Key Levels
ES 5342 = SPY 532.26
ES 5302 = SPY 528.39
ES 5272 = SPY 525.40
ES 5265 = SPY 524.71
ES 5253 = SPY 523.51
ES 5238 = SPY 522.01
ES 5218 = SPY 520.02
ES 5208 = SPY 519.02
Trades
6.6.24: Bought a 2WTE SPY $534p. 2.5% of capital.
June 6 Notes
2:36pm EST
I added a fourth trader to the “team” this morning who has a great, detailed read of the SPX options market, and is a fabulous market seasonality specialist. Great addition to the team, adding extra bulk to VOL market analysis, precise levels, and trade precision. When this team fully aligns, results are powerful.
I also cleaned up the Operating Principles and added a section for the trade I put on today: a high probability flyer of 2.5% of capital using 2WTE options. These will be small bets based on my read of the market, picking and choosing how different pieces of evidence are fitting together at a particular point in time against the tactical backdrop.
Right now The Traders are in wait & see mode after this big breakout, but certainly with a bullish lean waiting for any pullback to pounce on. But The CASP is speaking loudly via IG CDX, and I trust my analysis that the Fed will want to be cautious here with rates coming in, and major catalysts forthcoming in NFP (tomorrow) and CPI (next Wednesday). So, with IG CDX decisively diverging and VOL sticky right here, I believe this is a high probability flyer set-up that I can sit on with some time looking out two weeks.
10:54am EST
Note sent this morning to my trading mentor:
K. Took a small confidence builder trade on what in my process is a no brainer set-up.
SPX/NDX green on the day, yet…
IG CDX and VVIX are green, indicating risk-off positioning beneath the surface.
Utes are curiously weak, again, while XLP/XLV are solidly bid, indicating to me long rates are not sustainable down here.
In my estimation, the Fed will not be ok with rates down here. And the fact IG CDX is higher than it was last time TIPS 30s were here, tells me IG CDX is calling the bond market’s bluff.
NFP tomorrow, CPI/FOMC June 12 all key events that could catalyze a dip in stocks and bonds
So, I bought a 2-week ATM SPY $534 put. 2.5% of capital. Tiny, as it’s going counter to a decidedly bullish outlook for stocks.
June 5 Notes
As painful as it is seeing my BTFD thesis play out without me participating, this week has been ENORMOUSLY beneficial to boosting confidence and preparing me for durable long term success.
I’ve been structurally spot on the bulk of this year, I’ve just traded it horribly. And not “just” because price is the only thing that pays. But what it tells me is that with better execution and precision I’m going to be in a position to generate tremendous returns over time.
This latest pullback and recovery is the perfect example. I called it perfectly, outlining a path of a series of opportunities to make 2x returns using 2WTE options. But I was horrifyingly early on executing, putting myself out of mental position to take advantage of the dip when all the evidence aligned. And I was still using the bucket strategy of two outside traders in addition to my own trades. Just awful. Conflicting messages, stops outs, etc. Gross.
I’ve got The Outlook, The CASP, and The Three Traders. Few are better than me at assembling a dynamic market outlook. That outlook provides great context for trading, giving confidence to the ability to act at extremes on counter-trend moves. I’ve got The CASP. Far from a perfect system. In fact, it has gotten me into trouble as often as it’s helped. However, when paired with The Three Traders, it provides wonderful signal at major inflection points. It just can’t be day-traded. Lastly, The Three Traders provide VOL market structure, highly precise key market levels to act on at key points, and overall trade precision.
So, zooming out, I’ve got it all. Now it’s just a matter of DISCIPLINE and CONFIDENCE. I’m looking for high probability extremes, and I need the discipline to WAIT for them. I’m looking to generate out-sized returns, and I need the CONFIDENCE to act when those high probability extremes emerge.
As a bit of an aside, these last two market recoveries have reinforced something I’ve observed for years now: The CASP’s behavior on a rally out of a key SPX low almost always gives the appearance of bearishness, yet price barrels ahead. That’s really key. Heading into a low, The CASP is invaluable; but coming out of the low price action reigns supreme. KEEP IN MIND.
Trading options, I have to be aggressive taking profits coming out of key lows, because the market is always choppy. But equally, I need to be highly aggressive in replying that back on pullbacks. The big breakout move coming off a low always takes time to develop, so critical to not get overly aggressive taking profits.
Getting into mental position has to be the number one goal of a market participant. Without mental capital, you’re TOAST.
If trading for small moves, taking profits quickly is key. If trading for big moves, taking profits quickly is a death knell. BE PATIENT with winners. But also manage the winners at the same time.
Turning to the market…
I continue to not want to chase this move given I’m operating from the starting point of all cash. If I was riding a portfolio of winning trades that might be a different story; but IG CDX is not behaving well for a risk-on move, and NFP Friday and CPI/SEP/Powell next week are all key events. I continue to believe this is going to be choppy, ala May-June 2023 where SPX revisited the 50dma three times before the lockout rally. That’s what I think is coming next week, and I think that’ll be the final low before a vertical ascent into Election Day.
June 4 Notes
3:23pm EST
In no way, shape, or form is IG CDX confirming SPY PA here EOD.
The Outlook says a major bottom is forming in and around SPY 20/50dmas, but IG CDX says that 20/50dma support needs to be tested more in the coming days. That is where I’ll act across the board. Sizing in Special Ops will depend on broad CASP support, VOL, and major levels. SPY $518 would be beautiful.
2:58pm EST
At 1:50pm EST today I sent my trading mentor the following thesis:
Today looks like distribution across the board while SPX hangs up here.
Defensive equities gaining relative strength all day
USTs bid all day
IG CDX near the highs of Friday when SPY hit $518-19
I see a better than average chance at an EOD spike down here, if not all the way into tomorrow down to new lows, call it SPY $516-$517.
My thought was it’d be worth taking a tiny shot at a 1DTE put. SPY proceeded to rip 50 bps.
On this rip, IG CDX pulled in, but really not by much; and defensive equities remain bid. I don’t think the rip lasts, but it is a fantastic example of how my cross-asset market analysis can be a major impediment to just trading price when necessary. My cross-asset market analysis for tactical analysis is nothing more than a guise for fundamental analysis, which is deadly for profitable tactical trading.
I’m learning a lot this week (all two days of it) by sitting, waiting, watching, observing, and stalking. I’ve missed out on some hefty gains by not bottom- and top-ticking the 1-1.25% SPY range the last two days. And that’s ok…especially given I would have needed to bottom- and top-tick the range to generate the gains. I’m looking for overwhelmingly high probabilities stacked in my favor before establishing a position.
Today is a good example of acting solely on The CASP without additional support from VOL, The Outlook, and major levels. Even thought I would have kept the position tiny, it would have been a waste. The CASP is my investment personality - it gives me comfort, and it works. But it’s far from the be-all, end-all. CLEARLY. It must be supplemented with The Outlook, VOL, and major levels, which I’m now doing. But for me to be mentally comfortable even with a Rifle Shot position, I must have The CASP at my back in some way, shape, or form that supports the position I’m taking.
9:42am EST
Discussion. Change in character is the phrase that comes to mind right now. Stocks weak alongside lower rates is more traditional risk-off PA, and the risk-offness of the move is confirmed by a solid IG CDX spike so far this morning. Oddly, Utes are acting a hair weak for a risk-off environment, but XLP/XLV are catching a bit of a bid. My gut reaction is this sets the market up for a lose-lose reaction to NFP on Friday. Hot jobs = higher rates; but a cool report doesn’t look like it will be received bullishly given equities aren’t ripping in response to lower rates right now. JOLTS is coming out here in a few mins, so we may get a flavor of this dynamic on a lower than expectations report.
The CASP. With IG CDX and defensives catching a bid and an odd change in character underway, The CASP is not supportive of out-sized positioning. So, the most I can bet on a Special Ops trade as of right now is 20%. But…
VOL. With VOL not yet fully supportive of longs, until The CASP improves the most I can do is a 5% Rifle Shot. VOL is becoming increasingly supportive, so depending on where SPY trades down to today, if at all, I may get more support here in real-time. We’ll see.
Levels. As discussed last night (below), $522 is an interesting spot to take a shot. It’s 9:57 right now, and perhaps I’ll even get a shot here at 10am in response to JOLTS. But given lack of support from The CASP and lack of full support from VOL, it’s unlikely a major opportunity emerges until a retest of SPY $518-19.
JOLTS. Ok, JOLTS is out and SPX ripped in a big downside miss, now flat on the day. IG CDX came in as well, but is still solidly up on the day. Given the change in character underway, it would not surprise me to see this JOLTS miss feed the sudden change in narrative to a growth slowdown and SPX sells off to go back and retest at least $522 if not $518-519.
June 3 Notes
10:05pm EST
Today’s SPY low was $522.60
Watch for an undercut low FBD of today’s low tomorrow.
Significant development today was that VOL is starting to turn bullish. It’s at least partially supportive of longs, which opens the door to a Full Conviction long trade on a move to $522. I’d consider going 20% allocated at $522, then add the other 15% on a reclaim of $522.60.
2:44pm EST
IG CDX is not especially bearish considering the move in breadth, but the fact SPX is weak alongside rates is cautionary, IMO, and VOL is not yet bullish. More than happy to sit today out and observe from the sidelines.
Clearly SPY $525 is an area of interest with a failed breakdown below today, and now the struggle to stay above. No surprise given it’s the 20dma. 50dma of $516.71 is an interesting spot for an undercut final low for this pullback, but that probably rises to $518-19 by the time it retests, which is where the bottom hit the other day.
11:20am EST
Pretty ugly fail of the Friday squeeze. Not the fact SPX is down, but rather that VOL, CDX, and BTC reversed decisively alongside the SPOOZ breakdown.
Also, rates down materially with no bid for equities is an interesting character change; and tough to interpret equity sector action here with Utes underperforming RSP and XLP/XLV outperforming.
SPY went as low as $525.40, not quite to major support circa $524.19. But given the pretty ugly cross-asset market action so far I have no interest in bidding $524.19 - I’d wait for circa $520 before considering a Rifle Shot long. Highly doubt I’ll get across-the-board support today for anything more than a Rifle Shot even at $520, but we’ll see.
Pre-Market Notes
This chop between 20 and 50dma reminds me of May-June of last year before SPX ultimately exploded higher.
Liquidity and election year dynamics suggest an explosion higher - i.e. a gappy lockout rally - is coming, but the market needs data/FED endorsement to do so. Decisive signs of labor market deceleration and/or no inflation reacceleration.
The Fed won’t be overly hawkish next week, but with markets up into the event they will be more hawkish than if markets were down. I’m looking for Powell to slip into the press conference that cuts aren’t likely until December or early 2025, per Waller’s guidance in the Liesman interview.
CRITICAL to not chase in either direction. Once a great entry point is established, holding is fine. But new positions cannot be established via chasing. PATIENCE. STALK. WAIT. Then aggressively deploy once everything aligns circa 20/50dma convergence.
Major buying ops likely emerge around June 12. But as Mancini says, prediction is irrelevant - I’ll sit back, wait, and react when necessary.
June 2 Notes
Zero interest in chasing this move higher into NFP Friday, CPI/FOMC the following week.
$524.19 support I would consider taking a rifle shot long on a failed breakdown set-up.
SPY $519.81 support is where I’d go big, pending The CASP and VOL. At minimum I’d take a rifle shot.
Operating Principles
Never trade more than 50% of Special Ops capital
Trade ATM 1MTE exclusively, unless trading against The Outlook, in which case use ATM 2MTE…or taking a high probability flyer, in which case use ATM 2WTE
SIT. SIT. SIT. SIT. SIT. Wait and watch. Stalk. Wait for major levels to hit, then depending on The Outlook, The Traders, and The CASP, craft a trade.
Don’t hedge or use stops. Confidently take a position and manage it according to levels, VOL, and The CASP
Max Conviction: 50% Allocation. In line with The Outlook, The Traders fully support, and The CASP fully supports.
Full Conviction: 35% Allocation. In line with The Outlook, The Traders fully support, but The CASP is only neutral.
High Conviction: 20% Allocation. In line with The Outlook, The Traders fully support, but The CASP doesn’t support.
Rifle Shot: 5% Allocation. In line with The Outlook with The Traders and The CASP at least neutral in the aggregate and mixed support for the trade in place.
High Conviction Counter-Trend: 25% Allocation. Goes against The Outlook, but with The Traders and The CASP in full support.
Rifle Shot Counter-Trend: 10%. Goes against The Outlook with The Traders in full support, but The CASP must be at least neutral.
High Probability Flyer: 2.5% Allocation. Long or short using 2WTE options based on my read of the evidence.