As we mentioned yesterday morning a reader had pointed out a small gap at S&P 1058; so on that blip up in the morning to 1070 area we decided to buy some hedges - [Another Small Gap in the S&P 500 Below 1060]
A reader pointed out a small gap I somehow missed in the S&P 500 just below 1060. Now that the 20 day moving average has been breached, this is very enticing - a nice trade set up. Short to fill that gap, with a stop out if we break back north over the 20 day moving average which is in the low S&P 1070s. In very early trading we've rallied right into resistance...a great risk/reward entry. I've done just that.
We used the same 2 instruments we've been using (1) short TNA ETF [Small Cap Bull 3x] and (2) some just out of the money SPY puts, in this case November 106. My position size was not too great, I only did a 6% allocation on the TNA short, and 4% on the puts - I usually will go somewhat larger on size
Here was the chart yesterday AM when we put on those trades
Early indications this morning show we have an excellent chance to fill the gap - here is the chart right now before the bell, and I've also outlined near term strategy.
In an overall sense, until we break down below the 50 day moving average we have to assume (right or wrong) there is a bounce. The market is not acting very well, with intraday reversals and late day selloffs but almost always we have at least a cursory bounce off support even if we have more downside. So if we get all the way down to 1050 we'll most likely do a 180 on the positions I outlined above trying to play a very near term bounce. Now if the pattern of the past 3 months continues [A Real Breakdown or a Trap of the Bears? Do we Rally Sharply Wednesday?] that bounce turns into a huge move back up. I am not counting on that - just outlining the possibility.
And of course a break of the 50 day moving average, and (to me) more importantly a break below S&P 1020 (indicating a lower low) would require a much more aggressive bearish stance.
Being a not too greedy guy, I'll be happy to make my 12+ S&P points early in the session if we open in the red and 1058 fills, and then see how the market works from there. While happy to play a cursory bounce, to get back to a bullish stance we need to recapture the 20 day moving average. Between the 20 and 50 day, its another white noise area.