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SPY Consolidation day – August 6, 2019

There was no indication of a rise or drop per SPY chart patterns. We have a higher low. However, the high today was also lower than yesterday’s high. This needs to break before I would feel more comfortable going long.


August 6, 2019 – What to watch for in the markets

What should you pay attention to in the coming days?

Watch VIX and see how the price action behaves vs. the SPY. If VIX is hanging still while SPY is rallying, I would be very skeptical of the rally in SPY.

A VIX crush would indicate that fears in the markets have been subdued for the time being.

Also watch treasuries and IWM in the coming days. If IWM lags ahead of SPY, it could be an indicator of more selling off. Treasuries will give you and idea of (1) what kind of future rate cuts bond investors are pricing in (bond prices go up, yields go down) and (2) an opposite (bond prices down, yields up) move would be indicative of China selling off treasuries as part of this trade spat.

Why do I believe volatility is vulnerable right now?

We’re in the middle of a nasty trade war.

The US Treasury accused China of manipulating their currency. If they are manipulating their currency, then you should be less concerned. If China isn’t manipulating their currency, then that is a sign of weakness in their economy if they can no longer control their currency, which could have a ripple affect across the globe.

I believe that China is worse off economically than they are leading on, and this trade war is making the situation worse for them.

China could retaliate against US tariffs with more measure of their own.

There’s also the wild card of what President Trump decides to do next too.

Volatility is already sitting at a high level, and it wouldn’t take much to blast it off through the stratosphere.

Why is uncertainty crucial when it comes to asset prices?

The more uncertainty there is in the market, the harder it becomes to price assets.

Investors are faced with a lot of uncertainty, which is why markets have been sputtering for 18 months now.

There’s uncertainty about the global economy, interest rates, the China trade war, other trade wars across the world, and debt to GDP levels for those biggest countries in the world.

This uncertainty makes markets harder to price, and creates the potential for big sell offs followed by big buy rallies.

Today’s stock market is turning out the way I expected

As of 2:20 pm, at the time of this writing, the SPY is up 1.2% and IWM is up 0.5%, with VIX down 16.7%.

Yesterday I made a post about how I expected a rally off of the sell off that took place in the market.

The rally has been quite strong today, and I think it could continue into tomorrow as well.

Why did I think the market would rally?

SPY and IWM were heavily sold off yesterday. If you use RSI, you can see that it was entering heavily oversold territory on the intraday charts.

Markets tend to rebound off of big moves, and yesterday was a large gap down and a slow bleed off throughout the rest of the day.

Today’s rally was a relief rally, or an opportunity for investors to take a breather and see where we go from here.

Was this the dip to buy?

I don’t think so. I think the market will continue to move lower over the next few weeks, with whipsaw days occurring during that time period.

If you’re a day trader or a swing trader, you could find some opportunities in long positions, as long as you keep your stop loss exits pretty strict. If you’re looking for good long-term investments, this isn’t the dip to buy quite yet.

Didn’t you say volatility would explode yesterday?

I thought it was possible, given the news about the US accusing China of currency manipulation, coupled with the futures selling off 1.5% in the opening minutes yesterday evening. However, the futures markets quickly rebounded off those lows, and a test of these locals didn’t seem likely today.

I do still believe there is the potential for volatility to explode given the political backdrop. Tariffs, trade negotiations, Yuan devaluation, dumping of treasuries by China, and their ripple effects all pose a risk for this market right now. VIX could explode. If you play a volatility play, keep it very small (NNT’s barbell approach).


Options Myth: 90% of all options expire worthless

Fact: According to the Chicago Board Options Exchange (CBOE), only 10% of option contracts are exercised. That does NOT mean 90% of options contracts then expire worthless.

Instead, the CBOE reports that 55% to 60% of options contracts are closed out prior to expiration. This changes everything. Whether those options are closed out for a gain or a loss isn’t know, but it shows that 90% of options do not, in fact, expire worthless.

More numbers, per the Options Clearning Corporation (OCC):

According to historical OCC statistics for the year 2015 (for activity in customer and firm accounts), the breakdown is as follows:

  • Position closed by selling the option: 71.3%

  • Exercised: 7.0%

  • Held and allowed to expire worthless: 21.7%

So you can see the even MORE positions are closed out per the OCC.

Selling options isn’t inherently better than buying options.

Crazy Day in the Market (more predictions)

Today’s day in the market wasn’t only crazy, but I called it last Friday.

Shall we revisit?

As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier today.

IWM was down 3.71% today alone. Look at the support levels I nailed on this call here:

Once IWM broke below $1541, it hovered there for a bried time before selling off today.

SPY is a little trickier for me. It tends to whipsaw in price when volatility picks up, possibly due to algorithmic and HF trading. I think we see SPY revisit $285 range before the end of next week (Aug 9 expiry), but it’ll be a rocky ride.

SPY visited $285 today. Completely unexpected by me. I thought it would take a while to drag the SPY down given how well it’s performed relative to the rest of the market.

There was a huge gap down on SPY this morning and we finished down 3.59% today.

I think VIX will also whipsaw next week, seeing a range with a low 14.7 and all the way up to 23.5. That’s just my guess.

VIX high of the day: 24.8. Well damn, it could actually go higher. I wasn’t expecting VIX to jump the way it did today.

What’s next?

Markets sold off so quickly today. I wouldn’t be surprised if tomorrow is a slow day or even a little rally off today’s quick selloff.

But there is still a ton of risk in this market right now. China retaliated against US tariffs by halting the purchase of US agriculture. Xi isn’t very happy right now.

I don’t know what is going to happen next to be honest. I took $4.6K in profits today, mainly from SPY puts, IWM puts, and VXX calls that I had been building up over the past two months.

I hedge all of my trades because I’m bad at predictions. But my best guess is that tomorrow is a day for the market to catch its breath, but I do expect this selloff to continue through the end of this week.

Also, a VIX explosion tomorrow or Wednesday remains on the table. I’m talking 70% gains or more…

This is subject to trade if US-China negotiations and relationship recover in the coming days.

The sell-off is not completed

Investors must now price in additional tariffs on China, and further conflict going forward with regards to China.

We won’t have a trade deal anytime soon. It’ll take a while for the repricing of assets to trickle through the market, just like it did back in May.

As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier today.

SPY is a little trickier for me. It tends to whipsaw in price when volatility picks up, possibly due to algorithmic and HF trading. I think we see SPY revisit $285 range before the end of next week (Aug 9 expiry), but it’ll be a rocky ride.

I think VIX will also whipsaw next week, seeing a range with a low 14.7 and all the way up to 23.5. That’s just my guess.

However, a quick resolution on China trade would negate this scenario.

Reviewing the Past Week Predictions

On July 31, after market close, I predicted:

VIX will peak around 23-25.

SPY pulls back to $292 by the end of this week.

IWM pulls back to $151.

My VIX prediction was way off, with VIX finishing at 17.6 today.

My SPY and IWM predictions were pretty damn good though. SPY finished at $292.97 and IWM at $152.48.

More predictions will come…

FOMC Meetings and Market Behavior

Last December I learned a valuable lesson: be cautious around Fed meetings.

I remember seeing the market sell off. VIX jumped through the roof.

To me it was obvious that the Fed was going to hike rates. They said they would hike rates, markets were sold off, but not so oversold where the Fed was concerned about backing off the rate hike plan.

Then the market sold off. I thought it was crazy. I thought people had already priced in these Fed expectations. I was wrong.

When a similar situation took place in March, I realized that Fed days bring volatility. Why? Investors are obsessed with interest rates and Fed policies. The world’s central banks, led by the Fed, have babied along this 10 year bull market all along the way.

Zero-interest rate policies, quantitative easing, and easy monetary policies have all propped up this market in an effort to combat deflation.

Investors need the Fed to keep the market afloat. The game has changed, and this is what investors rely on.

Fed meetings solidify estimates that markets have priced in, or they rock the boat even more when estimates were not priced in. Then investors move on to speculation about the next Fed meeting. And thus the cycle continues.