The holidays are behind us and everybody is making their returns and buying the gifts that they really wanted.

Investors and traders are making their way back home and getting situated and prepared for the new year. 

This puts the market in an extremely vulnerable position as volume is going to be low this week – according to Bloomberg (and our lived experience), this is going to be the lowest volume trading week of the year.

This means you need to approach this week with caution as there is going to be some whipsaw movements in the market, if you’re not careful you could even lose a finger in the final week of the year.

I plan on laying out all of the risks involved – and a few things you should be looking for to survive trading before the new year.

Trading volume is the total number of shares of a security that were traded during a given period of time. 

Trading volume is considered a technical indicator because it represents the overall activity of a security or a market. Investors often use trading volume to confirm the existence or continuation of a trend, or a trend reversal.

So this puts trading volume on my radar quite frequently.

Essentially, trading volume can legitimize a security’s price action, which can then aid an investor in their decision to either buy or sell that security.

Now, this is accurate during a ‘normal’ trading week.

This week is far from what I would consider ‘normal’ for the market by any stretch of the imagination.

You see when the overall market volume is low, volatility tends to get a lot more dangerous – especially if you don’t have the stomach to hold a position through the noise.

This is because there is no support or resistance in the market… after all these points in the market are artificially created based on when a stock’s movement shifts the sentiment of those who have a dog in the fight.

So, there is nothing to stop a stock or ETF from making a huge swing in one direction or the other.

Or, worse yet, the ‘market manipulators’ can drive the stock in any direction they please because there is less resistance to their wishes. 

For example, a pullback on a stock will often be considered a reversal of the trend under normal circumstances.

But, when the low volume is our flavor of the week, a pullback is usually seen as the result of nervous traders closing their long positions for booking small profits and is often not seen as a trend reversal. 

The initial scare could be caused by a single trader getting out of their position causing the stock to take a sharp move to the downside.

That isn’t the only concern that you need to have in the back of your mind as we work our way through this week.

Now, if you have adopted my trading style, some of these may not be a concern to you – such as the liquidity issues that could arise-

I wouldn’t normally mention this but I have seen some of you in the chat talking about the day trades you’ve been making – just because I don’t day trade doesn’t mean I can’t help you with these trades.

You might come across a stock that has experienced the aforementioned pullback, and this it’s a good deal – a value buy, if you will – which may be the case, in the event the company is following a strong trend and the fundamentals support the trade. 

So, let’s say you decide to invest in a company with the intention of getting out of it quickly, with just a few bucks to pad your portfolio into the new year.

Well, the pullback happened because people were selling and with low volume, traders are not going to be there to pick up the shares when you want to sell them.

In addition to that, you’ll see investors start to sell their losing positions as they start to think about tax loss harvesting and getting prepared for tax season. 

This will inevitably drive the price lower, meaning you are going deeper in the hole and have no way to get out other than to wait for the volume to pick back up.

This is when you end up turning into one of the nervous investors that I mentioned earlier and could take a loss when a slight change in the approach could have saved you from yourself.

This is where my teachings come in. I preach day in and day out that you need to slow the markets down and buy time on your positions and make sure that you have done your technical homework to insure success if you absolutely have to trade the low volume.

This is a quick checklist of things to be sure that you are looking for if you want to make if out of the low-volume week unscathed:

 

  • Are the technical indicators supporting a strong trend 
    • Tightening or a break of the Bollinger bands
    • Trends or recent crosses in the Moving average lines
    • Overbought or oversold RSI

 

  • The fundamentals support the trend (good luck, remember the word recession has not left our vocabulary yet)
    • Has the company had good earnings recently (like i said good luck)
    • Have they issued good forward guidance (yea, probably not)
    • Is the company in a “strong” sector (okay, you might find something here)

 

  • Buy time for the trend to play out
    • Don’t be afraid to look at February or March expiration cycles so the market has time to recover from the low-volume noise
    • Be aware of upcoming events for the company such as earnings
    • Know that you’ll be spending a bit more to protect your trades

 

All said and done, trading in a low-volume market can be a riskier proposition. In a low-volume market, price moves are rapid, making it very difficult for you to time your move. 

Additionally, the low volume could be used by manipulators, as they have the leeway to exert an outsized influence on the stock price.

Therefore, I’ll leave you well advised to proceed with caution when betting on a low-volume market and watch Kenny this week for some scalping plays and Garrett to find the longer-term ‘value’ buys that you can get ahead of the new year.

 

 

 

 


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