We're not going to over complicate this: Stay calm, this too shall pass. We are buyers on this huge over reaction that has occurred to the downside. The market is going to bounce, whether it's dead cat type of bounce, a relief rally of sorts, or indeed the very beginning of a larger bottoming pattern (more in this camp) ...the market is very much going to counter rally this move in some form. But keep perspective on the larger trend here, as we are still very much in a confirmed uptrend on the primary term time frame. Can that change, sure...but don't make the mistake thinking that markets just go straight down. There will be plenty of GTFOD (get the f out of dodge) moments where we'll be able to reassess as the data comes in & pivot / hedge in some form. In the meantime...get ready for the next round of long positions here in this area. The trick here is to model the trades to give us time to be right no matter what happens in the near to intermediate term. We don't need to buy the exact bottom, we only need to buy NEAR the bottom. We did real good reducing to cash before this giant pullback has occurred so we're in a solid position to now put the 35% cash position to work. In the morning, members will receive direct alerts with the buy rounds that we're initiating, which will include both swing to more aggressive call options & conservative call spreads on TSLA, AAPL, SPY, TQQQ, MSFT, COST, TSLA, ZM, FB, XOM & some others that we may consider.
I want to point out something that tends to happen in almost any big plunge like pullback which is the fear that's associated with BUYING during what feels like is a very scary & perilous time. We've all heard these Rockefellar & Buffet pearls of wisdom... and when markets are bullish everyone swears that "Oh man next time the market pulls back like it did back yonder I'm going to buy that dip bro!! I'm with you" etc, etc, blah blah...
"I will tell you how to become rick. Close the doors. be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffet
"The way to make money is to buy when blood in running in the streets" - John D. Rockefellar
But it's the hardest thing to do when the blood induced panic cascades into a series of heavy plunges. People TALK...and it's although it's in their earnest ambitions that they indeed want to be that guy who bought blood in the streets...but when the pain & fear of a big correction cycle comes...they just lock up & freeze like a deer in headlights...and most of the time end up NOT BEING THAT GUY THEY SWORE THEY WOULD BE....and instead end up getting giddy and buying the highs. Those of you who have been with BotTrigger for sometime, many of you since 2016, know that we very seldom are ever buying near the highs. There is a big reason why I don't like buying the highs and it's because my buffer & margin of control is lessened when buying at the highs.
Well here is your big chance to prove to yourself that you have the moxie to take on that risk & really buy this fear mongering induced plunge that has occurred. Let me remind you something about this market, it likes to bully you out of your conviction...above all the market was largely designed to TAKE YOUR MONEY, NOT GIVE YOU MONEY. So you have to go into the trade with that general understanding & mitigate that possibility by increasing your risk / reward ratio. One of the most effective ways of doing that is to be the guy buying NEAR the lows & exploiting pullback cycles on quality names that are in a confirmed uptrend.
I want everyone to take notice of this chart below on the SPY to VIX relationship. Take notice that the VIX right now has now gotten as high as the December 2018 correction that occurred. Also take notice of the relative relationship of where the bottom has tended to occur whenever the VIX got this highs on the SPY. In almost every instance, that has marked the absolute bottom or if not absolute then NEAR the bottom for the correction cycle. The only time the VIX getting this high failed to call a bottom was back during the financial crisis era. In that particular era, the VIX actually was just kept on creating a series of higher highs while the SPY kept on making LOWER LOWS over a very lengthy and tormenting bleed out.
Take notice here on this weekly chart on both the SPY & QQQ how history isn't necessarily repeating but rather...it rhymes. Breakout above giant consolidation / volatility range followed by a retest of that original breakout zone. Here we are across nearly all the indices and we are @ the 40 week moving average on the weekly now retesting that breakout zone. I don't think we're going to get a vertical "V" like recovery but rather more of a complex bottoming pattern such as an Inverse Head & Shoulder, or "W" double-bottom "W" recovery pattern that will flesh out over the next couple of months.
We have in front of us the most historic correction with regards to vertical steepness the market has EVER seen. Down -16% within the last 7 trading days is an absolute record. That is a massive over reaction that we want to take advantage of. To whether or not the market & economy is entering into recession...either way, the market is going to bounce / rally / oscillate a giant pattern before we can can conclusively distinguish that we have indeed entered a bearish downtrend on the primary term trend.
So what does it take for us to realize the trend is indeed broken? In its most simple expression: LOWER HIGHS, followed by LOWER LOWS. Whether it feels like it or not, the primary term uptrend IS STILL within the vicinity of now cultivating HIGHER LOWS. So until proven otherwise, the benefit of the doubt goes to the buyers and we're to assume the uptrend is still in play. That's precisely why we're going to be longing this entire down move. If we're wrong, we'll have plenty of opportunity to be selling the rally on the next set of "LOWER HIGHS."
So our plan right now is to:
→ assume the bull trend on the primary term time frame is still in effect & acknowledge that a more chunky bottoming pattern will need to fleshed out before the market can get back to the highs. That will take time.
→ to be buying this down move into long positions with 80% of our cash.
→ The remaining 20% will be reserved to initiate a hedge trade utilizing index puts, ideally on the next up-cycle. We will be targeting longer dated puts designed to mitigate the possibility for an upcoming recession. It would be irresponsible to not at least account for the possibility of a recession...and we will be putting on a hedge trade that is there as a form of insurance.
→ model our long trades with a parachute of some kind that will allow us to get out of the positions unscathed or near / at breakeven in the event that market cultivates lower highs & lower lows. If the market indeed bottoms out somewhere within this area, then our long positions will appreciate handsomely as the market creates out a bottoming pattern & gets ready to retest the all time highs.
"Retest the Highs" ...did he really just say that? YES! Show me one instance in history where the ALL TIME HIGHS were not retested & eclipsed since the inception of our stock market indexes. Show me one. It doesn't exist. The market continues to represent the growth & expansion of an ever growing global economy, that is not without obstacles & setbacks...but where the net long term effect is that of GROWTH.
In other words, we are still to give the benefit of the doubt to the bulls on the larger trend.
I'm not downplaying the risk associated with the potential economic deterioration associated with Covid 19 Then markets crashed last week. Perhaps not in percentage terms, but in terms of vertical velocity to the downside it was unmatched in history. The fastest 15% correction off of all time highs ever and by far.
Worse, months of buyers of stocks and markets at high valuations suddenly found themselves trapped as the bottom fell out inside of a few days:
The very central banks that have led them into another liquidity trap. By printing, cutting rates, adding to the balance sheet at a record clip and even producing new record holdings of treasury bills the Fed has created a stock buying frenzy. In denial of its actions and the historic valuations that were created in the process the Fed caused a massive melt up in stocks and markets and now investors have paid the price as the Fed lost control:
And now everybody is in hopes that the Fed can print even more to rescue markets once again.
Sure enough on Friday Jay Powell came out and tried to “sooth” markets.
Fortunately we reduced heavily into our strongest cash position before this move happened. Do we wish we sold more, sure...but that's neither here nor there. We didn't sell it perfectly but we are in a very strong position to now put that cash reserve to work.
For now, get ready to stay calm, chaos will subside.
More updates coming soon.