Market Update - May 4

BotTrigger Trade Alert: $SPY sold half of our $SPY January $275 puts here @ $27.20. So by closing out half of our SPY put position, we've reduced down our risk on the entire trade. The positions we sold were purchased @ a cost basis of $27.66 which gives us a very small loss. The point here is to reduce risk. We will buy them back if the SPY returns to its highs. This pull-back went way too far and it will likely be damaging to the bull case. That's because our lows are too close to the previous lows. It doesn't quite look like a contained uptrend anymore. This pull-back should have stopped in the high $280's.

As we mentioned last week, the 1-2-3 pattern signals momentum loss and forecasts a change in the trend. Here's what is likely to happen next on the SPY as a result if this continues:

We should see another push to the upside that either falls just short of the previous highs or that reaches incremental new highs before we get another sharp pull-back. That pull-back will then likely turn into something more significant. The point is if we see the SPY trading up this week and back near the highs, that's a shortable event. We will not rebuy our position, we will probably add more aggressively. By selling this position here at $27.20 – note anything near the ~$27 area is fine as an exit point – it has put us in a significantly stronger position than we were in last week. We can ride this out now to conclusion now. If we're wrong and the SPY rolls over, we have a 7.5% short position to drive profits. If we're right, we'll be able to significantly reduce our cost basis for the eventual roll over.

So the trading action for the past three days lends strong support for the double-dip forecast. The market could have just shot higher on earnings and completely invalidated the entire 2nd leg down hypothesis. There were a few days there where I expected the SPY to push through $300 a share which would all but guarantee a retest of the highs. We have here instead is confirmation that a three push-up pattern is at play and even if the bulls find a way to invalidate that with a very strong push to the upside, I do feel pretty confident that a second leg down is coming now. In fact, I think the market is in for some very tough and volatile times ahead. We're probably going to see some massive moves up and down over the next 6-18 months now. That's what this entire move has telegraphed. Here's what I can see happening. Once we start to re-open a bit, the market will shift its focus away from "the end of lockdown" to the economic data. Numbers will come in weaker than expected and the market will start to worry again about how these numbers are going to impact earnings. And just as that obsession is taking hold, we'll see a resurgence or a second wave of Covid-19 cases. That's a very obvious bi-product of opening too early. Many epidemiologists believe that we need to see Covid-19 cases drop to 1 per million of the population before it's safe to come off lockdown. We're currently at 1 per 300 right now. That's way way way higher than what is considered safe to come off lockdown. As human contacts increase, so will the cases of Covid-19. And that second wave will come at a bad time. That will drive the market lower. The market will then shift focus to something positive, we'll get a rally for several weeks until more bad data comes out leading to another sell-off. This will be exactly like the European and Greek Debt Crisis where it returns multiple times for multiple corrections. Also, many market participants now believe it is unthinkable that the market will retest the lows. I actually think that is now becoming more probable precisely because many others are now not expecting it. We are not that far from the lows. Remember, the market went from where we are now to the lows in just 8-sessions. That's all it took to go from $280 to $218. We can easily see that happen again. So far what we've been seeing is pretty minor in terms of the selling pressure. This three day pull-back was minor. We can very easily go back to limit down futures when risk comes off. Thus, our plan for now is to wait patiently. If the market rebounds back toward last week's highs, we'll be ready to add to our put position.

Some of the greatest pearls shared by Jesse Livermore:

“Money is made by sitting, not trading.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

“Buy right, sit tight.”

“Nobody can catch all the fluctuations.”

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“It takes time to make money.”

“Don’t give me timing, give me time.”

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