Watching the wild swings in the market of late, I couldn’t help but think about what it must be doing to the casual investor.  I have been speaking to a few of my neighbors who are casual investors.  They keep expressing to me how unsettling it is to see something up big in the morning, only to return from a meeting or from lunch and the same stock or index has reversed and is now down big.

That is the market we are in right now … an extremely volatile one.  My neighbors and most investors don’t have the ability to watch the market all day, and that is almost necessary if you are trading this market.  You have to be like Jack - nimble and quick.

The long-term trends that existed for the past few years on the S&P and the Nasdaq have been breached.  Now there isn’t a prevailing long-term trend that you can count on. 

So how do you play this market?  By making trades based on the short-term trends and playing the swings in the market. 

If you look at the two charts of the S&P below, you will see how things are different based on the time frames.  The first is the monthly chart and it shows how we closed below the 20-month moving average for the first time since June 2003.  You will also notice that this is the first crossover from above to below the 20-month since November 2000, as the bear market really got started. 

The next chart is the daily chart and it shows the short-term trend connecting the October and December highs.  The S&P is well below this trendline right now and is bouncing back after hitting extremely oversold levels.  While I would not rush in to buy calls on the S&P, because the trend is downward, there are individual stocks that are in an uptrend and I would look to play calls on those stocks. 

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At the same time, the overall trend in the market has shifted to a downward trend, so I would be looking to stay somewhat balanced with puts on companies that may have already bounced back into their downward-sloped trendlines and are overbought.

This trading environment requires swing trading and using options.  By using options, you can lower the amount of money that you have at risk in a fickle market.  By taking advantage of the leverage of options and the short-term swings up and down, you can still make incredible gains.

This is the type of trading that I teach in my new K.I.S.S. program.  It is an educational program that teaches you how to use swing-trading principles and how to use options to magnify the move.

This market is not going to settle down anytime soon, and it looks as if the market has entered into a bear market.  It is time to learn to make money in a bear market.

Good luck and good trading,

Rick

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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