August 17, 2017

Yes, Trading Can Be Frustrating At Times

Yes, today was, should I dare say, frustrating. My combined position of SPY puts moved into positive territory near the open only to rally hard at the close of the day. It is certainly easy to be look in hindsight and say, I should have taken off my positions when the $108.24 level on the S&P was hit (close of the gap from several days ago), but the major benchmark was still in an overbought extreme so I thought more selling was ahead. Of course, the selling could be right around the corner and I think it is over the short-term, but (for reasons I will state shortly) that still does not hide the fact that trading can often be an endeavor that requires much patience and conviction. As an options trader outside noise (media, etc.) creates emotional trading and as an options trader (we deal with more volatility than most other traders) I am required to stay disciplined and trade  accordingly when the market vacillates widely.  This means abide by my risk-management guidelines through position-sizing and stop-losses. This keeps me in the game and keeps my cumulative profits in tact.

So, with that being said the current market, in my opinion is still due for a short-term reprieve. Over the last three days the S&P 500 (SPY) has been met with strong overhead resistance while sitting at a short-term overbought extreme. Yes the gap from 7/13 closed today (which does concern me a bit), but that does not hide the fact that the S&P is plagued with the aforementioned bearish signals.

Furthermore, at the beginning of the trading the SPY had managed to close above its open for six straight days, which is a feat that has not occurred since May 22, 2001. That particular date, if any of you can remember that far back, marked the end of that rally. The next day (which would be today), the S&P was only able to close above its open 2 out of 9 times when it was below the 200 moving-average.

Moreover, the Rydex Bull/Bear RSI Spread has hit an extreme reading which signals a short-term pause is near. Couple that with the Rydex Beta Chase Index in an extreme and the probability of a move to the downside  increases that much more.

In fact, over the past ten years there have been only 19 occasions when both Rydex indicators hit this type of extreme at the same time and out of the 19 there have been only 3 occasions when the S&P displayed a positive return three days later. However, even the 3 occurrences were eventually met with bearish fate over the short-term.

With that being said, you can see why I am still in the short-term bearish camp. As I always say, as a high-probability mean-reversion trader I have to base my analysis on what makes the most sense to me and that is when Mr. Probability is leaning heavily towards one side, whether it is bullish or bearish. Certainly, even though the herd is quickly moving towards the bullish camp (and maybe that is the right call over the intermediate-term, who knows), but over the short-term my analysis sides with the bearish camp. We shall see soon enough who is right.

Have a wonderful night!