Volatility is back!

Whenever there’s volatility in the market, I like to take advantage of it. As a trader, you need to be flexible and adaptable, using the tools that make sense for the particular circumstances you find yourself in. When we are experiencing volatility in the market, $UVXY is one of the my go-to vehicles.

On Tuesday, the S&P had been down four days in a row and was resting on the 50 DMA. When the market pulls back aggressively, as it had, volatility rises. But stocks, and the market as a whole, can only go so far, so fast in either direction before there’s a correction. The analogy I like to use is a rubber band – you can only pull it so far before it snaps back.  A quick look at the ETF $UVXY, which tracks market volatility, confirmed that it was over-extended, and due for a pullback. It had soared from $9.40 to $16 over just a few days!

On 6/14, $UVXY gapped up. When you see a gap up after a big run like this, it’s easy to assume that’s an extremely bullish sign. In reality, it’s the exact opposite. These are called exhaustion gaps, and they are usually the last gasp of an over-extended stock.

Parabolic Short Setup

We shorted it at $16.15, with a stop at $16.40. Very quickly, it flushed down to support. We covered partial shares on the way down, closing the entirety of the position around $14.60. Overall, a great trade. But it’s important to note that $UVXY is only worth trading when the market is volatile – the rest of the time, it doesn’t move enough to provide worthwhile percentage gains.

Here’s a short video I put together to walk you through the trade! Any questions, email me at kunal@bullsonwallstreet.com