- Many people recently told me " you keep shorting a market that only goes up"
- That is partially true but is also making an implicit false statement.
(1) I have been looking for shorts since Jun14 (had some success, took profit in the right places and also got stopped tactically a few times).
(2) I am still holding the view that there is a top building process but i did not know what shape it would take (it is becoming clearer now and i will explain my view lower in this post)
(3) In the mean time the volatility has increased and although it appears the market keeps going up, overall the progress has only been 7% from top to top with many corrections of 5% and one correction of 10% within.
Going back to the market only:
- Since June 14, I "know" some sort of correction is coming (flat, fast, slow, volatile?).
- It could have had different shapes:
(a) Fast and swift 20% correction with bottoming process and resumption of the rally.
(b) A longer topping process with more shallow corrections and new high which may lead to a more lasting top (counter intuitively)
- It seems that the market has elected for (b) in the US while Europe is making its catchup.
- The Volatility Regime is interesting: volatility reduction until Jul14 and then got very agitated with no ability to break lower.
- I think the last move up is a squeeze that will leave space for another 10% correction in the next 8 weeks.
- Then i foresee, SPX may enjoy a last rally of 12/14% from 1900 which may be slow/steady over 3 months (a more sanguine rally than the Nov14 one).
- This last top in july15 (the 3rd one over 12 months) may leave the market subject to a longer/calmer/deeper correction into year end (a move where the volatility would increase gradually marking acceptance of the new price paradigm)
Conclusion in short:
- My view is the current new top is a bull trap and is part of a triple top in the second top which is forming since November 2014.
- Risk to that base scenario: some more drift up for 1/4 weeks up to 2140/2160 (europe will not allow i think).
- Whatever happens, given the posture on Dax, Nasdaq, Biotech... a correction is due in the next 8 weeks.
It is close to impossible to short tops without bearing 3/4% adverse moves over 3/5 weeks.
it is tricky because either you short small (30/40% size, that is probably the right thing to do) or you deal with options which can be eroded in theta if there is resilience.
My trading stance:
- 3 weeks ago i went short through 2000/1930 march put spread (will be a close call) and added 20% short via future.
- Now, after 3 weeks, and the market having gone up, I have added 20% short.
- The position is bleeding a bit but that was part of the game plan and I think it will perform either very well if a collapse occurs in the next 3 weeks or decently if after.
Note1: I am not holding short against a market that can make moves of 10% vertically. There is a market structure that prevents that when it comes close to the red line which only allows for drifts that are manageable (the situation was very different in Europe and that is why i have largely refrained from shorts on the DAX/ESTX).
Note2: With the latest move in Europe, the US / EUROPE posture is in better sync now.
I am a swing trader. To enjoy the honey, you need to bear some bee bites.
Don t forget the time perception, I noticed:
- People forgive me more for being wrong 5% in 2 days where i stop rather than 2% over 4 weeks where i hold my position and repeat myself.
I foresee some nice swings going forward.