$SPX Post-Market Update (And A Personal Note)

The outline guesstimated at earlier here has worked quite well, at least so far. We wrapped up the Orange b of Blue 2 (or what I think is Blue 2), rallied as anticipated for the orange c, and had a further 5-wave decline from that high. The Blue 2 reached in between the 61.8% and 78.6% retracement and it looks good as a 2. The last minutes into the close even gave us a little 3-wave curl that might be sufficient for Orange 2 of Blue 3.

Next, we would like to see a large move down to help to confirm that we’re in a 3rd wave.

SPY

On the post minutes spike, I was able to unload the call hedges I had taken and I reaccepted my long puts back. I’m going to wait before reopening the bear call spreads I had closed (though I have others). So, we have the ingredients in place that we would need for a big move lower.


Personal Note:

Trading is difficult. Even for folks who have been in the market for a long time. This rally was strong, and it’s upset some folks, and even a few have left. I’m sorry about that. It is important to hedge from time to time, and to monitor position sizing, and there are many other strategies available to help one navigate a difficult market, including allowing oneself to be stopped out if things don’t go according to plan. I have a feeling that the folks who have been the most upset (it’s just a small handful) need more practice implementing some of these strategies. And so, despite my not wanting to be in the position of offering trading advice in any way (this is my expression of where I think the market will go, and I publish it so that others can take it into account with their own independent thinking), I have started noting the specific kinds of trades I am inclined to take during certain market movements. I hope some of that will help people see the benefits of things like strangles (which I recently took, and made 181% return overnight despite the market doing the exact opposite of what I expected—I was looking for a top and we weren’t there yet). So, I hope some of that will be helpful. I will do some more of that as we go along, but don’t necessarily assume that that’s the right trade for you, too. I don’t think I want that responsibility: you should have a careful plan of your own in mind as well.

Also, bringing up when things don’t go according to plan. Let’s review my plan as I’ve laid it out. On July 31st, in my “Roadmap” article, I recognized that the move up was probably incomplete, and I expected further upside, consolidation and another pop, before a big decline could begin. Let’s look at what that has turned out to be.

SPX

The consolidation arrived, on schedule, and that’s the Green 3-4 in the orange box. Now, oftentimes, when you have a consolidation like that, you get a little “look above and fail,” in this case that would have been a tiny Green 5 at the green arrow. But instead, we got a full-bore 200-point Green 5. That’s okay, to my mind, and I don’t view it as earth destroying. I think what has upset some folks (I got a little bit of harsh feedback) is the FOMO. People look at a rally like that and think, “If only I had been balls deep long, etc.” That’s true, you can make a lot. But, if we are topping out, it’s also exceptionally risky to lean into a major high. If this is a bear market rally, the trend is still down and that’s the preferred trade, though one is welcome to take pot shots at the upside when they feel like they can get away with it.

And let’s review how I thought about things as we’ve gone along.

  • Right before that big gap up, I acknowledged that I was long short duration and short long duration. And I even suggested that we were likely to move up next. That was my protection against being wrong about the top I was looking for, because there was uncertainty. And the top wasn’t in, and we gapped up sharply, and do you know what short duration calls do in strong gap up? Yeah, they’re little miracles. Little gestures like that have allowed me to protect, roll and even add to my long-duration short position all free of charge and add to cash. Short duration in a sharply rising market is miraculous.
  • After the gap up, I closed the short duration longs out of caution.
  • We gapped up again (much smaller gap), I thought it was a great candidate for a top—terrific fibs there—and I sold it. I was immediately rewarded with a meltdown that lasted the rest of the day. And though I hadn’t consciously made the decision to point out all the nuances of the trades I make, I always take something right back off if it immediately goes my way (you saw me do that this morning for example).
  • At that close (on the 11th), I was skeptical because the pullback only gave us three waves. I acknowledged my having re-hedged. And what did we do? We gapped up again.
  • And early in the day, I acknowledged the bullish potential—even possibly longer-term—and disclosed my having taken a strangle.
  • I held that until the strength of the 15th, when I discussed how I had cut loose the call sides of all the strangles into the strength (I had a few different ones).
  • Now at that point, we were only a day away from the top we’ve had. It’s not been terrible. And in fact, I caught a lot of it with mostly short duration, and hell, even though I’m looking for a top, it’s been a lot of fun even.

So, I wanted to walk through all of this, because of the emotional rage-quitting I’ve seen lately. A few folks were upset, and I don’t know if that criticism has entirely been warranted. I won’t publish the comments that were made to me, but I think they were unfair because some folks have acted like I’ve only been obsessed with looking for a top, and while I am concerned that this is still more likely to be a bear market rally (despite how high it’s gone), it’s not as though I haven’t participated on the way up and even acknowledged on the way up, that we could keep going up, and I even sometimes put money behind that, too.

Now, I still do think this can be a bear market rally, and the Fed minutes today emphasize that still: their message continues to sound unified: inflation remains the sole focus.

That said, let’s see what will happen. It would have been impossible for me at the June lows to say we would go up like this. I do think it’s probably an expanded flat. And that would be a very reckless structure to insist upon before one saw it unfold. But, it’s important to see it once it’s unfolded, and I think I’ve done that here. But I think it’s unfair to accuse me of being dead wrong all along. Technical analysis and trading is a process of discovery with some prediction. Things need to be tweaked along the way, and I’m never afraid to do that as new evidence emerges.

I am sorry to see some folks go, and I’m sorry they feel bad, or angry, or anything else unpleasant. Trading is not easy. I wish this market (or any market) didn’t harm anyone. And it sounds to me like some folks got harmed and that saddens me. But it’s not as if I’ve leaned in fully short all the way up. And if the folks who have been most upset were doing that, I hope my looking for a top wasn’t the biggest reason one would hold positions like that (if that’s what they did). I will try to express going forward some of the ways I hedge and participate even in a market that isn’t going where I want it to. And if it was the feeling of having missed out on a lifetime opportunity, that’s patently absurd, as the market always gives us another trade. Hell, I didn’t even get into this, but I scalped that trading range we were in up, down and sideways, because I expected rangebound conditions (what’s become the Green 3-4—I probably got a hundred points in there while the market went nowhere: there’s always an opportunity). If the folks who are angry are angry because they sat in a structure like that holding weeklies, I’m not sure what to say. I don’t actually know the actual reasons a few folks are upset, but the language they have used leads me to conclude they believe I’ve gotten it all entirely wrong, and that doesn’t seem justified to me.

If I say we’ve had a great candidate for a top and it starts going up instead, slap a few calls on and see what happens. That’s what I do anyways.

At any rate, let’s see what comes next.


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4 thoughts on “$SPX Post-Market Update (And A Personal Note)”

  1. Well said DC, I appreciate you sharing all the context and your positioning, it adds valuable insight.
    I learn something from each of your posts. I have also been frustrated by the market action, but that’s
    A result of my trading actions and choices, not yours. If anything, your perspective has kept me from making things worse for myself. Keep up the good work, and thanks for all you do.

  2. Well said man. In short, if this was easy everyone would outperform the index’ and everyone would be rich. Doesnt work that way. I get angry too when things dont go my way. But there is always a lesson to learn. In the end, i prefer to have your analysis/opinion than not. But, like almost anything these days, you can’t please everyone. So keep up the good work and carry on…

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