Last week here I was very clear that our market was no longer one you blindly buy the dip into, that the rules have changed, and that to survive you would need to adapt pronto. I further went on to describe that we were likely trading in a bear market, which I had also suggested and wrote about right after the October rally.
Unfortunately, all too many people were buying the dip last week and getting their a$$ handed to them. Ironically, I saw perma-bears buying the dip insisting the market was too oversold instead of finally reaping the benefits of their years of incessant warnings. Go figure.
A bit about psychology: The market has trained us for years that shorting is extremely challenging and should always be very short term if done at all. Every bounce from oversold levels could be the next bull leg and often was. So when the tide shifts it is understandable that it is difficult to stick to the short side. Each bounce likely promoted thoughts such as, “this must be it.” “I don’t want to miss the rally if this is it.” To top it off, you were likely reading tweets, articles, statistics about how oversold the market was. It is all very hard to fight. So how do you deal with it and not rush in trying to capture every potential trade? By recognizing and identifying your emotional state and motivation behind the next trade. Are you afraid if you remain short you will be wrong? Are you afraid you may miss the bounce that ‘everyone else’ will benefit from? Do you fear being wrong? Are you trying to make up for previous losses?
In psychology one of the biggest ways to overcome obstacles is to identify the emotions behind them. Here is a useful and simple article about self-awareness for those interested. Why do I bring this up now? Part of adapting to a new environment involves change and change cannot take place blindly. Since the new year and the market ‘turmoil’ emotions have been running high. Awareness is crucial.
The markets and next week:
Luckily for me I remained on the correct side of the market last week, something that required patience and yes, self-awareness. Come Friday afternoon, I went from bearish to short term bullish. I tweeted, 
Here was my reasoning behind getting net long:
- We finally hit August lows at 1867, bounced and remained above it (and importantly closed above it). This had been a target of mine (and thus part of my game plan) as I detailed last week in my weekend post.
- A few of the breadth measures I monitor exceeded typical bull market oversold levels and even reached or surpassed August low levels.
- SPX stocks above their 50-day MA: reached August lows.
- SPX 52 week highs minus lows: have nearly reached the August lows (note some of the August lows were due to a lack of liquidity and were artificial whereas recent lows were a result of real market forces).
- SPX 20-day lows: This is the one measure that I would like to see more oversold for a sustained rally. It has definitely met the criteria needed for a bounce, but a rally similar to what we saw in October likely needs to see further 20-day lows.
- 10-day put/call ratio: This has now exceeded August lows and is at similar levels to the correction in 2011.
- TRIN: Until Friday, the Arms index, which you can read about here had not exceeded 3. Friday’s move finally got the panic that often equates to a short term bottom in combination with all the above.
- Finally, and this is anecdotal, it seemed that most traders expected a flush into the close. That makes sense because who would want to be long before a 3-day weekend after major drawdown to start the year. After weighing all the evidence on Friday and noting fear was palpable going into the weekend, I decided if there was a time to pull the trigger, that was it. I posted a couple long trades for subscribers of mine and then posted the above tweet to my public TWTR and StockTwits (which btw I got flak for confirming that emotions were indeed running high and making it increasingly difficult to make calls publicly).
In the end I started the weekend being long SPY, GOOGL and TLT calls. The TLT is already a free trade and something I believe will continue to work for Q1 of this year (so it’s not a 2 day trade and still something traders have time to get into). Will being long SPY and GOOGL work? I don’t know, but what I know is that if there was a time to try for a bounce, the set-up was there.
Those who are regular followers know I look at open interest to help guide me (which I still find useful for several individual stocks). This week, however, I am not going to post the SPY open interest because based on what I see it doesn’t seem to be relevant. I trade what is useful in the moment (adaptation) and I find it currently a distraction. Below is some information that can help guide your trading next week. In the end, it is very hard to write a complete game plan when the market is as volatile as it has become. Daily analysis is really what is needed. Since I reserve that for my subscribers, below hopefully serves as a guide. If nothing else, I hope that this post can demonstrate the importance of your own psychology in trading as well as a guide to what to look for when searching for a bounce.
- Gap up Tuesday that continues higher: resistance at roughly 1900, 1920. Should the market be able to expand past there then 1944 & 1950 would be potential targets. It would take a massive squeeze to get beyond that so although it could happen, as of now I don’t find it likely.
- Gap down Tuesday: support at 1867 and 1857. Below there opens the door to 1835 and then 1820.
- Should the market chop sideways in a tight range consolidating the last two weeks, it will most likely lead to further downside in the coming weeks.
Good Luck next week. If a bounce does ensue, look for previous strong stocks that are oversold as they will likely stage the largest and most profitable bounces. If you trade options it’s an easy way to capture high profits with limited risk.
Why Friday Afternoon Was a Good Time to Buy & Psychology
Last week here I was very clear that our market was no longer one you blindly buy the dip into, that the rules have changed, and that to survive you would need to adapt pronto. I further went on to describe that we were likely trading in a bear market, which I had also suggested and wrote about right after the October rally.
Unfortunately, all too many people were buying the dip last week and getting their a$$ handed to them. Ironically, I saw perma-bears buying the dip insisting the market was too oversold instead of finally reaping the benefits of their years of incessant warnings. Go figure.
A bit about psychology: The market has trained us for years that shorting is extremely challenging and should always be very short term if done at all. Every bounce from oversold levels could be the next bull leg and often was. So when the tide shifts it is understandable that it is difficult to stick to the short side. Each bounce likely promoted thoughts such as, “this must be it.” “I don’t want to miss the rally if this is it.” To top it off, you were likely reading tweets, articles, statistics about how oversold the market was. It is all very hard to fight. So how do you deal with it and not rush in trying to capture every potential trade? By recognizing and identifying your emotional state and motivation behind the next trade. Are you afraid if you remain short you will be wrong? Are you afraid you may miss the bounce that ‘everyone else’ will benefit from? Do you fear being wrong? Are you trying to make up for previous losses?
In psychology one of the biggest ways to overcome obstacles is to identify the emotions behind them. Here is a useful and simple article about self-awareness for those interested. Why do I bring this up now? Part of adapting to a new environment involves change and change cannot take place blindly. Since the new year and the market ‘turmoil’ emotions have been running high. Awareness is crucial.
The markets and next week:
Luckily for me I remained on the correct side of the market last week, something that required patience and yes, self-awareness. Come Friday afternoon, I went from bearish to short term bullish. I tweeted,
Here was my reasoning behind getting net long:
In the end I started the weekend being long SPY, GOOGL and TLT calls. The TLT is already a free trade and something I believe will continue to work for Q1 of this year (so it’s not a 2 day trade and still something traders have time to get into). Will being long SPY and GOOGL work? I don’t know, but what I know is that if there was a time to try for a bounce, the set-up was there.
Those who are regular followers know I look at open interest to help guide me (which I still find useful for several individual stocks). This week, however, I am not going to post the SPY open interest because based on what I see it doesn’t seem to be relevant. I trade what is useful in the moment (adaptation) and I find it currently a distraction. Below is some information that can help guide your trading next week. In the end, it is very hard to write a complete game plan when the market is as volatile as it has become. Daily analysis is really what is needed. Since I reserve that for my subscribers, below hopefully serves as a guide. If nothing else, I hope that this post can demonstrate the importance of your own psychology in trading as well as a guide to what to look for when searching for a bounce.
Good Luck next week. If a bounce does ensue, look for previous strong stocks that are oversold as they will likely stage the largest and most profitable bounces. If you trade options it’s an easy way to capture high profits with limited risk.
For daily analysis, set-ups and real time trades, come join us at SassyOptions.
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