Stocks - SPX Capitulation of Human Emotion
Idea for SPX:
- I think that we will have a bit of a rally in the short term.
- A bit of a lengthy post to document process and my thoughts on the market psychology here.
The hardest trades to make are usually the best ones to make.
- Traders have been betting on a trend reversal of this ungodly bubble, but after a 5% correction, there are many warning signs of a bullish rally.
- Firstly, we never made it below the 200 DMA, and now are over the 50 DMA once again.
- The Quad Witching window of weakness has passed, and bearish momentum has faded. The options market is back to its regular scheduling. FOMC appears to have changed something, and it does smell like Fed intervention. I would guess that the doubled RRP facilities gives banks more room on the balance sheets for risk.
- One more day of rallying would confirm a 5-day Sliding Window closing higher (Sushi Roll) and an IH&S confirmed.
- The dollar is at an important level, and I would expect efforts to stop it from breaking out at this level.
Commodities are leading the charge:
Dollar is at a critical juncture:
Some Market Psychology:
- Typically short term traders will hold for up to 3 days, so a move beyond that does not offer a reversal. We have squeezed for 4 days from the lows.
- Usually the best thing to do is what people don’t want to do. Identify where traders may be trapped and remain stubborn to take their losses. Also, traders will usually refuse to enter gap positions, but it can be the best thing to do.
- Traders had piled on shorts at the lows, largely fueled by fears of Evergrande being sold by the media - but their fears may have been unfounded. If it sounds too good to be true, it probably is. In fact, it is likely that there is a sentiment divergence trade building up, and a squeeze is coming on Monday morning to come for stubborn shorts and those who had entered short on Friday.
- Price closed at an obvious 'Right Shoulder', but there was too much time for retail traders to enter short. I think time is more important than price, and this should have alarm bells ringing. If the reversal does not occur in a reasonable time frame, then it probably won't happen.
The I'm Mad As Hell And Can't Take It Anymore Trade is coming:
- We must understand points where human emotion will capitulate.
- At extreme points, market gaps will occur in the direction of the prevailing trend as traders will try to achieve peace of mind.
- Stubborn shorts will have had the entire weekend to have suffered and many will have accepted defeat.
However, there will be a time to be short. Indeed we have made a lower low, and bullish momentum has indeed weakened.
- "The trend has ingrained in people's heads that it doesn't pay to be short."
- "The market gapped higher on the opening because the shorts were throwing in the towel. They are willing to pay up to whatever it takes to liquidate in the first 10 to 15 minutes of trading. That's what made the market gap open higher to begin with. At this point, the professional traders step in as sellers. They probably have been riding this trend and now are taking the opposite side of these losers and closing out their long positions, and some are probably getting short as well. The unusual thing that occurs here is that even though the shorts have thrown in the towel as evidenced by the gap-higher opening, the market shortly after the opening trades lower as these professionals liquidate their longs and initiate shorts." - Mark Fisher, The Logical Trader
- Wait for the Washout before the Flush.
- The risk is that all of this has already occurred on Friday.
- Barring a debt ceiling crisis and US default, I now think that we would have rather a slowing of momentum, and controlled decline over 2022, and only at the end of this bear market, would we have a capitulation. Wait for the 200 DMA to break to have an earnest downtrend. If you remember the COVID crash, even there, the main meat of the sell-off had been near the end.
How can the Market Possibly go Higher? The 'I Have No Clue' Trade:
- "Let's say that a market has been trending in one direction for a significant amount of time, and you ask traders that you respect why they think this is happening. Maybe natural gas prices are trending higher because of a prolonged bout of cold weather. Or, crude oil prices are climbing in anticipation of an OPEC summit. Perhaps S&P futures are tanking because Federal Reserve Chairman Alan Greenspan is speaking at yet another luncheon. If a market is making a substantial move and traders seem to understand why, this market trend is not going to last very long. However, if the market is moving in one direction and nobody has a clue as to why, then the trend is going to be prolonged. When a market goes up or down for no apparent reason, it tends to go a lot further in that direction than people can imagine." - Mark Fisher
Strategy:
- Unilateral: Long
- Intraday: Look for the reversal to enter Short/hedge
- Overnight: Postpone
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor." -Jesse Livermore
“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” -Paul Tudor Jones
GLHF
- DPT
- I think that we will have a bit of a rally in the short term.
- A bit of a lengthy post to document process and my thoughts on the market psychology here.
The hardest trades to make are usually the best ones to make.
- Traders have been betting on a trend reversal of this ungodly bubble, but after a 5% correction, there are many warning signs of a bullish rally.
- Firstly, we never made it below the 200 DMA, and now are over the 50 DMA once again.
- The Quad Witching window of weakness has passed, and bearish momentum has faded. The options market is back to its regular scheduling. FOMC appears to have changed something, and it does smell like Fed intervention. I would guess that the doubled RRP facilities gives banks more room on the balance sheets for risk.
- One more day of rallying would confirm a 5-day Sliding Window closing higher (Sushi Roll) and an IH&S confirmed.
- The dollar is at an important level, and I would expect efforts to stop it from breaking out at this level.
Commodities are leading the charge:
Dollar is at a critical juncture:
Some Market Psychology:
- Typically short term traders will hold for up to 3 days, so a move beyond that does not offer a reversal. We have squeezed for 4 days from the lows.
- Usually the best thing to do is what people don’t want to do. Identify where traders may be trapped and remain stubborn to take their losses. Also, traders will usually refuse to enter gap positions, but it can be the best thing to do.
- Traders had piled on shorts at the lows, largely fueled by fears of Evergrande being sold by the media - but their fears may have been unfounded. If it sounds too good to be true, it probably is. In fact, it is likely that there is a sentiment divergence trade building up, and a squeeze is coming on Monday morning to come for stubborn shorts and those who had entered short on Friday.
- Price closed at an obvious 'Right Shoulder', but there was too much time for retail traders to enter short. I think time is more important than price, and this should have alarm bells ringing. If the reversal does not occur in a reasonable time frame, then it probably won't happen.
The I'm Mad As Hell And Can't Take It Anymore Trade is coming:
- We must understand points where human emotion will capitulate.
- At extreme points, market gaps will occur in the direction of the prevailing trend as traders will try to achieve peace of mind.
- Stubborn shorts will have had the entire weekend to have suffered and many will have accepted defeat.
However, there will be a time to be short. Indeed we have made a lower low, and bullish momentum has indeed weakened.
- "The trend has ingrained in people's heads that it doesn't pay to be short."
- "The market gapped higher on the opening because the shorts were throwing in the towel. They are willing to pay up to whatever it takes to liquidate in the first 10 to 15 minutes of trading. That's what made the market gap open higher to begin with. At this point, the professional traders step in as sellers. They probably have been riding this trend and now are taking the opposite side of these losers and closing out their long positions, and some are probably getting short as well. The unusual thing that occurs here is that even though the shorts have thrown in the towel as evidenced by the gap-higher opening, the market shortly after the opening trades lower as these professionals liquidate their longs and initiate shorts." - Mark Fisher, The Logical Trader
- Wait for the Washout before the Flush.
- The risk is that all of this has already occurred on Friday.
- Barring a debt ceiling crisis and US default, I now think that we would have rather a slowing of momentum, and controlled decline over 2022, and only at the end of this bear market, would we have a capitulation. Wait for the 200 DMA to break to have an earnest downtrend. If you remember the COVID crash, even there, the main meat of the sell-off had been near the end.
How can the Market Possibly go Higher? The 'I Have No Clue' Trade:
- "Let's say that a market has been trending in one direction for a significant amount of time, and you ask traders that you respect why they think this is happening. Maybe natural gas prices are trending higher because of a prolonged bout of cold weather. Or, crude oil prices are climbing in anticipation of an OPEC summit. Perhaps S&P futures are tanking because Federal Reserve Chairman Alan Greenspan is speaking at yet another luncheon. If a market is making a substantial move and traders seem to understand why, this market trend is not going to last very long. However, if the market is moving in one direction and nobody has a clue as to why, then the trend is going to be prolonged. When a market goes up or down for no apparent reason, it tends to go a lot further in that direction than people can imagine." - Mark Fisher
Strategy:
- Unilateral: Long
- Intraday: Look for the reversal to enter Short/hedge
- Overnight: Postpone
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor." -Jesse Livermore
“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” -Paul Tudor Jones
GLHF
- DPT
Note
FOMC and on RRP:- Speculate that RRP limits doubling allows funds to have twice the 'risk-free' assets, allowing for a rebalancing of less Treasuries and more risk assets, hence the rise in yields and equities.
- One thing to watch closely is still the debt ceiling, as more liquidity in the RRP and dumping of US Treasuries may have been in preparation for a debt ceiling event.
Order cancelled
I tried to get smart here and predict the movement before it happened, but should have had conviction in my original thesis.
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