Honestly, I was caught off guard by the tremendous strength in stocks on Friday. With a half day, I should have known better. If stocks could catch a bid, this was a perfect opportunity to inflate (or deflate) prices as there were likely limited participants on either side of the trade to contest a move. I expected that kind of action to happen on Tuesday with Wednesday and Friday being more of the indecision type…alas, things usually don’t work as planned, so I’m forced to make adjustments.
What is clear is that the market has come an awfully long way since the depths and doldrums of a mere 7 (SEVEN) trading days ago, when it looked like we were going to spiral off the cliff to much lower equity prices.
Things were clearly oversold November 15 & 16, and the DOW has responded by rallying over 500 points…in 5 days…let that sink in for a minute.
We read all the time about “healthy price action” in stocks. I challenge anyone out there to dispute my notion that a 500 point rally (in 5 days) from deeply oversold conditions, is ‘unhealthy’ price action in stocks.
At this juncture, things are clearly getting overbought (if not already overbought), so upside from here, in the near term, is extremely limited. This move went further than I expected, but I have strong conviction that we are going lower to test the lows from 11/15-16.
To show conviction in this thesis, I have been accumulating puts on the $QQQ December 7th 62 contract…starting Wednesday afternoon, buying up bunches every hour. I now have a ridiculously large position…and if things shape up the way I’m hoping today, I may look to add many more contracts before 4:00 PM EST Monday.
What I was expecting was the short holiday week would add confusion to my analysis. That happened, but I haven’t let that deter me from my confidence that we are going lower.
As always, protecting against loss is paramount (should I lose, my losses are going to be larger than normal with this trade due to the size), so I will be keeping a very close eye on the indexes to see how we digest this most recent move. If we blast off higher, I will admit defeat and get out. If we trend sideways for more than 2 days, I will get VERY leery and start heading for the exit. If things go according to plan, I’m looking for a move to at least 137.5-138 on the $SPY.
My best to you all.
-EM
