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When the market turns Red, it’s not just noise — it’s a clear signal that something has shifted beneath the surface.

This is the kind of environment where protecting capital comes first — and opportunity follows close behind for those who are ready.

In my world, momentum is everything. It’s how I track capital flows — in or out — across the entire market. I distill thousands of stocks into a simple daily reading: Red, Even, or Green.

When that signal flips to Red… I know it’s time to shift gears.

Negative momentum means risk rises, correlations tighten, and selling can accelerate without warning. That’s why I stick to a clear, proven framework. If momentum turns negative, these are the 6 rules I follow — no exceptions:

Rule 1: Cash Is My Friend
 

You want to have a solid cash balance when momentum turns negative. In my trading account… I move to heavy cash.

I’m out of long positions and position my cash for buying opportunities. Since I’m an active trader and investor, I focus on key technical levels that allow me to focus on new entry points. The move to negative momentum is very important as I protect as much capital on the balance sheet as possible. This is how I can buy for a dollar and sell for two dollars multiple times yearly.

Rule 2: Don’t Sell Puts, Unless… See Rule 6
 

If I find myself selling put spreads as an entry point, now is not the time for me to open new positions… If I sold previous cash-secured puts or put spreads, I entered this with the mindset that I was willing to buy the stock at a lower price. If I’m up in my current position, now would be an excellent time to take profits. If I’m down, now might be the time to assess whether I want to sell spreads at an even lower price.

When momentum goes negative, selling can be indiscriminate. That means nothing is safe. The last thing I would want to do is have exposure to a $50 put when the downside for a stock is much lower.

Rule 3: Learn Implied Volatility Rank
 

One of the great rules I learned from my time with tastytrade was how to know the difference between cheap and expensive options. I use a tool on tastyworks called Implied Volatility Rank (IVR).

This measures the implied volatility of a stock TODAY compared to its IV during the previous 52 weeks of the year.

If a stock has an IVR of 25, its implied volatility is lower than 75% of the trading days over the last year. If it’s at 80, it’s higher than 80% of the days in the previous year. The general rule is that if IVR is under 25, it’s cheap to buy calls or puts. If it’s over 30, I might want to sell calls and puts. And if it’s elevated, that’s the time for me to do exotic trades like Iron Condors. This can also tell me which stock to trade and how to trade it compared to other ideas.

Rule 4: Sell Credit Spreads in Negative Momentum
 

If a stock is expensive to short with a long put, there are other “options.” I can sell vertical call spreads on stocks with a high IVR and benefit if the stock trades sideways or declines in value. I’d be selling someone the right to purchase a stock from me at a higher price. If the stock price falls, the underlying call will fall as well, thereby reducing the value of the call spread.

I use a higher call on the trade to protect myself against any surprise upside on a stock — think a buyout or sudden momentum reversal.

Rule 5: Look for Oversold Levels on the SPY and IWM
 

Finally, the market tends to sell off fast and furious in negative momentum environments.

From June 8, 2022 the S&P 500 ETF went from overbought to oversold in about seven trading days. The market was oversold after the SPY’s move on the Relative Strength Index (RSI) to under 30.

Oddly enough, no one had the guts to buy stocks.

The same thing happened in October 2022. We had oversold levels on RSI and MFI daily levels in early October. It happened again in December… and March too…

Want to know who purchased shares in oversold conditions and made a fortune?
Robots.

Algorithms — which have no emotion or fear — scooped up stocks in deeply oversold conditions and kept buying for a month.

Rule 6: Wait… Sell Puts in Very Specific Conditions
 

The oversold territory is also a very good place to sell puts on stocks I want to own when we’ve reached a period of “peak fear.” If the RSI on a stock is at 25, and it’s a great blue-chip company, I use the high volatility and the fear to sell puts on a stock maybe 15% to 20% lower than its current level.

If the stock does fall to that point, I’ll have an absolute bargain. But if the stock does rebound from overbought, I can repurchase the option for less and pocket the difference.

With that, I’m ready for battle. It’s time to trade momentum.

This is the kind of market that rewards preparation and discipline.

Let’s get after it.

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