When I first used the term "elected short", many were unfamiliar with this bit of trader's jargon. When you're elected short, you're letting the market elect you into a short position by moving below your pre-selected entry level. It's essentially a stop used to enter a position, instead of exiting one.
This is a technique used frequently by futures traders, and those who like to trade volatility breakouts. After a period of congestion, when a streaky move can be expected, you can let the market tell you whether you should go long or go short, depending on which way it comes out of the congestion.
Yesterday, our long SPY trade was stopped out for a nice gain, and we were elected short when the S&P 500 (SPX) fell decisively under 870. The rationale here is that if this were going to be a highly bullish, inconsequential pullback from the initial thrust up, the SPX would not sink below this important level.
Yesterday's huge sell-off went much further than a purely bullish case would allow, so the market is telling us that the buyers, who have been on a rampage lately, are more than willing to step aside on the first hint of bad war news. There isn't that much conviction on the bullish side. Not many stepped in to buy the market at this first obvious support level.
The market continues to react very emotionally to every little tidbit of news flow from Iraq. That's the only game in town right now. We're not here to say whether this is silly, or "wrong" -- we can just try to adapt to whatever the market's doing.
That's why I've gone to these position trades, using the stop-and-reverse, during this war market. It's the only way to keep your losses small, and still give yourself the opportunity to capture some good profits. The only enemy of this style of trading is sideways congestion and a lack of volatility, as then you can get stopped out innumerable times for small losses in both directions. But so far that does not seem to be a problem with this war market, as there are huge directional moves occurring in just a few hours right now, in both directions.
The prime reason I'm advocating these position trades right now -- and staying away from the Rydex funds -- is the VIX just isn't providing its usual directional clues. It's been stuck in a range between 35 and 40 for two straight months.
This is unusual behavior for the VIX. It's not able to develop any momentum either up or down. Friday's big down day on the VIX -- which looked to be the start of an important move down, which would coincide with a strong uptrend for the markets -- was quickly repelled back up with Monday's decline. So now we're right back in the range on the VIX, and not getting much help from this usually excellent trend indicator.
But the good thing about this range on the VIX is when there is a confirmed break out of this range, it will mean the market is ready to embark on a big, sustained trend. The signs are pointing to the eventual break on the VIX to be to the downside, and for the markets to put in a bigger run to the upside. But we'll see. It's time to keep an open mind.
Back to the SPY trades: All of the gains since Monday of last week were wiped out in the first hour of trading yesterday, and the long SPY trade entered down at $82.20 was stopped out. We were also elected short, when the SPY went decisively under our $87.30 action point.
Now we need to be vigilant about a move back up and through SPX 875, which would equate to about $XX on the SPY. If this happens, and the SPX stays above 875 for a good half-hour -- or has obviously moved past it in a single thrust -- then turn right around and go long. Cover the short, and add a long position.
Otherwise, if the market keeps pulling back, we'll keep notching down our action levels. There are a number of ways to pick the important levels, but one way I favor is the funky "market profile". This unique indicator shows where the market is finding its balance points. Here's the hourly market profile of the recent action:
I'll explain this indicator in more detail tomorrow -- time permitting -- as it's worth a closer look. But for now, we can see that if the 855 level is breached on the downside, then the next natural resting point is down at 830. So if the market takes out 855 decisively, then we'll lock in a profit on this short position by notching down our action level to 855. Until then, we'll leave it at 875.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled up 4 points to "46% full" of negative sentiment on Monday. After draining from 85% to 42% during the sharp rally off the market's March 12 low we were due for a pullback.
SHORT-TERM: The hourly gauge rolled over into a short-term decline phase.
MID-TERM: Despite the retracement in Price the mid-term advance phase progressed 9 points to 82%. Strictly speaking we're now into overbought territory on this gauge. That means that we've advanced far enough that IF this is just another bear market rally then it's probably time to roll over into a mid-term decline phase. However, if we're really headed into a phase change in the market then there's still some more room to run to the upside. Our Confidence Diffusion Index regressed to 1 out of 7. That's pretty close to neutral. If the CDI regresses into negative territory for more than a day then the odds are that this advance phase is exhausted. If the CDI moves higher from here, then we'll likely have some more upside near-term.
LONG-TERM: The weekly gauge progressed 5 points to 59% in its decline phase. That beats last week's highest reading. Our weekly CDI resurrected itself from the green side of ZERO to get to a bearish 1 out of 7. That's still in pretty neutral territory.
Both the mid-term and long-term gauges made big jumps in the divergent directions of their respective trends. At the same time both CDI's are very close to ZERO. Sentiment continues to behave in unusual and perplexing ways. The VIX again rejected a brief foray down and out of the 35-37 band in which it has been living for 2 months! A few fun facts: It is unprecedented for the volatility of the VIX itself to be so low when the VIX is above 30. The 50-dma of the VIX has never been this high without the VIX hitting 50. Finally, the 50-dma of the VIX has never been this high without Historical Volatility jumping up over 40. 20-day Historical Volatility now stands near 24.
Meanwhile the Put/Call Ratio shot up to 0.85, which is high, though not climactic.
What does all this tell us? That there has been a strong shifting back and forth of negative and positive bets being made, but that "marketeers" have consistently been willing to pay high prices to make those bets. There has probably never before been such a high degree of expectation for volatility (first one way, then the other, and then back again) while the market remains caught between important support and resistance. Just a thought...perhaps the way for the market to fool the most people now would be for it to remain in a narrow range.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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