Yesterday's briefing about the "stop-and-reverse" apparently caused some confusion, so I want to revisit this topic again.
I am outlining this trading idea as a way to capitalize on a tricky capitulation phase, if it's even going to come. I'm not saying it's going to happen. I'm only presenting this as a way to speculate on such a volatile event while keeping position risk to a minimum.
First off, some people were confused by the term "elected short". This means using a buy stop to initiate a position. Most people are familiar with the concept of a sell stop, where an order is placed to sell when a certain price level is reached. But you can also use stops to enter a position.
If you only want to be short when the SPX goes below 814, then you set your buy stop at 814, and if the market falls below this level you will be "elected short". You've picked your level ahead of time where you want to participate, and it's up to the market whether or not you are entered.
The phrases "elected short" or "elected long" are common trading jargon because breakout traders actually have dynamic envelopes around the market that will elect them long or short depending on which way the market breaks out of a congestion period.
Some people were also confused about how the price of the S&P 500 (known as the SPX) translates into the SPY, which is the exchange-traded fund that is a proxy for the S&P 500. Here's how the recent action looks in the SPY:
The "short point" on the SPY is $82.10. So if you want to give this a little leeway to not get faked out, then that should put the action level around $81.80.
Again, the point of this trade is you want to be short below this key support level, for a potential panic sell-off. But if the market quickly reverses and moves back above SPX 817, at that point you won't want any part of a short. In fact, on such a reversal you'll actually want to be long.
I also mentioned that since I took the time to outline this strategy, inevitably the market would rebound. And of course that's what happened. But the market is still in a precarious spot, so we'll want to keep our stop-and-reverse game plan close by.
Instead of going off the cliff yesterday, the markets managed to rally and trigger a short-term advance phase. So now there is a window of opportunity to at least retrace some of the recent decline.
But the bigger picture is getting more disturbing, as the market is squandering its chance to really make some upside headway. Since the mid-term decline ended on Feb 13th, the markets have had a great chance to cycle into a mid-term advance phase. Yet there were really only two strong upside days coming off the low, and so far this potential "advance phase" has been a bust.
If the markets fall below the closing levels of Feb 13th, then it's no longer an advance phase at all, and that's when I'm advocating being "elected short". When an oversold market can't get up off the canvas, then that's a time when market wipeouts can actually occur.
Adam talks more about this so-far squandered opportunity for a mid-term advance in the dashboard section below.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 9% yesterday to 66%. It now shows a series of lower highs and lower lows, showing a significant draining of negative sentiment since the February 13 market low. But while negative sentiment has been draining the market has not been making any notable advance. Let's look at that more closely in the mid-term gauge below.
SHORT-TERM: The hourly gauge moved into the beginning of an advance phase yesterday.
MID-TERM: The mid-term gauge advanced 4 points to 23% in its advance phase. However our Confidence Diffusions Index (CDI) only flickered back to the "green" side of ZERO to ONE from yesterday's MINUS ONE. The draining of negative sentiment that launched off the February 13 market low has not been accompanied by much advance in price. Indeed Thursday's SPX closing price was a mere five points above that February low. That's a potentially bearish divergence developing. With the market making no headway while it works off its extreme level of negative sentiment, it is becoming ripe for a new mid-term decline phase. The market is wasting this window of opportunity to advance.
LONG-TERM: The long-term gauge backed up three points in its decline phase to 50%. The slope of the weekly reading remains further along in its decline phase than last Friday's close despite having backed up relative to Wednesday's reading. The weekly CDI also clicked down a point to THREE. The weekly gauge has been skittering around the 50 area for quite a while, uncertain whether to flip over into an advance phase, or continue the second half of the decline. One or the other will happen pretty soon...probably in correlation with geopolitical news.
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