Week of September 18
Powell on Deck. Selloff to continue?
Recap of last weeks action:
Another winning week secured. After getting short post Labor day weekend, and nailing a huge short, we flipped bullish last week. And scored another winner.
SPX was 4457 on last Fridays close, and we traded 4488 on Monday afternoon. No MAE taken, a massive winner right from the get go. Once again only 1 trade given, 1 direction only. No losers, and on the winning trade we gave, there wasn’t even a single day (or hours) spent in drawdown before a massive increase in contract value. If you didn’t sell Monday, Friday these contracts again gave you a chance to exit at +35%ish. As always I encourage you to take your own trades, and to modify my ideas too. If you are more experienced, you can always choose lower delta strikes, and closer expirations to hit those multi baggers with more frequency. As always trim and take profit along the way, and set your stops in profit once you get a decent sized winner. Not much else to it.
Now onto next week, we could be in for a crazy week and many will be fucked I think. This is not a week to skimp out on the market prep.
Next move for markets?
Up. Now make sure you read this entire post in detail. This is going to be a tricky week to trade I think. I am both bullish and bearish, even though I dont like to be. For starters, if you have been following me for a while you know what I am going to say. Don’t anticipate the range break. If you have say 445 SPY as support, you can buy that support for say 8 times, producing a winning trade each time, and then on the 9th time you buy it and you take a small loss, do you care? Hell no. In fact my goal is to always be stopped out when a support inevitably breaks. Never be the one to say, “this time it’s going to break”, let the market tell you that. So the right trade is to buy the support, no two ways about it.
That said, there is more depth and nuance to this. Every situation in the market is unique. Buying a double bottom is not the same as buying a triple bottom. Buying support at 9:30AM is different than buying it at 12:30AM during after-hours trading. Buying support on Dec 24 during a half session trading is different than buying support on Sept 20 post FOMC for example. There are so many moving factors to markets.
Technicals look weak with a massive bearish engulfing. We closed below the 50MA and 20MA. We are in the middle of the channel and have alot of “room” to the downside before hitting oversold conditions.
So I am going to go ahead and give a slight advantage to bulls, and If I had to assign a probability I would say 60% chance this support holds for an early bounce last week. I am not anticipating the range break, but it is in the very forefront of my mind as a likely outcome. For a couple different reasons.
First off, this support has been tested before, it held but during a very strong seasonal period, and notable before the two hot inflation prints came in last week. The flow of funds during the period where it was initially tested was very strong, and starting next week they will be very weak.
Secondly, further to the seasonality point, you should know this is the worst week of the year for the SPX. Thats right, not just a weak week, but the worst week of the year. 52 weeks in a year, and this is the worst of all 52.
Here’s the past 20 years or so of post Sep OPEX performances. I encourage you to re read last weeks Stack, as I go further into detail of why Mid-September is so strong, and why after it it tends to be week. Also, please note this past Friday was the largest Sep OPEX ever in terms of notional value. So it naturally follows the seasonal effect will also be the largest ever, and that is very bearish.
Now one way I have come to frame my trades before I take them, and figure out my position sizing, is this. I imagine a scenario a week or two in the future, and I imagine that I lost money on the trade. That I was wrong. In this imaginary future scenario I try and think how I would feel. Would I feel stupid if I lost money on the trade, or would I think “it made sense from a risk/reward standpoint and had a positive expectancy and im happy I took the trade”. So you have to think here, if you went short next week, knowing what you know now, and say you were wrong and lost money on the trade, would you be upset? I wouldn’t. If we go short during weakest week of the entire year, and lose, all you do is shrug and say oh well. On the other hand, say you went giga long, and you got fucked, the market sold off. You would be punching yourself in the face, and extremely disappointed. You would say to yourself “why the fuck would you go long on the worst week of the entire year, you fucking retard”. Something to think about.
Furthermore, last week had a distinct “look above and fail”. We had developed a bit of a range from 4440 to 4500 over the past 2 weeks. The market of course is destined to break this range eventually, question is to the upside or downside. We had that chance on Thursday into Friday, market bid up over the 4500 call wall and into 4515 or so. It was rejected very strongly from sellers and closed the week around 4450. Now if we know that 1. we will exit from balance inevitably and 2. the area above 4500 was rejected, it just naturally follows that we want to try below now. This is not quantifiable of course, like seasonality it, but the psychology behind it makes perfect sense.
Now, next question is who buys the dip here near the bottom of the range. For one you have people like me who follow a strict process, and we buy it simply because the market has deemed it unfair value, below the bottom of the range. Thats about it. Market makers are not buying back many delta hedges post OPEX. Also corporates have entered their blackout window as well this week.
Now again I want you to put your feet in the shoes of someone else. Say you are a fund manager, you have 1B to deploy. Are you eager to put that money to work during the worst week of the entire year? Hell no. Now if the market crashed 20% overnight because nukes started flying, would seasonality matter? No. But in cases like these the marginal buyer is very important.
So we all just saw SPX reject >4500 on Friday. If you are a potential 4450 support buyer, here is what you are thinking. In a couple days, not much as changed, and it is very likely >4500 is again going to be rejected if you were to test it again. So you are looking at catching a falling knife here at 4450, for 50 points or so in return, because we already established >4500 is not accepted by buyers currently, barring new information.
New information, which could be provided by Powell at FOMC on Wednesday. But we also know inflation has beat already high expectations in both the CPI and PPI report, so it is safe to say he will be hawkish and more likely to be a negative for risk assets than positive. Especially considering a no hike has a 97% probability of coming to fruition, it is already expected by markets.
VIX is also just now entering an extremely bullish window.
Historically, this period has been a time when market suddenly “realizes” all the bad news and prices it in. There are many reasons for this, but one of the main ones is dealer gamma frees up in a big way post Sep quarterly OPEX, and volume really comes back into the market after everyone is officially and unofficially back from Summer vacation. There is also tax reasons, mutual fund year-ends, etc.
Now you know what I mean by bullish/bearish this week. We have to play for the initial bounce, because that is what a good trader does, he follows his system. And hey sometimes the trades you last want to take are the most profitable. I think 60% chance support holds, as mentioned earlier.
So that leaves 40% we break in my humble opinion. Although this is a lesser likely outcome, you should be very prepared. Owing to the aforementioned factors, a decisive break below our September low of 4440ish on SPX I think opens a trap door and significant selling to 4350 or so, and below that 4200. Distribution of outcomes is not symmetrical, ever, but especially so this week. I think max upside this week is maybe 2% higher or so, but downside could be much greater than that. We also just rejected 4500 the last trading day so market I think generally is keen on testing the lower end of balance and below that. So although I think support breaking is the lesser likely outcome, it is potentially much more profitable than catching any upside here.
This chart is back to relevance again. In a down tape, we could see systematics sell aggressively, exacerbating a potential downturn in this weak period. Conversely, they are already close to max long and not big buyers in any scenario.
To sum up, I think support holds most likely, but it is close to 50/50. That being said, any upside here is likely limited this week due to very strong seasonal, lack of buybacks, lack of dealer and gamma support, market technicals. In the lesser likely scenario that support does break however, there is much more downside to explore and at a higher velocity. When playing the upside, I would be quick to take profits, on the other hand, playing downside I would have more ambitious targets and could aim for a multibagger using options.
SPX 9/22 4500 calls, 8.95 at the mid. Stop loss if we make a lower low than Fridays low. Take the trade, set your stop, dont overthink it.
If we close below Fridays close, you can enter into basically any SPX puts. 4400 strike for 9/22 are 9.65 at the mid.