7/4/2020 Stocks up 4% this week and begin to chip away at the bearish case. Sentiment indicators still overly bearish, hinting at continued upside. I’m no longer bearish short-term.

Happy 4th of July, I hope you are having a nice day!

Recently, the market is back to going up on good news, and not going down on bad news. This to me signals that we move higher until something more fundamental changes.

From a technical perspective, the obvious levels to look out for on the SPY are the local high at 320 and the local low just below 300. A break above 320 likely signals new all time highs, while a break below means we likely retest the low 270s.

Although I think we move higher from here, I suspect the 320 level will be hard to get past, and even if we do, it will likely fail whether that is near or past all time highs. I believe the upside is limited here, so I will keep my 90% cash 10% stocks asset allocation. I suppose with my large pairs trade I took on Thursday last week that I am technically no longer 90% cash, but since the pairs trade I took is a market neutral strategy, I’m “effectively” 90% cash.

Also, the AAII sentiment indicator is still excessively bearish, hinting that there is a lot of excess cash on the sidelines (myself included). Again, we use the AAII sentiment indicator as a contrarian signal to the market. Since it is still excessively bearish, if we go by this signal, we should be positioned to be long here. I’m avoiding this signal though.

Weekly chart of SPY below:

I took a nice day trade this week, which I normally don’t do, but the opportunity provided itself and my brain kept telling me to GO GO GO, so I went for the trade. I told my twin on Monday morning, “I woke up today and just really wanted to short Boeing.” He looked at me without saying anything, but might as well have said “cool story bro.”

By now I hope I have baited you into thinking I made so much money I wouldn’t have to work for months, but I actually lost money on the trade. Haha gotcha. The reason I said it was a nice day trade was because I followed all my rules, stayed calm during the whole trade, and also learned something valuable. What I learned is that sometimes although I’m taking a good risk reward trade, the odds of the stock making such a large move in my preferred direction might either take too long or just not happen since it’s a day trade. This applies to my swing trades too since there’s always an opportunity cost to being in a trade and tying up capital.

30 minute chart of Boeing below:

I noticed the large counter trend gap up in the premarket, reaching 184.5 at the highs. My plan was to short at the open as long as we opened above 183, we didn’t. Instead of getting baited into the massive sell-off at the open. I waited. And waited. And waited… Then Boeing finally jumps up to 184.5, briefly hitting 185 and quickly reversing. It looked good, so I didn’t check Boeing until much later in the day, where I noticed I got stopped out.

Since my account is relatively large now, I didn’t want to risk 1% of my account on this trade since it would be a sizable dollar amount to me (and I hate losing money), so I risked .25% of my account to gain .75%.

I suspect the markets will be getting more volatile these next few weeks since we are near a breakout level, so at least I should be entertained even if I’m basically sitting on the sidelines right now.

Again, Happy 4th of July, and see you next weekend!


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