Who Will Ring the Bell?

“Buy America. I am” said Mr Warren Buffett on Oct 16,2 008. He announced to the whole world that he was buying american stocks, and those who listened to him, probably made a great fortune. So will Mr. Buffect announce “Sell America. I am”?

I have great admiration for Mr Buffett. However, I don’t think we’ll ever see this. So who is going to ring the bell? I don’t know. It’s hard. I will share my three cents.

Almost 8 months and no major movement.

Call it consolidation or whatever, market price action, at best, now, is “tired”.  Since 2009, Trillions have been pumped into the stock markets (and other riskier assets) and thus market kept on marching higher and higher. But the fact is, since Fed bond purchases stopped last October, markets haven’t been rising as those were during QE times (ok…may be it is still being supported by record corporate buyback..fine). Leave aside NDX extreme on bullish side and Dow Transport on the weakest side, rest are just so so. Economies are not good or else we should be seeing at least 25bps rise by now.

Performance of Major US Indices YTD

Dow Vs S&P/Nasdaq/Russell 2000

I highlighted this divergence on May 21, almost 3 months ago. Call it luck or good observation, Dow marked all time high, and since then Dow Jones has lost almost 1000 points. Now, during the past 3 months, both Transports and Industrials are in alignment.

Performance of Major US Market Indices Since May 20

What’s interesting though is that S&P500 seems to be holding the fort so far. And as I mentione above, on year-to-date performance basis, S&P500, Russell 2000 and Nasdaq are all up while both Dow Industrial and Dow Transports are down.

Humm! We’ll soon find out who is right?

Update on My Indicators

After extensive research, I developed 4 indicators which have guided me through lot of directional decision (and I have been sharing results on OPN discussion forum). Just like other indicators, sometime these are right while other times not. But whenever it’s right, these do deliver great profits and that’s one of reason I keep using these. As of Friday close, 3 out of 4 indicators are on sell mode and the 4th indicator is currently meaningless due to 8 months of sideways action of the stock market.

So how do I use this information? I only trade downside, not the upside!! And that’s what I see as my trading action during this week or next as long as these indicate “sell”.

Dow Deterioration

Technically speaking, Dow has done enough damage so one has to be careful. Ever since recent bull leg started 4 years ago (Nov’12), now is the first times that 50day moving average is trading below 200days moving average (also known as “death cross”).

Dow 4 Years

Albeit, unless 17K is taken out, I don’t think there is much to worry. It’s all play time, and we’ll focus on trades for sideways markets.

Strong S&P500

In spite of all the weakness in Dow Industrial and Transports, S&P500 has not weakened as much. So as opposed to Dow Jones, my eyes are focused on S&P500 price action as I see few concerning price patterns on S&P500.
Without going into mumbo-jumbo of price patterns, lets focus on the numbers that matter.

  • Upside travel path –> 2100, 2115 and then towards 2145+/-
  • Downside Journey –> 2075, 2045, then 1980+/-

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So, What’s the Bottom Line

A lot of people have lost lot of money trying to predict the bear market during these abnormal times since 2009. It’s been almost 4 years and markets have not suffered even a tiny 10% correction. So don’t bet your life on correction.

Trade the price action, not the forecast. If however, the weakness emerges on S&P 500 (which will be clear based on the numbers I shared above) then it’s time to be courageous and buy volatility and short S&P delta (I don’t mean VIX calls). You can construct that postion via n number of option strategies (simple one is buying plain vanilla puts). Choose the one that you are most comfortable with.

Vols are low. It’s time to dust-off your options trading skills. Best time to profit is to prepare in advance, not after.

Have fun and profitable trading, OP






6 responses to “Who Will Ring the Bell?”

  1. OptionPundit Avatar

    As mentioned on the FB >> It was quite an interesting move so far. First down (2079+/-, just above 2075 a level I mentioned above), then ramp-up. A Hockey stick pattern. It will be interesting to see if ES mini (sept) can really go above 2096+/- today (Aug 17). I might pick-up a few puts around 2101 and then add more in case it drops below the session low.

  2. OptionPundit Avatar

    Those bearish puts I mentioned above are already closed for good profit. In fact, we also closed SPX bear call vertical spread (under OPN) before FOMC minutes release.

    Another day. Another buy-the-dip.

    FOMC minutes were leaked earlier than scheduled time and it seems that Sept raise is not a certainty. Today S&P did break below 2075 but to bounce back quickly. 26 points intra-day range.

  3. OptionPundit Avatar

    Since this post on Aug 17th, S&P500 has dropped 130 points and Dow Jones almost 1000points in 4 days (till Friday Aug 21)!!!
    Talk about panic!! All the points I mentioned above are broken now. SPX has a support area around 1920/1900 and if that’s also gone, then look for 1810+/-.

  4. OptionPundit Avatar

    During current pullback process, S&P500 futures dropped to 1831 suffering another flash crash kind of situation and VIX rose to 53.29 (from a close of 28.03 on Aug 22), that’s an increment of almost 90%. In fact, it was so bad that VIX readings weren’t available for initial 25mins.

    We are not out of the woods yet and a key date, FOMC Sept meeting (Sept 17) is approaching soon. Will they, or will they not?? Though I don’t think interest rates hike will take place, but never say never. 1989+/- and 1930+/- is a range I am looking at till the FOMC meeting.

  5. Martin Avatar

    Hi, just found your blog, read the post and will read others too as they look quite interesting. However, I have one more question which bothers me since I started to trade options couple years ago. You mentioned: “Trade price action, not the forecast.” That’s excellent. But how do you put this into action with options which are sort of a future contract about something what may or may not happen sometimes in the future? I trade put, call spreads and mostly Iron Condors, I sell contracts 45 – 50 DTE, buy them back at 50% credit, try to be as far OTM as possible so I do not have to worry about daily market volatility, yet recently I was caught with puts being ITM as I really didn’t expect the market to fall 390 point and actually STAY there! Based on that I adjusted my strategy and now on I am also using STOP loss orders on the put side, yet it bothers me what else I can do to protect my trades and avoid trading forecasts? As we all know, short spreads are high probability trades but when they turn against you, they can be mercilessly punishing you hard. After I changed my strategy couple months ago I made 16 trades since then. Three trades went against me during this downfall and they basically almost wiped out all gains from the other 13 trades. So how do you avoid trading forecasts then? Thanks!

  6. OptionPundit Avatar

    @Martin, Thank you for stopping by and for your kind words about the post.

    Condors are all about risk management and adjustments. It is a beautiful strategy, but a brutual one too and thus timely risk management is key. We happen to trade condors during May 2010 flash crash and this time (not in OPN) as well. We were saved both the times due to appropriate adjustments. The question is how do you know it is right time? One of the key thing I use is 50/200dma (besides short delta) for immediate “hedging” units. These units brings huge gains if there is a sudden crash at these critical points (how many units etc. is dependent upon positional theta). I don’t care whether there will be a fall or not but as a discipline I place these hedges for condors. During past 4 years of centrally planned markets, a few times, it resulted in “watse” but this time it was appropriate. So hope this answers the question. If not, feel free to write more pls.

    Profitable trading, OP

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