Friday, February 5: S&P Drop As We Expected towards 1865ES; >$2k in Net Profits Despite Mistake

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S&P500 Daily Chart February5

Zooming In, Here’s S&P Hourly Chart

Zooming Out, Here’s S&P Daily Chart

While my expectation is that we go below 1800 at this point, I need to also be open to the possibility that we can still rally from the mid 1800s  back up to 1960 before completing the wave 4 as suggested in the above daily chart. So I will need to see more clues in Monday or Tuesday to figure out which one is more likely.

Trade of the Week (Net >$2k in profits for the week)

On Tuesday, we cashed out a $1.2k profit. On Wednesday, we exited $3,000 worth of puts at roughly 75% gain — so a little more than $2k in profits.

On Friday, our bear call spread expired for max profits — selling the 193 call strike that netted $1.4k in profit  (I personally doubled the size so had $2.8k in profits, but I recommended half the size to subscribers).

This could have been gains of more than $4k, but I had a mistake.

Mistake in Gold

However, our mistake was on the gold trade, where we lost more than $2k on the rise—still positive for the week ($1.2k + $2k + $1.4k – $2.4k = >$2k in profits) but definitely painful and unusual since we didn’t follow our own trading rule of exiting if it exceeded the morning’s high. This is a lesson on the importance of staying disciplined to rules.

This is the only way of counting it that makes sense if these two requirements are true:

1. if we have not bottomed yet
2. if we rally towards 1200

However, if we exceed, 1240-1250 — then I have to accept that the bottom is in, even if the pattern does not look complete to me.

But the pattern above allows for the possibility of Gold reaching 1200. Typically, with metals, we should see 5th wave extensions, rather than short 5th waves, but we haven’t seen that extension — plus the rally from the bottom is not immediately violent enough to typically be the start of a massive 5th wave. It looks corrective to me. But corrective doesn’t mean it can’t go up a lot as it clearly has shown. It can even exceed the prior fourth wave (iv) by a little bit. So I had a lapse in judgment here, but i think drawing it out here helps me see it more clearly.

But the focus needs to be on making money, rather than on picking bottoms. So for the time being, I will stay away from Gold and allow it another week or so to see if the pattern can complete in the 1175-1210 region before deciding to re-enter.

Transcript

This is a recap of the trading week Feb 1-5, 2016

Another week in the markets, another week of profits for lifestyle traders around the world. The S&P futures ending the week at 1874 –it went as high as 1940 on monday, down to 1865, then popped up to 1922, then back down to 1865.

On monday we initiated a bear call spread trade and our timing was pretty much impeccable — right when the S&P futures were in the 1935-1940 zone — the local top was 1940 on the dot. We were expecting a little bit more upside, but knew that further upside was not guaranteed — so we wanted to be in a trade that allowed room for error in case the market continued to go higher. It turns out we caught the top as the very next day on Tuesday, we cashed it out for $1.2k in profits because the market turned around to the downside. When we cashed out our $1.2k profits, we re-deployed the money in an SPY put – which we again exited at the perfect spot right at the bottom below 1870. Well, we exited half before that for 50% profits, and then we exited the other half in that bottom zone.

So at this point, we’re feeling pretty awesome.

We typically offer just 1 high probability trade per week, but we were on a roll, so we just gave another bonus trade — this time betting the market would stay about SPY 191, which we then adjusted to 193 — and that gave us another $1.4k in profits on Friday.

So that would’ve been more than $4k in profits just for this week alone.

But we did make a mistake on gold — which cut our supposed profits in half — we were still up about $2k for the week, but being down from over $4k on a dumb trade definitely hurts.

Where we lost money was attempting to short gold — the wave pattern we were seeing doesn’t look like a bottom in gold and so we didn’t expect the bounce to be that high. But that’s the issue — we shouldn’t be focusing on whether the bottom is in or not — instead, we should be focusing on making money regardless of bottom in or not. Even if it doesn’t look like a bottom, we need to be open to the possibility that the bottom is in anyway and trade accordingly. After reviewing the chart pattern again for gold, it turns out there is one alternative possibility for the wave count in gold that allows Gold to go up just a little bit more before turning down. So we need to be patient and let the next week or two to play out, before doing any risky plays. So it’s definitely been a lesson for us here to stick to our own trading rules of exiting when we should have and allowing for the possibility that the bottom could be in even if we don’t agree with how it looks.

Now going into next week, it appears we could potentially be heading straight down and break the prior lows at 1800 — however, we only got as high as 1940 before turning back down — I was expecting 1950 or 1960. So 1940 is on the low end. While it’s possible, that could have been the local top, I need to also be open to the possibility that we test that region one more time and hit 1950 or 1960 before going to 1800. So shorting in a large size at this point could be good, but it could also dangerous if the rally does happen. So for the time being, position size will be small and I will be watching from the sidelines.