Will This Buy the Dip Rally Continue?

Posted On September 24, 2021 2:35 pm

Last Friday, I wrote about the “3 Reasons Why This Decline Won’t Turn Into a Serious Sell-off;” only to see my thesis seemingly smashed against the wall Monday as the indices suffered their largest single-day decline in six months.  A 2% sell-off in SPDR 500 ETF (SPY) coming from all-time highs, after a 23% YTD gain was certainly no reason to panic.  We’ve had plenty of false breakdowns over the past 18 months. However, this one felt like a turning point and cause for greater concern as Monday’s gap came down on heavy volume; breaking below the 50-day-moving average and a very well-defined uptrend. Surely, this time would see some follow-through selling. 

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But no.  It once again turned into a one-day blunder as bulls quickly grabbed the reins and bought the dip (BTFD), not only eliminating all of Monday’s losses but sending the SPY up and through the gap at $441.30. 

You’d think we’d be used to these “V” reversals.  However, this quick rebound caught a lot of people, myself included, off-guard.  Even if you didn’t turn bearish, the assumption was that the gap resistance would cap gains for at least a week or two. 

I’m a visual person, so let’s look at the charts to see what I’m talking about. 

Here’s the longer-term uptrend being broken.  

spy stock chart 2021

Here’s the gap not just being filled, resistance pierced, and now holding above the 50 dma, which will once again turn into a support level. 

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spy stock chart 2021

Now, the question is will this most recent BTFD really stick? 

Honestly, I’m a bit on the fence.  I’m still thinking long-term, 4-6 months, and bullish (a volatile market coupled with weekly options can warp one’s perception of time).  I also believe that we may need a retest of Monday’s low before we can get a sustainable bounce.  As I wrote on Tuesday, “The 50 dma break – while pointless long-term as far as economic recovery – corporate profits and supply chain issues, do have a short-term impact in stocks’ price action.   The market’s increasingly run by algorithms keyed towards momentum.  Presently, the upward momentum is broken. My best guess is that we still need to see both a retest of Monday’s low, and a fall back to the $420-$425 level, which would qualify as a 10% correction before we can resume a healthy and sustainable new leg higher for this bull market. “

What’s nice about options is that I don’t necessarily need to pick the exact course of price to produce profits. Options360 reduced exposure. However, 4 of the 5 current open positions, including McDonald’s (MCD), Russell 2000 (IWM), Penn Gaming (PENN), and Ford (F), are all bullish diagonal spreads in which I’ve been rolling to collect premium and reduce cost basis.  The most recent addition to the Options360 portfolio was establishing an Electronic Arts (EA) iron condor. 

So, on the whole, I’d like to see a broad move higher over the next 2-3 months.  However, I’m positioned to collect premium and generate income if things drift for the next 2-3 weeks. 

Meaning, I won’t need to watch every tick and will be free to hold my own hand for a self-absorbed beach walk.  Every sundown will remind me of the theta or time decay trickling into my account.  I can’t think of anything more romantic. I don’t know why none of the women on Match.com (MTCH) share that vision. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.