Another Jack-pot day!
— Unlocking the Algorithm (@Pattern_Trader_) October 17, 2018
The last time I have called next day 2-3% drop was on October 8th and the sell-off came with a 1 day delay. This time the timing was perfect but the max daily percentage only reached 1.95%! Ooh well close enough to call this as a hit I guess!
When my upper bound PT 275 is hit I started covering puts and SPXU position and went back to flat hedged position @276 again acknowledging on my Stocktwits account. SPY 279 10/19 puts were closed between 150-200% returns!
The next 2-3 days is very critical and I would like to discuss what are the possible scenarios, how I weigh them and what will be my strategy in each case.
Let’s have quick look at what I have shared about this week on Sunday
A higher opening or testing 279 levels would be really ideal to re-open short position again to capture a 3% drop in week. I will not go as heavy short as I was in the beginning of this fall but I plan to short with SPXU and SPY puts for Friday if SPY reaches to 279 level in the beginning of the week.
On the other side, I am still not convinced that 270 level is going to be kept as bottom yet and equally weighing on the option 2 described on Thursday also. A Closing below 269 may trigger another sharp sell to 260 easily.
So in either scenarios, I think the down side risks are still higher for this week. I expect SPY to reach 271 range again as a minimum requirement and that’s why my intentions will be on the short side this week.
The upper line was just more than expected but today’s move aligned it back for the bottom formation.
So here are the scenarios and the signs to identify which way the pattern will proceed from this point.
Scenario 1: This is the scenario that I am giving max chance of occurring and I have started shaping up my portfolio by adding stocks this week because of this despite expecting a one last visit to 270 levels.
Although SPY has reached the first target of 275 today, I still think this is still premature for the bottom formation and ideally I expect a visit to 269-271 range one last time before getting a bounce and I expect this to be in next 1-2 days stay there max 3-4 days and pick up to new highs.
Scenario 2: Waterfall-2! Interestingly the next 2-3 days it may proceed almost exactly same as scenario 1. Stay around 270 levels hang in for couple days than a gap down and accelerate down. So next 3 days appears to be very critical for the direction reversal or breakdown for Scenario 1 & 2.
Scenario 3: Although I give this a low chance, wanted to acknowledge in case we see a full recovery day tomorrow. If today’s drop is almost recovered tomorrow this options can kick in and we may see going back to 287 in the next couple weeks and retest higher lows and go up. If I see this happening I will cover all shorts for short term.
At the closing today, I decided to increase my short position again to 40% SPXU vs 60% stock positions as I expect higher chance to going back to 270. I am not taking any options position until I have higher clarity (this may take 1-2 days :)) Ones we get into the cruising mode again after a reversal confirmation, I will be selling options for premiums.
I am long MU (10%), LRCX (10%), FIT (10%), BABA (5%), HBM (5%), TEVA (5%), BMY (5%), AFMD (5%), GE (5%) and short SPY via SPXU (40%)