The markets are in liquidation mode.
The Nasdaq 100 closed down 4.4% yeseterday, and saw followthrough today.
The S&P 500 closed below its 200 day moving average for the first time since June of 2016.
The VIX is exploding higher as investors are forced to buy hedges into this move lower.
I’m here to tell you, while this isn’t normal statistically, these kinds of liquidations have happened before.
Remember Feb of this year? Or Aug 2015? Or the first quarter of 2016?
Sometimes, the rug gets pulled. That’s why we trade Proactively – we pick our levels, use spreads, and scale into positions.
My “gut feel” is that we’re coming into a tradeable bottom. I don’t know if its today or next week, just know two things:
- The rip higher is going to be much further and faster than what people are anticipating
- We’ll probably retest the low
What does that mean for us? It means into any rip higher, start scaling out of your positions. And once that rip is over, we’ll start looking at laying out some bear call spreads to get some bearish exposure.
This market is probably going to setup like it was after the February crush– a volatile trading range that will give us opportunities both to the long side and short side. Don’t panic, just adjust your expected price movement and use vertical spreads to keep your risk limited.
I’m not looking at any new trades because, well, all of our other setups from the past few weeks are already in play. Some setups that I didn’t dream would come into my price levels did so over the past few days.
For the next week or so, it will be all about risk management. If there are any spreads that are taking too much heat, I’ll be sending out adjustment plans to roll them down in price and out in time to keep risk low.
In terms of short term market analysis, I’m keeping an eye on 2750 on the ES futures market to see if it can hold above. Emerging markets (EEM) may give us a bullish divergence that would be helpful.
And I’m closely monitoring the VIX futures market. Currently the entire complex is in “panic” mode, once that subsides we should get the all clear and a hard bounce.
What kind of bounce?
Well, in the market crush from Feb, the market retraced about 2/3rds of the move in 6 trading days.
After the China currency crisis in Aug 2015, the market retraced half in 3 days. It was the same for the pullback in Jan 2016.
Assuming current levels hold, and that’s a pretty big assumption so far, then we’re looking at a move above 2800 very quickly when this all washes out. It’s probably going to be *that* kind of move.
And if you think that this is some kind of major market top… go look at how 2007 traded. There were massive countertrend moves.
What I’m saying here is, there’s going to be an opportunity to scale out of existing positions. If they get too risky, we’ll roll them out to December options, and then scale out from there. Into a retracements we can start looking at broad market shorts, and into the retest we’ll get aggressively long again.
This may end up being a very fun and lucrative end to the year. I’m looking forward to it.