All never ending bull runs ended at some point; including the mad run of 1929s, the bubble run of 2000 and the bull run of 2007. Without a doubt, current run since November lows has been one of the most stubborn and amazing runs. Whether you call it a run fuelled by liquidity, fundamentals or whatever, the fact is, it has been one of the most bullish periods. So have we seen the highs? at least for the short term?
Recall, from the beginning of this year, I have been suggesting to dance to the music Uncle Ben is playing but dance closer to the exit. So how do I know where the exit is?
No one knows for sure. However, at times, we can take clues from price charts to guide us.
Ever since this run started in November and S&P cruised above 50dma in Dec’12, S&P didn’t stay below 50dma even for 2 days and it continued to run almost 100 days without a single 3 day pullback. However, current markets are too stretched to use 50dma as exit guideline. 50dma is almost 60points away from May 28th close. In this article, I am suggesting a different approach. The key points to consider are 1635 (20dma) and 1594 (50dma), followed by 200dma which stands at 1486.
At This juncture i.e. SPX 1660 (+/- ORB as explained below), I am inclined towards a bearish trade.
The set-up is like this-
Once markets are below 30minutes opening range, Open a bearish trade on SPX with a stop loss when SPX is 1678+/- (Since, there is no exact price level, I used +/- to represent as guideline). Once SPX moves below 1635, I shall book profits on this trade, and then open a fresh bearish trade with stop loss at 1650. Notice, these are very tight stop loss as “weakness” in broader markets hasn’t been proved yet. It may just be a temporary pause before next bull leg starts. Thus I need to be nimble to control my trade for what if I am wrong. And I am going to use points mentioned above as guidelines to continue to shift the goalpost as long as S&OP doesn’t close above its previous swing high.
Also worth considering is the time to enter the trade. Keep the two widely known observations handy-
- During the past 31 Tuesdays, markets have gone up on every Tuesday.
- The first and last hours are notorious for dip-n-rip i.e. if we see a drop at the beginning, we might see a surge after that 30mins (morning) and last 30min (before market close)
Before you consider a bearish trade, please do understand this run has wiped-out many bears. Not all highs were tops, but all the pullbacks started from the highs.
If you need any help in setting up a trade using options, pls leave your questions in the comment section.
Disclaimer– As of this writing, I am bearish on S&P500 but I may change my positions anytime. If you do decide to take this trade, please do your due diligence and be nimble. Before investing, please make sure you are comfortable with the loss.