Wow, that was a fun day!
After bragging about how easy it would be to replace departing CEOs, Trump ended up disbanding what was left of his Business Council as we finally found a group of people in America with the backbone to stand up to the President. From our point of view, we don't care what news brought the market down, as long as the market goes down and, once again, our index shorts were big winners. In fact, we made almost $1,000 for our Members in just over an hour during our Live Trading Webinar alone (you're welcome!).
Our 5:49am call to short the Futures was linked pre-market in yesterday morning's PSW Report and now would be a good time to review the calls after the fact, so we can get an idea of how our 5% Rule™ operates in the wild:
The Dow had a 400-point run (1.8%) to 22,050 so 80-points back is 21,970 and then all the way back to 21,890 but I'm only expecting a weak retrace for now.
As you can see, we pretty much nailed 21,970 (weak retrace). 90-pont drop from 22,000 (our shorting line) was good for gains of $450 per contract.
/ES had a 30-point run to 2,470 and that's 6-points back to 2,463 and then 2,457 if it's so inclined to fill that gap.
Again we have the weak retrace and a 10-point dop on the S&P Futures (/ES) is good for gains of $500/contract. What we're looking for this morning is simply whether we break back up (doubtful) or continue down to the strong retrace lines. Even there, if they hold we're still on a bullish consolidation at the highs but, if they break down – we could be looking at a proper correction (see last week's hedging plays).
In our Live Trading Webinar we stuck with our Dow (/YM) shorts (2) and cashed the others into the close (not wanting to leave $1,000 on the table). This morning, we have tight stops at the retrace lines but, if there's no bounce, we can go right back to shorting using the same entry and exit rules we had yesterday – only now we use the retrace lines for our stops. See – not hard at all!
/NQ 5,940 is an air reject from 5,950 from 5,800 and, even though it's 150 points, the Nas loves those 25-point lines so we'll look for 5,925 and 5,900 and below 5,900 means the others are likely to at least do a strong retrace too.
We nailed our 5,950 target on the button and then a very rapid drop. Nasdaq Futures (/NQ) pay $20 per point and this drop is now 50 points and good for gains of $1,000 per contract.
/TF 1,370 back to 1,400 was a narrow move (and we fell from 1,430 so it was a 50% bounce which failed at 1,400). That was meant to retrace 6 and 12 points so 1,388 is the line to watch to see if we're really recovering and below that is a fail on the RUT. In the bigger picture, 1,430 to 1,370 was a 60-point drop so 12-point bounces to 1,372 and 1,384 so that's our real zone of contention on /TF – between 1,384 and 1,388 and whichever way we break is likely to determine which way the market breaks.
We didn't get back to 1,400 but we used the 1,390 line and a 30-point drop on the Russell (/TF) is good for gains of $1,500 per contract – that's why it's our favorite short.
That's the simple way we use our 5% Rule (see: "5% Rules! How Can We Be So Right?" and "Charts From the Future: 5% Rule Update" for some basic notes on using the Rule). We can now apply the same rules to the 24-hour drop to see what kind of bounces we expect this morning without breaking the downtrend, which also has the side-benefit of identifying potential re-entry points.
For example, the Dow fell from 22,050 to 21,950 so a 100-point drop gives us 20-point (20% of the drop) bounces to 21,970 (weak) and 21,990 (strong) and failing the weak bounce is a bearish signal and failing the strong by the day's end is also bearish – indicating a continuation is likely to our strong retrace line (21,890) and, below that is a bearish signal on the bigger picture (so we zoom out to a bigger chart and apply our formulas). Remember, the 5% Rule is NOT TA – it's just math!
From a Fundamental standpoint, the Fed minutes left no doubt that these people don't have the balls to raise rates as they see a still-shakey economy (albeit with record market highs), low inflation and low wages – not exactly robust growth. Despite the Atlanta Fed predicting 3.7% GDP growth, the reality is likely to be much closer to 3%, perhaps lower and the Fed won't tighten into that. That caused the Dollar to take a 0.5% dive yesterday, which was a nice save or the market sell-off would have looked a lot worse.
I was over at the Nasdaq yesterday morning, in fact, speaking to Jill Malandrino about how Central Bank buying is keeping a firm floor under the market as well as the algo-trading mechanisms that allow us to make our short-betting profits – even as the markets continue to climb higher.
TradeTalks: Will the Trend Ever Change? @JillMalandrino with Phil Davis, CEO @PhilStockWorld https://t.co/HYN79ip4ou
— Nasdaq (@Nasdaq) August 16, 2017
Would it be easier to just bet the market to go higher every day? Of course it would but these shorts are HEDGES – we have 3 Member Portfolio that are stuffed full of bullish long-term trades – that's why we're always looking for short-term short opporunities. Our long side is well-covered and we give up a little of the bullish profits to put in some bearish hedges. That's why we love using the futures – we can make cash on these little pullbacks, even if it's not a proper correction.
A good example of our upside plays is from my May 15th Nasdaq appearance, where we discussed our core strategy and used Fiat/Chrysler (FCAU) as an example with the following trade idea:
- Buy 10 FCAU 2019 $10 calls for $2.75 ($2,750)
- Sell 10 FCAU 2019 $15 calls for $1.00 ($1,000)
- Sell 10 FCAU 2019 $7 puts for 0.75 ($750)
That was net $1,000 on the $5,000 potential spread and, though FCAU is only at $12.78 now, the $7 puts have fallen to 0.35 ($350) and the bull call spread is now net $2.70 ($2,700) for net $2,350 – up $1,350 (135%) in our first 3 months and that's right on track for our full expectation of a $4,000 (400%) gain in Jan 2019.
As with many of our Member Trade Ideas in progress, even if you are a free reader you can still enter this spread for $2,350 and the upside is still $2,650 (112%) in 16 months.
Our free leftover scraps are better than the best trade ideas you find in other newsletters!
