- 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 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 Regime is interesting: 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 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.
- DAX is overbought and due for a correction.
- Nasdaq is against important resistance.
- TRAN did not even manage to breakout.
- Biotech is overbought and due for a correction.
- Russell 2k is not breakout within channel (just hugging the line from below)
- ESTX50 is against speed limit
- EURUSD wants to go down it seems.
- Crude Light wants to go down it seems and might make a marginal low.
- Gold may climb if holds above 1175.
- Volatility Second contracts remains in upside mode if remains above 16.50%.
Note: This week, alghough DAX was ballistic, SP500 was unable to even reach the line.
My opinion: this top will remain 1/2% away from the line (keeping the risk on both sides open) and on the next top the risk will be even bigger as the risk will in the 3/4% region.
As we are dealng with market that is getting more volatile/unstable, one thing becomes clear.
If the game is to achieve 10/15% per year, given the magnitude of the moves and their frequency, by reducing the size to 20% and keeping the ability to add 20% on extremes with a tight stop on the last tranche, you will be able to hold your positions against most moves if sold/bot extremes and you shall cash in 100/150bp a few times during the year which should enable to gather 5/7% on sp500 alone.. And there are other trades out there in currencies, commodities, rates..
- It is really the backbone of my reasoning and has been instrumental on previous tops.
- It is becoming clearer it will hold now. That was not the case in July14, Sep14, Dec14 where the line had a margin of error... I see it more often on charts now as it supposedly became more precise.