By: Steve Smith
Over the past two weeks, I’ve been oscillating between whether the recent sell-off represented another chance to buy the dip or whether we’re witnessing the development of the long-awaited 10% correction.
Both indices have now hit new relative lows — but not before squeezing the bears up into the gap.
As I wrote last week, time and time again, this market has shown that it’s foolish to call a top or get too aggressively bearish. I stand by last Friday’s statement:
“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.”
Also in the past couple of weeks, the SPY and QQQ have covered a lot of ground, whipsawing bulls, and bears traders. However, the dominant trend is now clearly down. Let’s update the SPY chart.
The trend line break, which matched the 50 day-moving-average, now seems to be firmly in place. The gap at $440ish was filled, and while stubborn, was ultimately rejected. For the first time in 16-plus months, we have a legitimate downtrend with a potential bear flag forming.
We didn’t quite yet hit my $425 target. However, the SPY and QQQ did take the September lows. Unlike past dips, this one hasn’t managed a quick and sustainable snap-back rally. Rather we seem to be at a crucial level as the SPY builds a bearish flag, which would be the precursor to another leg lower. The new SPY target is $417.
This recent action has influenced the Options360 positions and trading activity by reducing overall exposure, and currently has a mere four open positions; actively managed through rolls and adjustments to reduce risk.
The iShares Russell 2000 (IWM) bullish diagonal represents our macro position that the bull diagonal market isn’t over yet. The IWM has shown relative strength thanks to its exposure and weighting towards energy, regional banks, and a variety of commodity-based and re-opening-oriented holdings.
Note: It’s mostly been range-bound over the past six months; neither bursting to new highs in August (lagging) and also avoiding new lows as of late.
This has allowed Option360 to execute multiple rolls to reduce cost basis. A position management glimpse can be seen here. Basically, our cost-basis has been cut from an initial $4.80 debit to the current $3.20 (a 34% reduction). Despite the IWM basically remaining unchanged since the position was initiated over three weeks ago worth $7.10, or up around 85%. We still have the option to take another 3 rolls before the November long leg expires.
Other positions I’m nursing include an iron condor in Electronic Arts (EA), which whipsawed me badly. However, today gave an opportunity to close a third at a small profit and more importantly, take risk off the table.
By using a strategy with a well-defined and limited risk, I was able to hold tight during this rollercoaster and am now positioned to profit.
The most recent Options360 portfolio edition is a Beyond Meat (BYND) bull position, which I described in yesterday’s Alert that despite that I’m “not a big fan of the stock, I think it is too highly valued within a competitive niche… the technical setup looks attractive and the company always responds positively to any news regarding deals with fast-food chains, such as McDonald’s (MCD). The chart shows the $100 level is major support and a potential bullish reversal today.”
This morning, the stock broke below the $100 level, forcing a decision upon me; to bail or adjust. I went with the latter and sold a short-term bear call spread against our longer-term bullish diagonal.
And that pretty much sums up, or least encapsulates, some examples of how options can keep your positions in play and retain profit potential even during choppy waters.
I haven’t necessarily been right or made any home run calls. However, through patience, strict selection, and active position management, Options360 is now up 41% YTD.
I expect to add to these gains during what’s shaping up to be a crucial fourth-quarter; inflation, the Fed, increased volatility, oh my!
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