high on the upper edge. Trading volume for the S&P 500 companies opened the week above the 50 dma, but remained below average all week.

The volatility index for the S&P 500 options, VIX, opened the week at 28%, and closed Friday at 26%. It would be a mistake to count this decline as encouraging. Traders remain nervous and poised over the sell button.

IWM, the ETF based on the Russell 2000 group of companies, succumbed to the bearish pressure this week, closing up 1.6% at 146.41 on Friday, but remained down 1.9% for the week. The small to mid-cap stocks of the Russell 2000 are often the first to be sold in a bear market and the first to be bought in a bull market. Hence this week’s trading is a concern. IWM never did recover its 
pre-correction high.

The NASDAQ Composite index closed yesterday at 10,914 for a gain of 241 points or 2.3%. Even more positively, NASDAQ was up 2.9% for the week. It has not recovered its 50 dma, broken last week, but it is only 111 points away and remains 1,097 points above its pre-correction high at 9817. NASDAQ trading volume was at or below the 50 day moving average all week.

Markets hate uncertainty and is being fueld by the coronavirus epidemic, economic shutdowns, political turmoil, rioting and looting in our large cities. The market reflects those anxieties. This market is volatile and very nervous. Trading this week supports the thesis that we aren’t seeing the beginning of a bear market trend. Bullish support continues to hold support. NASDAQ remains well above its pre-correction high. Thursday and Friday’s market strength is encouraging. However, the light we think we see may be the train coming at us.

Remain vigilant and largely in cash.

The Standard and Poor’s 500 Index (SPX) closed yesterday at 3319, down 38 points or 1.1%. SPX lost 1.3% of its value over the week. The 50-day moving average (dma) provided support to the sell-off that started last week until yesterday when the index broke through the 50 dma at 3343. I wondered last week whether this was just a temporary step on an overall trend lower, or part of a sideways cooling off period. Friday’s break of the 50 dma along is evidence on the side of a more significant pull back.

Trading volume for the S&P 500 companies spiked up significantly on Friday. Normally I would interpret that as reinforcement of the drop of the index and the break of the 50 dma. However, Friday was what is known as quadruple witching, the expiration of stock index futures, stock index options, stock options, and single stock futures on the same day. This occurs on the third Friday of March, June, September, and December and always contributes to higher volatility and wild market swings. Perhaps that gives us hope for a bounce on Monday. Perhaps not.

The volatility index for the S&P 500 options, VIX, opened the week at 25.9%, declined to low of 24.8% on Wednesday and closed the week at 25.8%. All in all, volatility remains steady and moderately high. Traders are nervous and on guard.

IWM, the ETF based on the Russell 2000 group of companies, has managed to continue to trade along its 50 dma all week, closing down 0.4 points on Friday at 153.29. That represented an increase of 1.8% for the week, quite an accomplishment for this week.

The NASDAQ Composite index closed yesterday at 10793 for a loss of 117 points or 1.1%. However, NASDAQ was down 2% for the week, breaking the 50 dma on Thursday and confirming that break of support on Friday.
NASDAQ trading volume was below average all week and spiked on Friday due to quadruple witching, so we should not read too much into that volume spike.

Markets hate uncertainty and we are in the most turbulent times of my lifetime. The coronavirus epidemic, economic shutdowns, political turmoil, rioting and looting in our large cities are featured on every newscast. It is a challenge to remain even marginally optimistic. The market reflects those anxieties. This market is volatile and very nervous.

If you can’t watch it throughout the day, you would be well advised to stay largely in cash and wait on the sidelines. There is nothing wrong with taking a pass right now.

The Standard and Poor’s 500 Index (SPX) closed today at 3341, up a couple of points on the day but down almost one percent on the shortened holiday week. It appears as though the 50-day moving average (dma) provided support to the sell-off that started last week. The index nearly touched the 50 dma on Tuesday and Thursday, and then broke through the 50 dma today, but recovered decisively to close above support. It is hard to take much encouragement from today’s bounce; it has been a volatile week for the market. The question remains whether this is just a temporary step on an overall trend lower, or just part of a sideways cooling off period. Trading volume for the S&P 500 companies spiked up above the 50-day moving average (dma) on Tuesday but has declined the rest of the week. That decline in trading volume was a welcome relief, suggesting there was little interest in a strong move to cash.

The volatility index for the S&P 500 options, VIX, spiked higher on Tuesday, but dropped back at the close and has declined steadily all week – again, an encouraging sign. VIX closed today at 26.9% after hitting an intraday high of 36% on Tuesday. Much of the anxious edge has subsided this week.

IWM, the ETF based on the Russell 2000 group of companies, traded along its 50 dma all week, closing today at 149.15, down only one point today, but down 1.3% for the week. IWM traded more weakly than the broad market indices this week, as one would normally expect. The fact that IWM didn’t fall off the cliff is encouraging because these are usually the first stocks to be sold when the panic starts.

The NASDAQ Composite index closed today at 10,854 for a loss of 66 points. However, NASDAQ was relatively flat this week, closing down 0.4% for the week. The talking heads were talking sector rotation today, but NASDAQ remains reasonably solid. Trading volume was below average all week and the index essentially traded sideways. NASDAQ remains almost ten percent above its 
pre-correction high. For all the talk of NASDAQ being the poster child for this frothy market, it didn’t sell off as strongly as one might have expected.

As everyone around me knows, I have been worried about this market for quite a while now. The prices just didn’t seem consistent with the economic damage we continue to witness. Many of my stops tripped last week, but I have added new positions this week. I am not bullish, but I am doing my best to extract some quick profits where I can find them. In my opinion, the market remains over priced. There are opportunities if you have the freedom and expertise to find them.

I recommend you watch this market very diligently. It turns on a dime. I played the Peloton earnings announcement last evening and closed the trade only a few minutes after the market opened this morning for a 58% gain. If I had waited, nearly all of those gains would have been gone by noon.

This market is volatile and very nervous. If you can’t watch it throughout the day, you would be well advised to stay largely in cash and wait on the sidelines. There is nothing wrong with taking a pass right now.

 

The Standard and Poor’s 500 Index (SPX) closed Friday at 3427, down 28 points on the day. Thursday and Friday took their toll on the market with the S&P companies losing 2.4% this week. On August 24th we broke out above the pre-correction high of 3386 and kept trading higher. But that pre-correction high appears to have served as support Friday as SPX broke down through that level to hit its intraday low mid-morning but then began a steady recovery of much of the day’s losses before the close of trading.

For several months trading volume for the S&P 500 companies has run well below the 50-day moving average (dma). That changed on Thursday and Friday as trading volume spiked on the large trading declines. I initially took that as an emphatic underscoring of the declines. But Friday’s recovery was also at above average trading volume. That was encouraging.

The volatility index for the S&P 500 options, VIX, spiked higher on Thursday and Friday as SPX collapsed. VIX closed Friday at 30.8% after hitting an intraday high of 38.3%. I will be watching VIX closely as the market reopens on Tuesday.

IWM, the ETF based on the Russell 2000 group of companies, followed the broad market indices off the cliff Thursday and Friday, closing at 152.80 on Friday, down 2.8% for the week. The S&P 500 declined 2.4% for the week. Normally, the Russell 2000 rises and declines at a much faster rate. This four tenths of a point differential seemed smaller than I expected. This may suggest that the recovery we saw Friday afternoon will continue next week. IWM bounced off its 50 dma at 149.98 before closing at 152.80 on Friday.

The NASDAQ Composite index closed Friday at 11313 for a loss of 145 points. NASDAQ lost 3.5% of its value this week, which was not surprising since this market rally has been led by NASDAQ stocks. This index bounced off its 50 dma to recover strongly on Friday. NASDAQ remains 13% above its pre-correction high. That is rather amazing.

I have been worried about this market for several weeks now. It just didn’t seem reasonable that the market prices should be back to pre-correction highs after all of the self-inflicted economic damage that has been done (and continues here in Illinois). When I saw the market drop off significantly on Thursday and then open lower on Friday, my only question was how low it would go. But then it started recovering Friday and that surprised me.

One of the fundamental lessons of trading is to trade what the market gives you, not what you think makes sense. In that spirit, I began to stick a couple of toes back into the water late Friday. I am largely in cash and feeling comfortable with that over this long weekend. However, I did take a flyer Friday. I surveyed my watch list and noted the stocks that were holding up best in this downturn. TSLA stood out. TSLA opened Friday at $403, traded down to $372 and then traded higher to close at $418, up 11 points on the day. I could not resist. I bought 100 shares of TSLA at 406.07 and sold the Sep(9/11) $405 call for $26.30. The assigned return would be 6.6%.

Watch the opens Tuesday morning carefully. Don’t jump too quickly. Even if it opens higher, it could reverse itself in that first hour of trading. It is a dangerous market. Remaining largely in cash is prudent.

Enjoy your holiday weekend. Remember to thank those people in your life whose work ethic made your life what it is today.

 

The Standard and Poor’s 500 Index (SPX) closed Friday at 3397, up 12 points on the day and up 0.5% for the week. On Tuesday, SPX broke the all-time high of 3386 set on 2/19/20. It still perplexes me how we could possibly be back where we were before this economy was effectively shut down a few months ago. The price chart reminds me of a math function asymptotically nearing its maximum value. The prices appear to have been flattening out as we neared the February high. Nothing changed this week on the trading volume front. Trading volume for the S&P 500 companies remains anemic, running well below the 50-day moving average (dma) all week. I interpret this as a sign of caution. Large amounts of cash remain on the sidelines or in safer investments.

The volatility index for the S&P 500 options, VIX, opened the week at 22.5% and closed unchanged Friday at 22.5%. VIX dipped early in the week, but then rose to close flat on the week. Volatility levels above 20% are relatively high historically, even though we may be becoming accustomed to them at this point. This remains a nervous market. Be cautious.

As the S&P 500 index leveled out this week, IWM, the ETF based on the Russell 2000 group of companies, declined. IWM opened the week at 157.50 and closed Friday at 154.61, down almost 2%. The small cap stocks on the Russell 200 act as the canaries in the coal mine and may be the early warning signal of a pullback. At a minimum, it adds to my caution.

The same old story is still unfolding for the NASDAQ Composite index. It opened the week at 11,083 and closed at 11,312, up 2.1%. Friday’s close set another all-time high for NASDAQ. NASDAQ’s trading volume has been running  below the 50-day moving average (dma) with only two exceptions since the first of July, but volume did perk up a bit Thursday and Friday.

Where do we stand? One could superficially think the storm has passed. After all, we are back where started before this nasty correction. All is well. Baloney.

I don’t know of any rationale for these market price levels. Cautionary signs abound:

•    Below average trading volume as prices move higher

•    Flattening of the S&P 500 as we near the pre-correction highs

•    The Russell 2000 turning downward

•    Market volatility (VIX) remains moderately high
•    Fifteen million people are unemployed

However, I am making a lot of money in this market. I brought in 5.2% in my trading accounts during the August expiration month. Don’t annualize that return; it will make your head explode.

The majority of that income has come from selling calls and puts against large blue-chip stocks. Volatility remains high and consequently the options are expensive. Traders often forget that higher volatility brings higher risk. I am managing the stops more conservatively so I shouldn’t give back much when this market ride ends.

Carefully weigh the risks of this market. There is money to be made but manage the risk prudently.

The Standard and Poor’s 500 Index (SPX) closed Friday at 3271, up 1.6% for the week. That doesn’t tell the whole story. Friday’s low was exactly at Monday’s open. Late afternoon trading pulled the market back up on above average volume. It was the only trading session this week that exceeded the 50-day moving average (dma). In fact, it was the first day to break the 50 dma in 24 trading sessions.

The S&P 500 remains about 4% below its pre-correction high. In my opinion, reality is catching up to the markets as the enormity of the economic damage done by the lockdown is more evident. Current market prices appear hard to justify.

VIX, the volatility index for the S&P 500 options, declined modestly this week, opening the week at 26.6% and closing Friday at 24.5%. We may be accustomed to these levels of volatility, but it is prudent to remain on alert. These are not low levels of volatility. This remains a dangerous market.

The NASDAQ Composite index closed Friday at 10,745, up 3.1% for the week. Several high-tech stocks had earnings announcements this week and almost all traded higher. NASDAQ’s intraday trading pattern on Friday was similar to the other broad market indices, trading much lower early Friday but rebounding late to close virtually unchanged on the day.

The last two weeks in July have been essentially a sideways market price pattern. My personal assessment is that market analysts are beginning to realize the amount of permanent economic damage that has been caused by the economic shutdown. It is hard to reconcile 17 million people on unemployment with a Standard and Poors market index that is only 4% below its pre-correction high. As I wrote last week, I am happy the market has rebounded so strongly, but I don’t understand how that makes sense. Carefully weigh the risks of this market. There is money to be made but manage the risk prudently.

The Standard and Poor’s 500 Index (SPX) closed today at 3216, down 0.2% for the week. Today’s close broke down through the earlier high set at 3232 on June 8th. The question on everyone’s mind is whether this is merely the breather we expect during a bullish trend higher, or if the market is changing direction. Trading volume for the S&P 500 companies has been running below the 50 dma consistently since June 26th. As I have written before, I believe this indicates that traders are apprehensive about the state of this economy and whether the market has correctly priced in the economic damage. Large amounts of cash remain on the sidelines. Traders are reluctant to “go all in”.

VIX, the volatility index for the S&P 500 options, declined earlier this week to 24%, but popped up slightly to close at 26% today. We often regard VIX as the fear index. On that basis, the general level of anxiety is elevated, but not rising. That tells me that fingers are poised over the sell button on any negative news. Don’t be lulled into complacence.

The NASDAQ Composite index closed today at 10,363, down 1.5% for the week. Today’s decline appeared to find support near the index value from last Tuesday, 7/14. If NASDAQ breaks down through that level next week, there is a congestion of support around the 50 dma at 9933. Trading volume has been running below the 50 dma over this entire NASDAQ bullish run. And that didn’t change this week.

Two very different conclusions from our market analysis are possible at this point. The more positive assessment is the standard observation about bull markets taking the stairs higher and frequently pausing for a breather. A less optimistic conclusion might suggest that market analysts are beginning to realize the amount of permanent economic damage that has been caused by the economic shutdown.

Over sixteen million people are on unemployment. We have not seen these numbers in my lifetime. The final bankruptcy count is still out, but many small businesses will not reopen.  Market price averages that suggest the damage is only on the order of 5% seem naïve.

I am more optimistic by nature, but I have to take the pessimistic view of this market. I am happy the market has rebounded so strongly, but I don’t understand how that makes sense.

Carefully weigh the risks of this market. There is money to be made but manage the risk prudently.

The Standard and Poor’s 500 Index (SPX) opened this week at 3155 and closed today at 3185 for a rise of nearly 1%. On Thursday, SPX’s 50 day moving average (dma) finally broke above the 200 day dma at 3021. A basic sign of recovery for a stock or an index is when the 50 dma overtakes the 200 dma. The S&P 500 remains nearly 6% underwater from the March correction. Trading volume for the S&P 500 companies has been running very low for the past several weeks. Today’s trading volume at 2.4 billion shares was well below the 50 dma at 3.1 billion shares. Today was the ninth trading session in succession with trading volume running below the 50 dma. I interpret this as general apprehension on the part of traders. We’re nervous about what tomorrow brings, and we are keeping a lot of cash on the sidelines. It is difficult or impossible to analyze what price makes sense for this market, given the extensive damage done by the shutdown. It is difficult to have the confidence “to go all in.”

VIX, the volatility index for the S&P 500 options, closed today at 27.3%. The recent low was 24.5% on June 5th. It may be hard to remember in the midst of this chaos, but volatility was running around 12% back in January. The current levels of volatility serve as a reminder that this remains a dangerous market.

IWM, the ETF based on the Russell 2000 group of companies, traded lower this week, closing Friday at 141.31, down 2.8% on the week. IWM bounced off of its 50 dma at 137.30 yesterday. Weakness in the small to mid-cap stocks has always been a reliable indicator of the market’s acceptance of risk. Like many of our citizens living in fear of the coronavirus, many traders are hiding under the bed, afraid for their investments.

The NASDAQ Composite index closed today at 10,617, a new all-time high for this index. NASDAQ gained 2.5% this week alone. Since June 29th, NASDAQ has been trading nearly straight upward, a run of 8.7%. But trading volume has been running below the 50 dma over this entire bullish run. This reinforces what we see with trading in the S&P 500.

I freely admit that I do not understand this market. Why is it possible that the NASDAQ composite has now set a new all-time high in the midst of the most severe (and self-inflicted) economic damage this country has seen since the Great Depression? Add in the rioting, looting, murder, and arson we are seeing in all of our major cities. Even more surprising, in almost every case, our government has stood by helplessly and allowed the mob to burn our cities, tear down statues, and even usurp public and private property and declare a new state. Many mayors and governors even defend the mob. The rule of law is not being enforced. Our very civilization is being threatened. But you wouldn’t know that from watching the NASDAQ hit new highs. The son of an acquaintance asked his dad why Costco was open, but they couldn’t go to church. Children often see the obvious that adults somehow miss.

You may disagree with my view of current events. A common response once was, “It’s a free country”, but it is now dangerous to express your views. Our civilization and our freedom are under siege. The S&P 500 remains 6% below its pre-correction highs and the Russell 2000 is 16% below its pre-correction highs. This week’s unemployment data improved but eighteen million remain on the unemployment rolls. I certainly wish the best for our leaders as they attempt to resurrect our economy. However, it is going to be a long, hard climb out of this hole.

The risk of this market is most succinctly illustrated by the current levels of volatility. Higher levels of implied volatility also communicate higher risk. As many of you know, the most conservative stock and options trade is a covered call on a blue-chip stock. My Conservative Income trading service has been using those trades this month and we are now up 3.7% for the month and up 13% for the year. You wouldn’t know we had a severe market correction. Those are better than average returns for this type of trading. Those elevated returns are a direct result of the higher levels of volatility that drive higher option prices and higher returns for this conservative style of trading.

The bottom line: It isn’t necessary to continue to hide under the bed from a financial viewpoint. We only took a 10% loss in March when the market lost 35%. And now we are up 13% year to date while the market remains down 6%. That is called risk management. Carefully weigh the risks of this market. Set tight stop losses and follow them with great discipline.

The coronavirus correction in March took the stock prices of the S&P 500 companies down by 35%. Ouch! How did your portfolio do? As many of you know only too well, the damage isn't over. The S&P 500 remains 8% underwater.

The perennial argument is Buy and Hold vs. Timing the Market. The Buy and Hold camp tells us that it is impossible to sell at the highs and buy back at the lows. Perfect market timing is impossible, but open a price chart of the S&P 500 index. It was obvious to everyone by the last week in February that the market was in serious trouble. Depending on when you started closing positions that week, you would have limited your losses to something on the order of 10-12%.

But the Buy and Hold crowd rode the market down to the 35% low on March 23rd. And those portfolios have still not returned to positive territory. Many investors are afraid to see how badly they have been hurt and are just not opening their accounts. The Buy and Hold crowd became the Hiding Under the Bed crowd.

Some will argue this is a matter of risk. Conservative investors have been told that actively trading their stock portfolio is a high risk game. The results year to date in two of my trading services, each of which mirror my portfolios at Charles Schwab and E*Trade, serve as excellent real life examples.

The Conservative Income trading service mirrors the covered calls and cash secured naked puts in my E*Trade account. When used with solid blue chip stocks, these are widely regarded as the most conservative stock and option trading strategies available to the retail investor. When the market lost 35% in March, this service lost 10%. One month later, this portfolio had returned to break-even for the year. As of today, the year to date returns for investors in this portfolio is +13%, while the S&P 500 is still down 8%. This portfolio takes low risk positions and survived the correction very well. Taking more risk isn't necessary to protect your portfolio from corrections in the market.

Dr. Duke's Trading Group uses a variety of option spreads that incur moderate to high levels of risk. Our low point during the March correction was -36%, approximately the same as the overall market. But that is where the similarity ended. This portfolio had returned to break-even after six weeks. Year to date, our trading group has gained 132%. Members of this group are certainly taking more risk, but they survived the correction very well.

Whether an investor uses conservative, low risk trading strategies or chooses to incur higher levels of risk doesn't affect the trader's ability to survive a correction.

The difference is risk management.

Conservative trading strategies lead to a tighter spread of wins and losses, i.e., the standard deviation of the results is smaller. The average gains over time will be positive if trades are managed well. But these trades take less risk and therefore result in smaller net gains over time.

Trading strategies that incur higher risk lead to a wider spread of wins and losses, i.e., the standard deviation of the results is larger. But, again, the average gains over time will be positive if trades are managed well. One of the fundamental laws of finance tells us that the potential of higher gains is always accompanied by higher levels of risk. The higher returns of the trading group are an excellent illustration of that principle.

The crucial learning here is that the level of risk you take in your trading does not affect the ability of your portfolio to survive a correction. The ability to survive the correction is rooted in risk management:

•    Choose trading strategies consistent with your risk profile.
•    Learn as much as you can about the trades you choose to employ.
•    Trade small. Trading small gives you the time to build experience without losing the farm.
•    Develop and follow a trading system, i.e., a system of rules for entering, managing, and exiting each trade.
•    Both greed and fear are dangerous emotions. Your trading system is the cure.


If you are tired of watching your portfolio swing back and forth in these volatile markets, check out the private coaching and group classes offered by Parkwood Capital. Subscribe to the Conservative Income service or Dr. Duke's Trading Group. If you aren't happy at the end of one month, we will refund your subscription.

Happy Independence Day!

The Standard and Poor’s 500 Index (SPX) opened this week at 3094 and declined through the week to close Friday at 3009, down 2.7%. Friday’s trading broke the 200-day moving average (dma) at 3021. Roughly speaking, this brings SPX back to where we were about a week ago. Friday’s close is 11% below the high prior to the correction. Personally, I think that represents an extremely optimistic assessment of the economic damage. Trading volume for the S&P 500 companies has generally run below the 50-day moving average (dma) over the past two weeks. I am unsure why trading volume spiked so much yesterday. The spike last Friday was due to quadruple witching, but yesterday’s spike is puzzling.

VIX, the volatility index for the S&P 500 options, which had declined since the peak of the correction, spiked up to 43% on June 11th and closed Friday at 35%. We may be becoming numb to these levels of volatility, but it is worth reminding ourselves that these are historically high levels of volatility. This remains a nervous, and therefore dangerous, market.

IWM, the ETF based on the Russell 2000 group of companies, traded lower this week, closing Friday at 140.24, down 2.6% on the week. IWM broke down through its 200 dma on June 10th and is now approaching its 50 dma at 134.01.

The NASDAQ Composite index tumbled Friday afternoon, losing 260 points to close at 9757, down 1.9% for the week. Perhaps more significantly, NASDAQ surrendered its pre-correction high at 9817 on Friday. This week appeared to be the splash of cold water on the strong bullish trend since the correction lows in late March. It remains difficult to explain why the NASDAQ composite should be valued higher than it was in February after all of the economic damage done by the coronavirus lockdown of the economy. I don’t have hard supporting data, but I think the market pricing that corresponds to the current state of this economy is lower yet.

The S&P 500 is now 11% below its high on February 19th. This week’s unemployment data reported twenty million continuing unemployment claims. How can we have twenty million unemployed and yet value the S&P 500 companies only 11% below the pre-correction high? The media have continued their push to fuel the panic. Have you noticed the shift in emphasis? Since the beginning of the pandemic, the evening news always led with the number of covid deaths and projections of an eventual death toll of two to three million and mortality rates of 10% or more. Now the headlines focus on the number of covid cases, which are increasing as testing becomes more widely available. The mortality rate is now on the order of 0.2% or less, more in line with a serious flu season. And the inconsistencies abound. Our governor thinks it is perfectly acceptable to walk shoulder to shoulder with protesters without a mask but continues to order churches closed.

Regardless of how you view the current events, the high levels of volatility drive higher option prices and offer trading opportunities. On the other hand, higher levels of implied volatility also communicate higher risk. Allow me to illustrate with one example from this week. On Thursday I sold the COUP Jun(6/26) 270 call for $715 and then rolled out to Jul(7/2) on Friday for a credit of $618. I collected $1,333 in two days on an investment of $25,718. Of course, next week could bring a very different story – that illustrates the pros and cons of this trading environment.

Carefully weigh the risks of this market. Set tight stop losses and follow them with great discipline.