Dow Draws Back

Now that some of the excitement of the Dow Jones Industrial Average reaching 20,000 for the first time ever has subsided, do you have a strong trading plan in place? Now that the Dow has taken some serious steps back from its high point, many traders are skeptical of what to do next. Will the Dow keep pulling back? Will it bounce back and forth, with 20K as a relative resistance point? Or will it move sideways as consolidation occurs while investors weigh earnings and political events?

Likely, the latter is most likely for the short term, at least until something happens to shake stocks out of their current trend. Much of the excitement of a Trump Presidency has worn off, and now that earnings season is upon us, many investors are drawing back from their positions, taking the big gains that they have already realized so far this year. It has been a very strong start to the calendar year, and now people are beginning to be cautious. Once the Dow crossed over into unknown territory, this protective feeling toward gains only increased.

It’s very easy to want to pull back from your long trades after a huge milestone like this has been surpassed by a major index, but looking at what the Dow represents can actually be a good guide for finding other long trades. The Dow is the most often cited index in the United States because it is representative of a wide range of large industries and is supported by some of the biggest companies in the world, but it actually is only comprised of 30 different stocks. And while it is indicative of the economy as a whole, it is not the most indicative. This is an honor that is reserved for the S&P 500. Currently, the S&P 500 is experiencing much of the same drops in price that the Dow is experiencing, but it has not received nearly the same kind of acclaim that the Dow has.

Why is this? Well, for one, 20K is a much more exciting number than 2,300 is. That’s the high point that was achieved just a couple weeks ago. As of this writing, the S&P had settled at around 2,278.

Earnings are important to watch at this time if you are looking for new trading opportunities. In the excitement of prices rising across the board, it’s very likely that many companies found themselves moving into price territory that they did not deserve to be in. These companies are considered to be overvalued, and as more earnings are released, these things will be revealed. However, many companies do deserve to be at the price they’re at. And it’s very likely that these situations will also be revealed. If they are major companies, you can even trade them as they keep rising in the binary options market, allowing you to take smaller positions and spread your risk out over time.

The same goes with major companies that are overvalued, too. By taking out smaller put options on these, you can realize a profit as they settle back down to the price that they should realistically be at.

Mixing in this fundamental approach with trader psychology and a strong understanding of technical analysis will outline a good approach for how to trade individual stocks over the next few weeks, especially as indices continue to move sideways. This is true of binary options trading and CFD trading, of course, but it is also relevant if you are a day trader in the traditional sense. With higher stakes you just need to be more aware of the risk that is involved.