April highs will hold and we have not seen the lows for the year. However, bulls have their way of continuing to march on more than anyone suspects. SPX 1150 or 1175 before we drop may not be out of the question.
Looks like recently we had an exhaustion gap and that we will go lower, although without a trendline to guide the move it will be more difficult to trade.
When a trade goes against you, you have to use reason. f a company was oervalued at one price and it is now higher, it is now more overvalued and is an even better reason to short. When a stock is undervalued and it trades lower, you now have more reason to buy it.
If you are trading a price pattern, a break of the neckline and the trendline indicates lower probability of a target being reached. However, higher prices should not scare you out completely. If you are not oversold and the trendline is broken, you can get out of the trade immediately. However, if you break the trend and you go overbought, you must at least try to play one more swing to the downside before surrendering. Getting out earlier will result in you losing more.
Additionally, this shows why you should scale back your position if you are right.
For example, the market dropped quickly after the trend line. That is an opportunity to swap out from shorts into put options and from ITM put options to OTM put options or reducing your position size so that you can get most or all of your initial investment back. The goal is to play with the house’s money.
When market is overbought and there are bearish setups like those in NFLX or GLD, those are great candidates. If market conditions continue, it still is fairly bearish as the chart patterns of individual names are breaking down in spite of stocks rallying. However, if things do turn bearish these stocks will often be even more bearish.
If you short stocks, you need enough cash on hand to really cover yourself. For this reason, I prefer puts and still having a lot of cash on hand. Puts allow you to bet on the downside without risking te same capital as you would for a short, automatically giving you a lot of extra cash provided you don’t invest it elsewhere.
Short squeezes will ruin your portfolio if you get a margin call when you are short and prices go higher. You cannot let this happen. Even though puts are inneffecient in that they lose time valu, the leverage and ability to earn the same amount with less money involved makes it worth the time value risk, provided you can manage “theta” by keeping the stock option only long enough for the move, while maintaining a long period of time left on the contract.
It’s possible to be very short without risking a lot of cash in the sense that with a big move down, you will gain a very large percentage gain and dollar gain without risking much. However, you have to own an out of the money option and pay a premium for your speculation. If you buy a option with a strike price of $75 with stock currently priced at $75. You might pay $5 per share. If the stock expires at the current price, you are paying an extra 6.67% than if you had just owned the stock. This is the premium you pay for the risk. However, if the stock goes up to $85, at expiration you make $10, or a 100% profit. The goal should be to make a quick profit and sell it while there till is most of that $5 premium left on the contract, and that may mean paying for an option with a later expiration date and paying a larger premium. However in terms of what you are paying per month of owning that option, the premium is less on a per month basis. Additionally, options lose value exponentially as they approach expiration, meaning for example, more than half of the option premium value will exist half way through the contract, but 2/3rds of the way through and less than 1/3rd will remain. The advantage is in the person who sells the option early.
Make your trades, plan a time frame, then walk away. Once your trades in and your plan is in, there’s nothing you can do but wait for things to play out.