* Due to some engagements, this post reviewing Friday, 8/16, is being compiled Tuesday, 8/20. So read accordingly. These are compiled from my trading journal, so I will do my best to write it from the same “headspace”.
Portfolio Performance: + 416%
Performance this Week: + 79%
Quick Summary: My liquidity measures continue to point down, and the breadth divergences lead me to conclude that the market remains inherently weak. Unfortunately, I was away from the computer all day and missed some spectacular intraday opportunities.
Following Thursday’s distribution, I was expecting some sort of strength with the possibility of an oversold bounce. If the market was in as stronger condition, then I would be looking to go long. We did have some strength, but it was on weak breadth. Thus, I shorted into this strength.
Based on some indicators such as the NYSE McClellan Oscillator, the market is quite oversold, however it goes without saying that the biggest declines emerge from oversold conditions. And my suspicion is that the market is in a downtrend and “oversold” becomes something dangerous to fade.
Currently, the market remains in a state of NEUTRAL liquidity with healthy market internals. The velocity of liquidity is NEGATIVE; acceleration of liquidity is NEGATIVE. The effects of this are that this market is in a sideways range with more risk to the downside, and there is a strong possibility that the market breaks the range to the downside. Since all liquidity measures are pointing down, more focus will continue to be paid to short positions.
The trend certainly remains higher, and it deserves the benefit of the doubt. However, until liquidity conditions improve it is wise to remain cautious and conservative in terms of amount of capital risked and profit targets. My portfolio will attempt to take advantage of opportunities within this environment. I am assuming this is simply a pause within an uptrend which I believe is appropriate given market internals. Thus, I am also spending some time studying stocks and setups to find the next batch of winners when the primary trend reasserts itself.
Despite my aggressive positioning, I am still treating this as a correction within an uptrend. Overall, the larger goal is to preserve capital for the time when market conditions are more suited to my style of trading.
BUY 200 TNA @ 55.3
SELL 200 TNA @ 55
Given that “buy the dippers” have been rewarded for so long and on many timeframes and by many measures, the market is now oversold, I decided to take a shot at a long hedge because riding oversold bounces in downtrends with the right entry can be lucrative.
We also had a major distribution day which typically sees a bounce of some sort, I was looking to at least hedge my short exposure. The one concern I had was the weakness in breadth which was barely positive even with the market up a healthy amount. Needless to say the market closed at its lows and I was stopped out.
BUY 600 TZA @ 26.4
SELL 600 TZA @ 26.8
Given the weak breadth, I made a quick daytrade on my phone. This worked out well as the market closed at its lows but if I was at my computer, I could have traded some weekly options that went up like 4x during the day, went down 90%, then in the final hour as the market sold off went back up 6x.
Now maybe I am guilty of putting a convenient narrative on price action but I like to think that I could have caught some of that move. After a distribution day, it makes sense to take buy signals and when breadth did not respond to the buy signal, it makes sense to short on sell signals.
SELL 20 SPY AUG13 168 PUTS @ 2.08 (Bought @ 0.21)
SELL 20 VXX AUG13 14.5 CALLS @ 0.82 (Bought @ 0.21)
SELL 200 UVXY @ 38.1 (Bought @ 33.82)
SELL 200 TZA @ 26.9 (Bought @ 26.42)
Clearly the gap down possibility did not materialize. And I was pleased we did not have a big gap up. I exited my SPY options quite early and the rest on buy signals through the day, ordinarily I ignore these in such market conditions but following a distribution day I take them more seriously.
The trend is certainly down but there is a reason that very few bears are billionaires and that is because assets in a downtrend can have vicious oversold bounces. In the past, I have been caught in them then forced to cover when I should have been shorting. So I have to take the possibility of a powerful bounce seriously. The real money is to be made in shorting the bounces.
BUY 200 DUST @ 44.07 (STOP TBD)
Certain sectors such as cyclical and commodity stocks have defied this move down, it is my observation that in the last stages of a correction, everything gets pulled in. Thus, I am picking up this ETF which has been decimated with this recent move higher in gold miners.
BUY 200 UVXY @ 36.55 (STOP TBD)
BUY 100 VXX AUGWK4 17 Calls @ 0.12 (STOP TBD)
BUY 100 VXX AUGWK4 17 Calls @ 0.12 (STOP TBD)
BUY 100 SPY AUGWK4 162 PUTS @ 0.33 (STOP TBD)
Based on the weak breadth and lack of buying following a big distribution day, I decided to reenter short positions. I know there is a risk of a big bounce with oversold indicators like the NYMO and price below the BB line. However, I have observed that a market that does not respond to these powerful signals are extremely vulnerable to steep sell offs.
My exposure is lower than before due to more uncertainty and worry about a forceful oversold bounce. Actually, for bears the best case scenario would be an oversold bounce on weak breadth with weak market internals. If that situation were to materialize, I would be betting aggressively.
move up stops
Take partial profits
Call Options on Shippers/Coal Stocks
Calls on Cyclical Stocks - CAT FCX BHP Steel stocks
STP LDK SOL
Chinese Internet Stocks - DANG, RENN
Coal Stocks - WLT, ANR, ACI
Shippers - DRYS EGLE GNK
Gold/Silver miners that are lagging
GLD, SLV calls
This move down is more than a mere dip. And there are some factors which lead me to believe that we cold have a big retracement of the entirety move from November.
These factors include the breadth divergence, bullish complacency, lack of real corrections on the way here, shift in market dynamics with increasing yields, and the leakage in liquidity.
I dipped my toe in with a long and it did not work out well. Moves out of these types of oversold conditions typically lead to melt your face off intense rallies so I will be moving up stops on my positions. I should lay off the leverage as it is really, really rare to short into such oversold conditions and make money… but due to breadth and liquidity, I think the payoff if I am correct will compensate me for the risk.
I guess just like on the move up I was OK with giving some back when the trend turned, here I am OK giving back gains when we do get the bounce.