Reasonable Expectations

Last week here I wrote that the longer term trend was higher, but that there would likely be a pause, chop, and a grinding lower. I was right about all of it except that latter part as there really wasn’t much grinding lower. In fact BEFD (Buy Every F’N Dip) has not let up at all since I mentioned it a few weeks ago. I also said the best approach was to look for pullbacks and although there wasn’t really much of any in the indices, nor was there much of a pop (the high two Friday’s ago was 2169. The closing price Friday was 2175.), for those that trade individual stocks, there were plenty of great opportunities.

At this point my thought process for last week still holds in that I believe there will be some type of pullback/grinding lower/correction etc. Make no mistake here, I am not calling a top and I am not a bear. In fact, I am not even suggesting to short (at least not before some type of signal). What I am suggesting is reasonable expectations. I believe upside will be limited (even if upside continues for a few more weeks) until there is some type of pullback or backtest of the breakout area. The longer and higher we go without one, the larger and possibly faster a future pullback might be when it comes. I am all for the idea of consolidating through time and not price, but I have also seen that fail just when it seems like it is happening. Hence, to reiterate, 1) the longer term trend is currently bullish 2) until signs of weakness show up BEFD is a much better strategy than chasing and shorting (the former may require patience) and 3) I believe the upside is limited in the near term and the higher we go before a back test, the sharper the pullback is likely to be. Hence, reasonable expectations not timing a top.

Breadth: There is nothing new to add here. On a longer term perspective breadth is so far keeping up with price and confirming underlying strength (something absent when new highs were being made in 2014/2015). On a shorter time frame there isn’t much to see. There is no immediate overbought or oversold conditions.

SPX stocks above their 20-day MA: price may have gotten a bit ahead of itself in relation to this measure supporting the idea of a forthcoming pause, but as a longer term measure their is no foul play yet.

Screen Shot 2016-07-23 at 11.47.16 AM

SPX stocks above their 50-day MA: same comments as above.Screen Shot 2016-07-23 at 2.53.35 PM

SPX stocks above their 200-day MAScreen Shot 2016-07-23 at 2.52.33 PM

SPY Open Interest: Unlike last week with clear high strikes to trade against, next weeks doesn’t afford us the same helpful hints. At this point the most formidable strike is at 220. Thus, the likelihood of price closing above there on Friday is slim. Other than that there isn’t much to go by. The current best pin is between 215 and 217 (but can easily change as the week progresses). spy

In sum, I wish I had something more impressive to say, but I’m not going to spend time trying to find something that makes me sound smart. The upside seems limited, but trying to time a short without a signal isn’t attractive. Thus for short term traders, next week once again deserves patience, pullback opportunities, and mostly individual stock opportunities.

General trading note: One of the most helpful ideas you can grasp as a trader is defining the type of opportunities that exist based on where price is within a cycle (this involves both indices as well as individual stocks). Is price just breaking out, breaking down, rangebound etc.? It’s a simple concept, but is easily forgotten by recency bias and by watching intraday market movements. Expecting great returns in a rangebound market (which has to be defined based on your individual time frame) is a recipe for disaster for short term traders – especially option traders.

For example, at the start of last week if you remained in the mind frame of the past several weeks you may have been overly ambitious in the type of returns you could gain. That can lead to overtrading, remaining too long in a position, or chasing breakouts. Reasonable expectations comes from studying where trend is in a current cycle. That includes overbought and oversold readings, where price is in reference to MA’s, where price is in reference to support and resistance, and of course, for me, open interest is a huge help. This helps especially for individual stocks.*

From my work this weekend with my premium service the best opportunities I have found are likely to be short term next week and many not in the typical momentum stocks. Particularly we are interested in (or currently sitting in positions) that have room to run without chasing . Other trades may be set-ups in stocks once they report next week. Importantly, at this point in the cycle, being more nimble is part of our strategy. That requires both patience and reasonable expectations; whereas a few weeks ago, we were more active with larger gain expectations as the market was just breaking out.

If the above is something you are interested in grasping better consider joining us at SassyOptions where you will get daily analysis, set-ups, and real time trade alerts (not just the set-ups but my entry and exit prices in real time). Check out some testimonials and sample weekend posts to get a sense of what other members see as beneficial.

*The SassyOptions service involves looking at the open interest of several stocks which helps define our expectations in accordance with trades we take.