June 23, 2017

Sharp Advance Into Short-term Overbought Leads to Another IWM Trade

I did something at the close that I rarely do, I scaled down my positions. I added some more IWM puts to the mix. Scaling down can be a valid strategy, but only when it is practiced with inviolable discipline – which, unfortunately, most traders do not possess. After years of trading and knowing the consequences of scaling down I know I have the discipline to know when to call it quits on a position.

Currently, the major market indices are in a short-term overbought state – all of the RSI (2), (3) and (5). The RSI (2) has pushed into a ‘very overbought state. The last IWM hit that level was 4/23. Moreover, the S&P (/ES) has pushed up against strong overhead resistance (1105-1110 area) while the Russell 2000 (IWM) left a gap unclosed at the $65.03 level.The underlying ETF closed the day at $66.99. All of these factors plus quite a few more have left me with a short-term bearish stance. My hope is that we trade lower tomorrow right at the opening bell, but I would not be surprised to see a gap up tomorrow or even another push to the upside. I am looking more towards after options expiration for the real move. As I have said over the past few weeks, post June Triple Witching is very weak (Dow lower 15 out of last 17 years) so I expect to see a decent decline that carries into the end of June before the bullish seasonality of the July4th holiday kicks in.

We shall see. All I have are probabilities and that is what I am trading. As always, risk-management is the most important part of trading and with such a large percentage of My Options Portfolio at work I need to be disciplined. Nimble, nimble, nimble. Ohm!

IWM Trade