Discussion
I have not performed anywhere close to what I projected back in July upon launch of the Trading Journal channel (see here, here, and here). My process correctly identified that a top was close a hand in July, but I didn’t take advantage as intended as a result of not appropriately managing profits into key tactical lows in August, September, and October. However, what came out of this period was a far more robust tactical trading framework that puts me in superb position to manage through what is likely to be a structural SPX bear market through 12/31/2025 (as I’ll write up about length in an upcoming Outlook piece).
Below is a rough sketch list of updated learnings and guidelines.
Learnings
At key market inflection points, when sitting on a big profit position permanently remove half of the profits from the account and reset the portfolio as if those removed profits never existed. In other words, don’t trade the remaining portfolio as if those profits are available for future trading. Completely reset the portfolio and your mindset.
Whenever the nagging feeling is there that you’re out of position, move to a 50% allocation. Not 1/4 or 1/3, but 1/2. Trade in two slugs of 1/2, as 1/2 is enough to keep your head in the game on the original thesis, but with enough margin for error in the event of being wrong.
You cannot be 100% short when the market is in the zone of a bounce. I don’t care how dire the outlook is, you cannot be 100% short looking for fully oversold conditions. When in the zone for a bounce, stay at 50% short but with the trigger finger ready to not just cover the remaining 50% short but to go tactically long for a trade.
99% of trading is mental management. getting into the right position to be able to mentally attack. Being in drawdown impairs your ability to attack (“scared money doesn’t make money”). You have to take profits when the market is O/B or O/S in order to mentally weather the counter-trend moves. Better yet, you have to be able to go both ways - especially getting long for bounces because of the very real psychological impact of missing out on the upside - to be able to put yourself in financial position to be able to go both ways. The mental and financial aspects compound on themselves. Success begets success.
You are FAR, FAR better off taking profits too early. The psychological difference between sitting on a freshly realized $100 profit versus watching an unrealized $150 fall back to $100 before realizing the $100 is completely different. You anchor on the $150 and have the natural urge to want to get back there the same way you lost it. Once you take profits from a position of strength, you can then either let the other 50% ride with confidence and/or start looking to trade in the other direction.
Don’t brag or mock after a big winning streak. Use those inclinations as signs that it’s time to take profits and/or start looking to move in the other direction.
Take windows and key dates very seriously. These windows and flows matter greatly to market structure. The CASP is good for identifying the meat of a tactical trend, but windows, flows, and high frequency O/B and O/S signals are critical at picking up on turning points that tend to be missed by The CASP.
Guidelines
Green equities with green VOL, VVIX > VIX, and green CDX is the highest probability short set-up that warrants conservative use of 1-2DTE options and an overall full allocated short position.
Green equities with green VOL and VVIX > VIX is the next highest probability short set-up, but if not confirmed with other parts of The CASP then use of 1-2DTE options is not warranted.
Green equities with red VOL but VVIX > VIX is not a sign of imminent reversal, but rather a sign to start monitoring for a broader topping process. It typically takes a number of trading days with VVIX > VIX before the market reverses.
CDX behavior is so key. SO KEY. You know it when you see it when CDX is confirming a move in either direction or not. It just has a certain look and feel to it. When equities are red and CDX is not responding in force, it’s time to be on the lookout for a tactical low. Not necessarily an imminent low, but once CDX acts soft despite red equities for a number of trading days, a key low is close at hand.
By far my biggest tactical mistakes have come from ignoring CDX behavior. Every single time. And honestly, I can him and haw about missing short-term O/S signals all I want, but I’m just ignoring my own read of CDX. I don’t need indicators and other traders to tell me when the market is setting up for a bounce - CDX tells me every single time. Again, trading is 100000% mental management. Full stop.
Breadth by itself is not enough to act, but it’s critically important in the context of the overall CASP. However, one sure fire breadth signal is when SPX _|- and RSP is -|_ on the day. Like clockwork, SPX moves below that close within the next handful of trading days. Key warning sign.