The market’s turbulence — not just today, but over the past few weeks — has plenty of investors on edge.
But I want to help you understand what’s happening so you can remain calm and possibly even spot opportunities!
A 10% drop in the S&P 500 from a recent high is often seen as a market correction.
Now, a term that might scare some investors but is actually quite a common thing. These corrections are normal parts of the market’s ebbs and flows and sometimes can even offer potential entry points for savvy investors.
Just today, the S&P dipped around that 10% mark but quickly rebounded. This suggests it might just be a temporary test and not a sustained downturn.
While these fluctuations can rattle your nerves, they aren’t necessarily a cause for alarm. Instead, they often serve as a reminder of the market’s natural ebb and flow.
What is ‘Limit Down’?
A crucial concept to understand during market volatility times is “limit down.”
This mechanism is designed to prevent panic selling by temporarily halting trading when the market drops significantly.
Overnight, the limit is set at a 7% drop.
During daytime trading, there are three levels: 7%, 13%, and 20%.
If the S&P hits a 7% drop from the previous trading day’s close, exchanges will halt trading for 15 minutes.
If the S&P goes on to hit a 13% drop from the previous trading day’s close, exchanges will again halt trading for 15 minutes.
Finally, if the S&P declines 20% from the previous trading day’s close, trading is halted for the rest of the day.
These limits provide a pause, giving investors time to assess the situation and potentially stabilize the market.
It’s an important safeguard that can turn a crisis into an opportunity for those who are prepared.
I mention this, because despite what many traders consider to be a massive drop from Friday’s close, the S&P never came anywhere near hitting that 7% threshold — and, in fact, today was a green candle day.
The Chaos Brings Opportunity
Now, one important thing I want to mention ties into that last point I made:
When the market dips significantly, as it did today, it’s often an overreaction to news.
This can present buying opportunities for traders who remain calm and strategic.
Understanding these corrections and limits allows investors to approach the market with a clearer mindset and avoid making impulsive decisions.
Now, I don’t want to imply that you should “buy the dip” whenever markets go down significantly.
It’s more of a nuanced thing that requires some experience, but it’s something that’s important to keep in mind for 2 reasons.
First, psychologically, it’s good to know that when markets drop like theres, we can often expect a bounce.
And secondly, as you gain experience in the markets and learn how they react to these kinds of events, you can position yourself strategically.
The key thing is to remember that these fluctuations are part of a larger pattern.
In tomorrow’s post, I’ll delve deeper into what the market’s recent moves mean, focusing in on the Russell 2000’s performance, including what it means for small caps and the economy in general — plus, a strategy you can use to protect your downside during this kind of volatility.
— Geof Smith
P.S. The great thing about The Oklahoma Trade is that days like today hardly affect it, which means traders can use it to target weekly income using a rock solid asset. Click here to see what I’m talking about.
