May 19 - Market Update - Triple Top Setup & Bearish Divergence


Each of the indices have now pushed up into overbought territory on the hourly. We've seen a running theme emerge since the market hit its early April lows. The SPY will push into overbought territory, pull-back sharply and then rebound sharply. We've been seeing this going on for a little over a month now. We've been seeing the same thing on the NASDAQ-100 as well. Both have now pushed back into overbought territory and I expect that we'll see a sharp pull-back again very soon. As we mentioned yesterday, we will be increasing our position size in the SPY. It's actually a lot lower than it was originally since we've been trading around the position for pretty significant gains relative to the position. We've reduced our cost-basis considerably from where we first entered on those SPY puts. Our plan is to add another tranche around $18.00 if the SPY pushes up to $297+ as we saw in the early pre-market. We will then sell anywhere from 25% to 50% of our SPY puts allocation on the next sharp pull-back and the remaining core position. Again, so our goal is to get as high as a full 20% short position via being long those SPY puts on the next peak...and then sell half of that when the SPY pushes down to the next trough. That has the effect of drastically lower our cost-basis and overall risk. We're in this trade for the intermediate-term. If we can keep reducing our basis, then by the time we get to our actual correction, we should rake in a huge profit. For example, we have already significantly reduced our cost-basis on over the last few weeks. We bought a full 20% around mid April, at an average cost of $27.66 and later reduced half of that position at $27.20. That generated a very minor loss of only or 0.004% of the portfolio. However, that had the impact of allowing us to drastically reduce our cost-basis on that remaining core position. By selling that half position around $27.20, we were able to then buy them back at $20.50 & $19.20. That is an average cost of $20.15. If you put the loss we took back into that, it puts us at an effective average of $21.07. That's a $7.50 reduction in cost-basis on that original position. This is why trading around a core position is very very key. Our total actual cost basis on our entire position now sits at $21.07. That's the total cost basis of the trade including that minor loss. That means we have an effective entry of around $285-$286 on the SPY. What's more, we're going to be adding to that position soon and further reduce our cost-basis. We will then sell that position and reduce our cost-basis further.

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.”