It’s not altogether clear to me at this moment how things will end up playing out with the SPY on the intermediate-term basis. We know how things should play out given the economic environment, but the market simply hasn't been playing ball. Now normally, I would be inclined to say what we're seeing right now is really bearish. We have a three push-up pattern now fully developed on the SPY. We have weakening momentum on lower volume. The SPY attempted and failed to take out $300. So there are a lot of things pointing to a peak on the SPY. However, the last two attempts to take the SPY down failed. First when the SPY peaked at $263 and again when the SPY peaked at $287. What's more, I don't like how Apple is trading right now. It gaps down big and then decides to go up to almost $299 intraday. That points toward uncertainty. If I were on the bull side of the trade, I would argue that this was just a minor pull-back off near-term overbought conditions on the hourly chart. Something that happened the last two times the SPY peaked and had a 10-15 point pull-back. So here's where I'm at. I'm thinking that the prudent thing to do here will be to reduce risk if we see the SPY push down to test $280. We bought 3 positions at $30, $28, & $25. We can reduce down our position by 50% on this specific trade putting us at long on those puts by only about 7.5% of the entire folio short. Right now we’re @ 15% short via these long puts.
If the SPY crashes as we expect it should between now and the fall, there's a good chance we could end up doubling our investment and adding roughly 15% returns on that 7.5% tranche. Or if we held our current size that would yield roughly a 30% return. But more importantly, that will open up a long opportunity. On the flip side, if the market moves higher, it will give us the ability to reduce our cost-basis and it will mitigate our losses. Even if we took a 50% hit to the position, it's a -7.5% loss. So yeah, if our options move up to $28, we're going to sell about half of our current position.
So if you take a look at the chart below, the SPY is actually nearing oversold conditions now on the hourly. It is trading at a 33.6-RSI. This after reaching overbought conditions two days ago. So this sell-off from that perspective makes a lot of sense. Again, I think if we get down to around $280, we should reduce down our position. I do not think we should chase the sale though. If it gets down there, then we reduce. If it doesn't, then we're staying put.
Right now we're breaking down out of this price channel. Notice here on this hourly:
One thing I do know for sure is that bears are in a significantly better position than they were in two days ago. The market could have very easily shot the moon, so to speak. It was set-up to just make a run right through $300. It didn't. Instead, now what we have a is a potential three push-up pattern having developed which is really bearish. See below here on this daily:
The reason 1-2-3 patterns "Three Push Up" patterns are bearish especially on declining volume is because they signal momentum loss. Compare that to a nice consistent uptrend -- like you see in the chart above between September & February – where the momentum and volume is consistent across the board. A three push-up pattern tends to be more unstable & unsustainable. Eventually, the bears tend to win that tug-of-war. The same goes for a three push-down pattern that comes at the end of an extended decline. So right now, the SPY is signaling that we've hit a peak. And if the SPY falls below ~$278 I think it's pretty much over as it would mean we only made an incremental higher low. The closer we get to last week's lows, the more likely it is that we've really peaked. Still, given that we're in crazy town where nothing seems to make any sense at all, it is still prudent to reduce our position. That's what we'll do at the right price. If we get up to $28, we're reducing down by a 1/3.