Is S&P about to start a bearish trend?

Regarding NVDA, I was in a unique situation. I’ve posted about this here and on the Options board. But I was in an existing strangle on NVDA. A strangle is where you buy put and call options at different strike prices betting that the stock price will move significantly either up or down. In a classic strangle, you don’t care if it goes up or goes down because you make money either way. How you lose is if the stock price stays in a narrow range neither up or down. If the price moves a lot then you can make enough money on one side (calls or the puts) to pay for both sides plus a nice profit. That’s how it’s supposed to work.

Now, my situation was more unique than that. I started out with just puts. I did this because everybody and their brother was saying how wonderful NVDA was and how they expect them to blow away estimates. Often, when everyone is buying and singing their praises that’s when the house comes crashing down. That’s what happened to all those tech stocks in 2000 when the dot-com bubble burst. But then at the last minute I got nervous and added some calls which turned my trade into a strangle of sorts. But it was still oriented towards the puts. In my “strangle”, if NVDA went up by 15% then I would get a small profit, but if they went down by 15% I would triple my money. Last quarter when NVDA blew away estimates they went up by 24%. I was expecting a big move.

After-hours yesterday, they topped out at 520 (+10.4%), but today their high was like 500 (+6.1%). Neither was high enough for me to make a profit on the upside. Then they traded down all day and closed unchanged (slightly negative after-hours). Unchanged is the absolute worst case in a strangle. If I had to close everything today I would lose money on everything.

But one thing I decided was that if the absolute worst case happens and the stock price is unchanged, then given all the hype that’s been going on for weeks on this stock, this will be viewed by everyone as a negative and the stock price would get weak and trend downward. So I made sure to give me plenty of time on the put side. My calls expire soon, but my puts don’t expire until December. So I have a little time to let NVDA drift down to where I can make a profit. Even if it experiences volatility both up and down (which may be likely), such volatility also is a bearish sign. I’ll just play this as it goes.

The strangle aside, I also traded a put on NVDA today. It was trading down pretty hard, so I bought a put. Sure enough it kept going down, bounced, went back down and bounced again a little lower leaving a positive RSI divergence, so I got out with a 25% gain and this from a 1.0% - 1.5% down move in the stock (not sure about the exact stock prices when I entered and exited). It turns out that had I held to the end of the day I would have done much better, but I didn’t want to risk having a bigger bounce up. This trade was not something I planned for ahead of time. It just felt negative to me at the time so I entered and exited according to plan.

So I have this intraday trade on NVDA, plus I have my puts which expire in December. All my trade calculations showing possible profit on the puts are based on options prices earlier this week which are all wrong because post earnings, the prices have all come down. I’ll likely take a look at that tomorrow.

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Charlie,

Sorry, I didn’t answer all your questions, but they may not all apply to me.

Right after the earnings, I just watched the action in after hours. Right away, I saw that traders where selling into the updraft. After hours had a high of 520 and ended around 505. The volume was uncharacteristically high, probably because this stock was so talked up that everyone and their brother was playing it after hours. But the high volume gave the action validity. Often the action in after hours can be very volitile, but this is because of the low volume which allows a smaller number of people to have a larger impact on prices. You almost can’t trust after-hours action because of this. I felt that the after-hours action on NVDA was very bad which made me wonder what it would do the next day. The action today started out lower than the 520 in after-hours, but selling immediately started again and the action reminded me of after hours.

Now one thing you need to understand is that I generally do not buy or short stocks. Instead, I buy calls and puts (options). I do this because the return that you can get is many times higher with options due to increased leverage. You pay a smaller amount but control 100 shares per options contract. Which is why on my put trade today, NVDA went down between 1.0% and 1.5% (I don’t know the exact stock prices because I’m watching the options prices), but my profit was 25%. So my profit was 16X-25X. The nice thing is that with options your possible gain is infinite, but your possible loss is 100%. I’ve exceeded 100% on an options trade many times (more times than I can count).

Regarding after hours (and pre-market) I generally do not trade at these times because I don’t trade actual stocks. My broker only does options during regular hours, but even if they did extended hours, I don’t think I would want to play with options when the volume is so low making the bid-ask spreads very wide. It’s bad enough during the day on a lot of stocks that are not very popular.

Regarding exits, I generally do not set a specific target number where I will exit. I do keep an eye on support and resistance levels so that I know where to look for a potential bounce, but generally, I track the patterns and get out when it looks like it could go against me. My favorite these days is to look for RSI divergence (both entries and exits) which I have talked about in other threads on the Fool.

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Oh wait, it was this thread. Scroll up to Aug 17.

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Okay, more thoughts on SPY and the market in general. All the talking heads are saying that the little downturn we had in the first half of August turns out was not too bad. It was only around 5% and now since August 18 we are up and with strength. Everyone expects for us to resume our 2023 uptrend.

Me, I’m still bearish. When all the experts on CNBC are saying that we are back into a bull market that makes me even more skeptical. Now, I am still holding puts which are currently losers and if I am wrong and all the experts are right then they will all be big losers. I accept this as a possibility. Being a successful trader does not mean never losing. The puts that I am holding are cheaper out of the money variety, and I never have many contracts. Often only one, but sometimes a few, I never buy positions valued in the thousands.

Now, looking at the recent chart on SPY, it still doesn’t look great to me.

Now this chart is an hourly line chart rather than candles because the RSI Oscillator below the chart is based only on closing prices and the candle lengths make it harder to see the actual tops and bottoms. The recent activity since the Aug 18 start of uptrend shows three succeeding and increasing upswings (labeled 1, 2, and 3) and one major downswing (labeled A). In general, the volatility, even though they are mostly big upswings, are a bearish indicator to me. Yes, strong up moves are bearish to me.

Also, you can see that there are negative RSI divergences. The first one marked goes from July 12 to July 31. And the second one is going on right now starting Aug 29. A negative divergence indicates that a downside reversal of an uptrend is more likely. Now, keep in mind these divergences do NOT work all the time. If they did, I would be a billionaire. They just indicate that all things being equal (which they rarely are) a reversal is more likely, but not guaranteed. For instance, there was a clear negative divergence for SPY on 7/14, but SPY kept going up, and it kept repeating the negative divergence over and over until August when SPY finally started going significantly down.

So what do I think is about to happen? There is now an increased chance that SPY will move more significantly downward. Looking at the recent price patterns, I think it might go down relatively sharply towards point B on my chart. If that happens, then I think it is more likely that it will continue the August downtrend into September which is typically a weak month. Of course, then again, it might not go down at all and it might just keep climbing upward like it did the 2nd half of July and hit a new all time high so that all the talking heads can cheer and tell all their viewers how right they always are.

We shall see… :slight_smile:

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I should explain this. I think I’ve said this in other places, but in my mind wild swings up and down, even if they result in up overall is volatility which is generally bearish. If a stock is moving up, I would rather see it taking smaller up and down steps generally moving up over time. This is something that can be kept up for a very long time. In the markets, they call this “climbing the wall of worry” which is generally bullish movement. On SPY I would like it better when the daily chart shows a consistent pattern with candles $1-$3 in length. If the candles are more like $5 with some $10 thrown in, then this is too volatile and I have less confidence in an uptrend. You’ll notice on a long term chart of SPY, long daily candles are most common during bear markets or at major tops and bottoms.

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Well, it actually got down to 443 on Sept 7 which is close enough to my prediction. The following chart is an hourly showing all the marks I made on the previous chart as well as a placement for my prediction (B). But now the pattern since 9/1 has me a bit puzzled. You all know how I feel about volatility being bearish, even if you are moving upward. But the SPY chart since 9/1 has a lot of air in it.

I guess I feel like gaps are a form of extreme volatility. If you look at a daily chart of SPY or any big company that’s been around for a long time (smaller new high tech stocks don’t count because they are always volatile) and scroll back for years looking for different situations, you’ll find that volatility is generally higher during bear markets when prices are trending down and also during periods that could be considered major tops and bottoms. When prices break out of a consolidation bottom, they generally move up in a more organized trend with shorter candles and more gentle ups and downs and can move up this way for a long time. Then as they approach the top, the action gets more volatile then usually stays volatile as they roll over and trend downward to the next major bottom.

Anyway, 9/14 looked like a nice upspring from consolidation, going back to the early September range before the post-Labor Day dive. We may even set a new September high or even a new 52-week high which is only 1.8% away. But I might look at this as a high and look to play it going down because I just don’t feel too good about this chart.

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Like I said… :slight_smile:

Today’s gap down adds even more air space to the chart making it look even more bearish. I think the 9/7 low may be in jeopardy of breaking as support, and if the August lows break then we are definitely in a downtrend from the July highs. Yes, as has been pointed out, you are not technically in a bear market until you are down 20%, but as traders we really cannot wait until SPY 370-ish to begin trading for down moves. I mean if you waited for 20% down in the 2022 bear market, you would have arrived just in time for the beginning of the bull market. And if you waited for 20% up to join the recent bull market, you would have arrived this summer which may prove to be the transition to a new bear market. Basically, the 20% “definition” is really meaningless. I’d rather use historical data to try to anticipate changes which may be coming.

It is well known that the majority of people arrive at the top of the bull trying to chase gains right as the market turns south. It is also well known that the majority of stock owners endure the pain of losses and sell out trying to cut losses just as the market turns upward. The majority is always late in both buying and selling and the majority lose money. But their losses translate to gains for the minority. Just one of the cruel realities of the markets.

Just want to point out one more thing. 9/14 looked great to many, mostly because it was up. Bulls love to see gaps up and they really love when it keeps trading up after the gap. But I viewed the gap and up move as a potentially bearish sign. Up is not necessarily good. If you are flopping up and down it could be a sign of bad things to come, even if you are more up than down. Now, of course this is the stock market and really anything can always happen no matter what you draw on your chart. You just need to look at past market behavior and try to ascertain the most likely price moves. And most importantly, always recognize that anything can happen and do your best to limit your losses.

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Okay, so I’ve updated the same chart to show the action the last two trading days. It still doesn’t look great to me. What I now see is a break down to new September lows, and a possible challenge to the August lows.

This is an hourly chart, but I believe if you push into a 5 minute or even 1 minute chart, it still really looks like it’s trying to break down after consolidation.

That said, I think I really only feel about 60% or 70% confident in this. It is still a very valid call looking at a longer term chart (1 yr, daily) to say that all this negative is really small and we could still be preparing to break out to a new 52 week high. I just don’t happen to believe it…yet. :slight_smile:

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One thing I have noticed is that SPY can have a dip for a few days after a dividend payment looking at the daily chart, but the weekly chart shows that the trend is usually positive after that dip…doc

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Well the first part of my prediction has come true. And we are only 1.2% away from the August lows. If we break those August lows, then we are definitely in a downtrend from the 52 week high. Now, we could still technically be in a consolidation flag on our way to new 52 week highs, but as I’ve been saying since early August, we could also be at the start of a longer-term bear market. We shall see…

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Derek,

Just for fun, happy to take the other side on this.

My prediction- market is very choppy in Sept…but by Oct/ November it is higher from here…

Of course, no idea as to what happens next year…but with an election looming, I just don’t see how the ruling party would let the market tank…

But from a purely technical short term trading point, I think you are spot on!

And even more importantly, your risk assessment discussions are very helpful from a practical perspective. Thanks for that!

Yes, well seasonally speaking, September is the weakest month in the market which tends to do better in October (although some of the biggest crashes happened in October) and November. December also is known to have the “Santa Clause Rally” to close the year. January is seasonally weak.

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There is no absolute way of predicting the market course. It also depends upon your time frame of interest. I personally have a had time predicting much from 5 min to hourly charts as I think more in terms of days and weeks. Regardless, we are in a consolidative chop. We have had a pullback, but averages haven’t significantly flipped (20 just hit the 34 today) so hard for me to use the term downtrend yet. But yes, we could easily reach that. We are forming a symmetrical wedge which may lean towards previous trends, but typically is more of a coin flip.

It’s reasonable to try and look more at the overall market perspective. Offense versus defense.

Small cap Growth versus value.

That is also showing consolidation, no clear winner.

CPCE Ratio is heading up but in the middle.

This is seasonally/historically a tough time for the markets. The annualized returns for the next week for the S&P is about -40%, the Nasdaq -50% and the Russell 2000 -80%. But October tends to be better. The VIX jumped at the end of today, but is still moderate at below 16. And let’s not forget our fearless politicians and the budget.

So, are we going Bear? All that and the answer is who knows. Personally, I think we are still consolidating. I’m anticipating a return to an uptrend but am prepared for a defined downtrend. I reduced positions a week ago before Max Pain and am not planning to open any more in the next week, but have a strong watchlist I’m tracking and have a hold list of orders. Cash is a position.

Happy hunting,

Lakedog

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Thanks, Lakedog.

Yes, I think I’ve been clear over and over again that even though we have been going down since the late July top, we could be in a consolidation. Some are saying that you really don’t know for sure that you are in a bear market until your are, by definition, down by 20%. For trading purposes, I’m not going to wait until we’re down 20% to begin trading for down moves. I have to trade as though we may be moving mostly down with high volatility because that is what we have been doing since August. We are definitely not in a classic orderly bull market, climbing the wall of worry. You could say that we were in such a market before the last FOMC (7/26), but not since.

The one thing about my long term investments is that I’m not worried at all about bull markets or bear markets or timing my accumulation of shares. The reason I don’t care is that I do not long term invest for eventual capital gains. I’m not buying stocks hoping to be able to sell them decades from now when I retire for a lot more than I paid for them. This is what most people do. But if you do this then you are basically trading. Long term trading, but it’s still trading. Buy low, sell high. I purposely make my long term investing and short term trading totally separate, never mixing. I will never buy something long term that I also trade short term. And what I buy for long term is basically for income (dividends), which most will say is completely boring, but it won’t seem so boring to me when I’m raking in 15%-20% (or more, hopefully) yields in retirement.

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An interesting thing is that the indexes have reversed direction on the day after a FOMC report so I wouldn’t be surprised to see the indexes green tomorrow because of this phenomenom…doc

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Could be, Doc. You just never know for sure.

But for me looking at the psychology of traders, I think the last FOMC started a negative trend in all the indexes (basically the market as a whole) because the whole issue of inflation and rising Fed rates throwing uncertainty into the market. Traders hate uncertainty. I think that the economic news of late has not eased this uncertainty, but I think everyone was looking to the Fed to send a signal that everything is alright, don’t worry, we don’t see us having to do much more. Adding more certainty to an uncertain economic future. The downdraft this afternoon seems to suggest that Powell did not give the assurance that they were looking for.

So then we need to ask ourselves. Are we now more or less certain than we were before? This is a complicated question because I am not asking if the economic condition is good or bad. The uncertainty that traders hate means that you do not know if it is good or bad. If everyone decides that it is good when they were uncertain before, then we can rally. But often if everyone is absolutely sure that it is horribly bad, that is not uncertainty and can actually cause a rally. The stock market is a leading indicator that reflects the *future situation. It does not reflect the current situation. Most often the rallies start in the middle of a bad recession. Why? Because traders conclude that this is the worst and it will only get better in the future. Likewise, some of the biggest long term crashes start at the peak of a strong economy.

Now, we are neither in the middle of a deep recession or in the midst of an economic peak, so what I just said probably doesn’t really apply. But you still have to ask yourself if we are more or less certain. Where the Fed is concerned, what the market wants to know is if FOMC will raise rates again this year or not. This happens again Nov 1 and Dec 13. Whether they do or not, are they likely to finally tell everyone that they are done? If so then people will feel more certain, but if they refuse to say they are done, then will they raise again next year? Would they even indicate that they might reduce rates next year? A lot of this will hinge on economic data on inflation, GDP rate, and Labor.

Now, I happen to be somewhat familiar with these concepts only because it’s in my face when I’m involved in the markets. But overall, I don’t really consider myself to be much of an expert. Bottom line is these are all fundamental economic factors and I really don’t try to spend too much time trying to understand fundamentals. No matter what I may happen to think, it may have no bearing on what actually happens. What actually happens on the price charts matters much more to me than what should make sense to happen according to the fundamentals.

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Your explanations are excellent on what you are thinking. Thank you so much…doc

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