PIVOT!!!!!!

That did not go as expected!

When I tweeted posted this on Thursday little did I know that this bearish engulfing candle was only just a stop run as opposed to the beginning of a pullback in SPX! It no doubt shook out many of the ‘late to the party’ traders who tried to jump on the rally after a huge run-up in price. They likely placed their stops just below any of the prior 3 day’s lows and those stops would’ve been hit.

Now, to be fair, I was expecting a rally on the following day but I thought it would’ve simply been a retracement in down move. Below is my post to that effect.

After price had begun the rally I posted about how the lows of those prior 3 days were important support. That meant that 4347-60 was the bull/bear line. I frequently post about what the current bull/bear line is and it represents literally that; above that line is bullish and below is bearish. It’s extremely important to understand that a bull/bear line remains active even if price crosses either above or below it. If price crosses above the line and that is bullish then crossing back below it again is bearish! If price crosses below the line and that is bearish then crossing back above it again is bullish! Too many traders lock-in on a bias and refuse to either exit or flip a trade when the line is crossed in the opposite direction! If a line gets crossed several times it’s no longer a valid bull/bear line. Don’t ignore the message that the market is sending!

So now lets’ consider what happened on Friday. Following Thursday’s bearish engulfing candle I fully expected the rally had ended, for now, and a pullback was beginning. What I didn’t do a good job of indicating in my posts was where the bull/bear line was going into Friday’s trading!

What was so significant about Thursday’s daily SPX candle? One, that it took out the prior day’s high, and two, it took out the prior day’s low (outside candle). In fact, it took out the prior 3 day’s of lows! That made it a very bearish candle, right? So, if taking out the prior 3 day’s lows was bearish, what was recovering back above those lows? That would be the opposite of bearish, right? Hmmm, I wonder what they call the opposite of bearish? 🤔

With price recovering back above those prior lows the bulls were in control of the price action. The next test would then be the 50%-61.8% Fib retracement (measured from top to bottom) of Thursday’s bearish candle. IF the bears were going to stop the bulls it would likely be done there! When that resistance area failed it was clear that the bears were done and the bulls were definitely in control.

Below is the 30 minute SPX chart showing the important candles where the bears were failing and the bulls were taking control. The signs were there for any trader to realize that the market had throw a curveball on Thursday and Friday was likely to be a strong rally day!

Easy to say all of that in hindsight but what was I doing on Friday to flip from bearish to bullish? Below are my Friday fills.

Below is the risk profile created by all of those fills. The initial buying and selling of the long Calls was to immediately flip my Deltas from short to long because I came into the day’s trading short SPX Deltas and I use /ES (SPX futures) to hedge my primary SPX position. I would buy the /ES Calls to hedge my risk quickly and then as I was able to exit my SPX short positions I’d then close the hedge. That process continued until I was out of my short Delta SPX positions and then I simply focused on managing my long Delta /ES position to match what I was seeing on the 30 minute chart. Prior to the close I turned those long Calls into a Call Ratio Spread.

What I hope you’ll take from the blog post is that whatever your bias is going into a trading day you must have a level(s) where you can determine that your bias has been invalidated and you need to either flip your position or at least stop out to avoid additional losses.

Bonus Content: Finally, I had a question on X regarding my choice of Calls. When I purchased the /ES Calls they were closer to 50 Delta (ATM) then they were to the 30 Delta Calls that I frequently talk about on this blog. What was the reason for that? Also, why did I choose those Calls with a 2 week expiry? First, this /ES position started out as a hedge to my short Delta SPX position. I typically use SPX as my primary position and when I expect price to move against my primary position (SPX) I’ll often hedge it by putting on an opposing trade in my secondary position (/ES). Those 2 positions can switch roles if price continues to move contrary to my original expectation. Second, I chose the Calls with a Delta of greater than 40 because higher Delta options can be hedged to zero cost or better with a smaller price move than can lower Delta options. After I had completely unwound my short Delta SPX position I was now net long (a lot of) Deltas and I wanted to be able to get to better than zero cost on the /ES position without needing a much bigger continued rally. In fact, I wanted to be hedged prior to Friday’s close! Remember, I don’t believe this is good location to be long Deltas since I still expect a pullback to lower prices so I wanted to remove all initial downside risk in this position in case /ES turns down from here! The reason for selecting the 2 week expiry is that it covers a potential rally thru the day after the Thanksgiving holiday in the U.S. which is often a bullish period. Any new Calls that I may be adding going forward will have expiry’s at various weeks in December due to the potential of bullish seasonality during that time period also. I believe in spreading my positions around by price and time to reduce both forms of risk! Any short Delta positions taken now through the end of the year will have very short expiry’s of a week or less due to that potential bullish seasonality.

Questions or comments? Leave them down below or post the on my X account @VegaOptions.