c505218304b50c59c3659f6dda43bae7-others-0–>E-mini’s expired at 2178ES – so our credit spread, the SPY 213.5/217.5 Put spread, believe it or not, expired at max profit. The short strike of 217.5 corresponds with around 2170ES.
While this trade was close to max profit, I had other trades that were losses that I exited on the massive drop yesterday and wasn’t able to re-enter partly due to pressure from others. So unfortunately, I’m posting losses this week overall.
To reduce risk, on this morning’s pop, we exited half of the position at $0.11 credit — and the remainder we let expire towards 0. Our entry point was somewhere around $.70 – don’t remember, but the brokerage statement will show.
These last two weeks have been incredibly frustrating to trade — especially with a “trade of the week” mentality with the intention of holding through the week.
Here’s the issue — this kind of intraday volatility did not happen for the past several months and the strategy I use here is not very effective during these up and down swings — it’s much more effective in trending environments.
No matter what trade I put on – one day I would be up, the next day I would be down. Any time I see a potential set up – the market fakes out and reverses. I thought the A-B-C 4th wave completed on August 26 — but it turns out that pop up on Aug 29 was NOT the beginning of the 5th wave up, but rather a B-wave fakeout — and there would be a C-wave down — but not just any C-wave — an expanding diagonal from hell.
Needless to say, I got a lot of heat from (understandably) angry customers when I exited at a loss. I really wanted to re-enter as I saw a clear 5-wave pattern (expanding diagonal) marked in the chart below, but everybody had their guns pointed to my head telling me not to re-enter. Well, the result is that we missed out on the Friday rally for one of our two trades, though our credit spread did end up positive for the week as we closed above 2170 ES. I can also understand why – there was a big 8:30am report — and re-entering Thursday afternoon –if I were wrong again — would make things look even worse. But in the end, I could have recovered more of those losses had I had the comfort to re-enter, which I did not. These are the pressures of trading independently vs having others monitoring your each and every move.
I suppose that’s partly why hedge funds have a lock-up period and don’t let investors see what they’re doing besides a monthly statement. Is it crazy to try to provide transparency but in the process end up shooting yourself in the foot?
Living the Big Short
This reminds me of a scene from the Big Short Movie. Remember when Michael Burry put on his big short trade – and each month that the market did not collapse, he had to pay some $90 million in insurance premium? I forgot the exact number, but it was in the millions.
Yet, when the trade went against him, his investors were all over him on it. I’m not saying who’s right or wrong, but this week I felt very much like Michael Burry — not just in one specific trade — but in, say silver, for example.
Silver
I believe Silver is in a long term – uptrend–partly why I picked this silver surfer screen name. Yet in the last two weeks, silver got annihilated. I came into silver with a long-term view and people wanted to exit. Timing is really hard to tell – and yea Michael Burry was off by like a year or something like that. I just needed another month with silver.
Silver started to show life today – with the 8:30am report — it’s almost always one of these Fed/Friday 8:30am reports that gets silver moving. We had a clear 5 waves down — and it’s just a matter of time that silver comes back. Well, you can see from the chart below what looks like Silver coming back. Gold is not quite yet out of the woods, but Silver looks promising — touching 19.44 from lows below 18.5.
Holding onto a trade with intense pressure from others to exit is not easy to do. But now that we held through the Silver trough, are we glad we didn’t exit at the lows?
Michael Burry
But back to Michael Burry -so I know how Michael Burry felt when his investors pressured him to exit his trade. He was ultimately able to hold on (props to him) – probably due to some legal clause in his contracts with investors. But in the end, he made a killing and now no longer trades for other people. I can understand why – when people are all over him. Again, I’m not picking sides, as I can also understand why investors only want to see green in their account and no reds ever. At the same time, it’s also important to understand that what we do here is an aggressive strategy that will likely see wild swings — and even more so if you decide to multiply our recommended trade size.
This week I posted two back-to-back red losses — it doesn’t happen often, but it has happened (you can see my trade history on the sidebar). But this would be the first time seeing more than $1k loss in two consecutive weeks.
As I’ve noted before, the nature of the markets changes constantly. The higher we are with lots of intraday volatility – with the constant potential for some massive drop – and relatively low premiums for spread trades — no movement ever trades for more than 15 points, the harder it is to make money. It was so much easier to make money post-Brexit. But the market conditions in the last two weeks — are like what happened back in April/May. Corrective portions of wave impulses are extremely messy to trade. I think the key when in what is potentially a corrective pattern is to minimize exposure and reduce the expectation of $1,000 per week to something smaller. Either that, or I would need to more actively trade to realize profits more quickly rather than holding them and seeing numbers go from green to red to green to red — without the guarantee that it will necessarily go back green.
I think I have the right strategy in mind, but it is extremely hard to execute properly in this market environment. No matter which strategy this past week, your account would’ve seen wild swings up and down.
Today’s S&P500 Hourly Chart
It appears this week was an expanding diagonal. The question it is leading or ending.
Since the Aug 29 high is not a new high and since this 1-2-3-4-5 expanding diagonal appears to be in the C-wave position of an A-B-C 4th wave, I am inclined to say this is an ending diagonal.
However, the difference between an ending diagonal and a leading diagonal is a big one. An ending diagonal means we are beginning 5th wave up with an A-B. A leading diagonal would mean we get a pop up and drop next week. So I can’t confidently say it’s an ending diagonal, but I lean towards that.
There’s still a potential for us to retest just below 2170 – however, I am not confident especially after the crazy up and down that happened recently. For now, will sit back and watch.
S&P500 Daily Chart
Green area shows where it’s easy to make money with my strategy. Red area shows where it’s not easy. In general, less intraday volatility – and moore trending moves is better.
Overall volatility is not a bad thing — so January 2016 was actually pretty good because the moves were bigger and volatility was spread out over several days. But recently, intraday volatility has been ridiculous, making it hard to make money.
Prior S&P500 Hourly Chart
The prior chart was wrong — as we were not able to get above 2176 in the overnight session. From there, it began the expanding diagonal from hell – with the overnight consolidation at 2176 as wave 2 — followed by bigger and bigger drops.
Silver Chart
Recall that the last silver rally happened in the last 3 day weekend — July 4 weekend. We are now entering another 3-day weekend — Labor Day. Will history repeat itself?
This past week was a B-wave triangle centering around 18.7. Yesterday we had a wave 1 rally followed by a wave 2 drop early in the morning. Then we moved up with the report. You can say the report was unpredictable, but from my perspective, the wave patterns were in place to allow for it.
SPX Monday Options and SPY Wednesday Options
Also, in case you haven’t noticed, they released SPX Monday options. SPY doesn’t have Monday options yet, but they now have Wednesday options.
This is a trend towards daily options expiration – and I would consider good news for us.
This past week for example, we did a credit spread over the prior weekend — partly to get time decay, but then as a result, we were exposed to all the intraday volatility of Monday, Tuesday, Wednesday, Thursday, and Friday.
In the future, we will be able to just get exposed to Monday – if we wanted to — so our strategy over the weekend can be more isolated and less prone to directional risk if we wanted to focus on that weekend time decay.
However, this is not yet available for SPY — so we would have to use SPX, which from my initial checks eats up more margin.
Notice that September 7 is a Wednesday, not a Friday.
And if you look up SPX, you’ll see a date for September 6 as well as 7 — so Tuesday as well as Wednesday. Tuesday because Monday is Labor day holiday.
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Pete Vincent