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How to Trade the Coming Russell Breakdown

Kevin Cook

I've been a seller of big up days when the Tariff Man tweets something positive about a deal with China, like on August 8, 13, and 19.

That could prove to be a mistake if the support levels at SPX 2825 and NDX 7400 are not broken as I think they will be in September.

But for now, it has proven prudent to "trim risk and raise cash" as I tell the members of my TAZR Trader group.

And I'm also looking for better buying opportunities into autumn as this uncertainty gets straightened out.

Because there is plenty of other uncertainty as global growth and yields plummet. But there is not yet enough fear to put in bottom.

On the Bright Side…

In the video that accompanies this article, I highlight some of the charts I'm watching about where the market could go during this correction.

And I give an example of how I plan to buy the Russell 2000 IWM using the Direxion Small Cap 3X Bull ETF TNA as that index breaks down below 1450.

I also show charts of Amazon AMZN and its surprisingly disruptive competitor Shopify SHOP.

AMZN looks ready to break down, just like the S&P 500, while SHOP won't let any new bulls in. But SHOP won't determine the direction of the broad market, whereas AMZN very well could.

But this correction should be much milder than last year's Q4 meltdown. Because the recession fears are overblown.

So you'll want to be ready with a shopping list of your favorite companies when they go on sale 10-30% as fear and volatility spike.

The video also shares my favorite "capitulation" indicator that lets you know when stocks are getting very oversold, like on 90% down volume days.

Not My Final Warning…

Speaking of volatility, one other thing I forgot to mention in the video is this really important warning: Don't try to trade market volatility using leveraged VIX-based instruments like the ProShares Ultra VIX Short-Term Futures ETF UVXY.

Here was the public service announcement I posted on Twitter and StockTwits the other day...

It's a good time to remind traders with little options experience/knowledge about trying to time the market and/or volatility with $VIX derivatives like $VXX $UVXY and $TVIX: "Don’t be the blind man holding the pachyderm’s derivatives."

To understand what I mean, here's the video I made 4 years ago that explains it all...

Trading the VIX: What You Need to Know

Whether or not you determine you are ready to trade TNA (or you find my instructions valuable), be sure to heed my most positive piece of advice: Have your shopping list of favorite stocks -- and your price levels and sizes to buy them -- ready before the correction heats up.

That way you won't miss opportunity. And you won't get scared out of those buys when the market still gyrates wildly around your entries because you already calculated the risk and the potential reward.

Planning + preparation + risk management = sound, sleep-filled nights.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios. In a prior life, he was an institutional currency market maker trading $100 million per day as he provided liquidity to the biggest banks and hedge funds in the world.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Shopify Inc. (SHOP) : Free Stock Analysis Report
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Direxion Daily Small Cap Bull 3X Shares (TNA): ETF Research Reports
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