Tickers discussed: SPY / SPX Strategy and Tactical Update
The Market recap provides a short overview of the market along with key levels, strategies and timely commentary to keep you on the right side of the trade.
- SPY & QQQ successfully tested and held the prior lows
- IWM not as much; falls to the Dec 2018 lows
- BA destroyed as cancellations top new order bookings; Implement a hiring halt and tap their credit revolver for $13B
- Trump to announce fiscal plans at 9 pm tonight. Will he bring a Bazooka or a BB gun?
Ripe for a Rip
While I am overall bearish on the market going forward, this market has been tough to trade. Lots of misdirection making overnight holds more of a guessing game than anything else. A painful lesson for me back in 2016 was “fighting NYMO”. That is, holding a boatload of shorts with the $NYMO oscillator deeply oversold. When the $NYMO is stretched tight and to the max, it is a prime set up for a “rip your face off” rally. Not a place where you want to be holding shorts. Lets look at the charts.
As you can see, we are well below the Q4 2018 and early 2018 sell off levels. Notice that below -60 you enter the danger zone for holding shorts. In the annotations are my thumbnail rules for respecting $NYMO levels. What has been frustrating this time has been the duration in time for the oversold conditions. As other commentators have mentioned, this sell off has dwarfed / over run commonly used technical indicators making it a tough market to position bearishly or bullishly anticipating a bounce. I think the oversold signals are about to win out at least short term setting the stage for a rip. Realistically the only alternative is a cascading panic sell off that results in a capitulation / exhausting sell off. I vote for plan A.
$SPX with $NYMO indicator
Here is the weekly $SPX chart with $NYMO in the lower panel as an indicator.
Technical Posture of $SPX
- 2700 is a key support level. It’s not shown on the weekly chart, but we’ve tested that level twice this week. Monday and now again today. I think it holds and we bounce. Let’s put it this way, if 2700 breaks, I think we will be in waterfall mode down to at least 2600, maybe more with a momentum overshoot.
- I favor a bounce to either the 50% fib level at 3056 or the 61.8% fib level at 3138. If forced to guess, I’d say thew 61.8% level. You ‘d have people screaming V-bottom, sucking in as many bulls as possible convinced the Fed or whomever saved us again.
- Then the bottom falls out as “Wave 2” hits. Wave 2 is when all the corona affected data continues to hit the tape and all the knock on effects of the economic slow down are revealed.
- If all goes according to Hoyle, we then come back for a back test of 2700. There we either bounce and move back to the highs or we break below which would open the door to lower lows.
- That’s a long ways off so no sense for speculation ; we’ll see how it goes.
Note: There are lots of other technical signals pointing towards favoring a bounce. There is positive divergence on the SPY 60 min chart. Also, TLT is backing off it’s over bought run. Yields backing up would be a boost for equities. I’m also thinking that the VIX is going to have a hard time sitting at 50. If the VIX relaxes even to the mid 30’s, equities should be able to nicely advance.
Short term strategy and positioning
- Positioned flat, but ready for a bounce
- I’ve already tried a couple of baby overlong long positions in SPY / QQQ anticipating a bounce that have failed. So I am a little gun shy about overnight holds.
- If we see a good upswing develop, my game plan is to hop on intra day, then try holding modest bull positions overnight and see how it goes.
- Stay Bullish, but be ready for a reversal
- I’d be happy to ride a bull wave to 3050 or 3100; works for me
- The higher the better. That would give great trade location to reset shorts at higher levels for a back test of 2700.
- That said, I want to be open and ready for a reversal at the various overhead resistance levels. There are lots of trapped longs out there that would love to get out at higher prices.
- Stay Mentally Flexible
- Grand plans are great, but they rarely work exactly as envisioned.
- There is always a wrinkle or curve ball.
- I want to stay as mentally flexible as possible. For instance, if tomorrow morning we break 2700, the NYMO be damned, I’m getting short with a stop just above. I don’t want to be sitting there frozen waiting for a bounce.
Trading a Hi-Vol Tape: Tips for success
- Cash is king.
- Overnight risk is elevated in both directions.
- Be ready for swift 2-way trading during the day; Know your levels
- Hi-Vol markets are technically driven
- Narrow your focus to the liquid indexes, Sector ETFS, and a select number of stocks.
- The wild moves will demand focus and attention. If you stretch yourself thin, mistakes will multiply.
- Migrate from strategic to tactical thinking and trading. Near term, the days of sitting in positions for weeks and weeks is likely over.
- Expect added chop and volatility. A VIX greater than 30 is not “invest-able” it is a trading environment
- Reduce position sizing. With the added vol and out-sized moves you can make good money with smaller position sizes.
- Consider using spreads to mitigate the high cost of options.
- Consider selling call spreads instead of buying put spreads to express bearish outlook. Premiums will be elevated which is great for option sellers.
- Flip your mentality from offensive to defensive if you have not already done so.
- I expect bounces into key fib and OH resistance levels will ultimately fail. The range of possibilities are huge so trading becomes day- to- day, hand-to-hand combat keying off support and resistance levels
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