The Bull Charged The NATH Hill, Then Slipped On A Banana Skin

And then this happened…

The bull made a charge for a face-ripper higher, all set to plant the flag on the all-time-high hill. Uncle Russell got there, barely, and then, oh, what’s that, a banana skin.

Woopsie daisy. Slip, trip and fall to a full kit of percussion sound effects, while the bear skateboards downhill chuckling like an asthmatic Muttley.

Fickle, funny and frustrating all at once, and on days like these the novice trader is the one smashing around like a bull in a china shop, getting angry at the move.

Most of it came overnight, a pop lower in the 1.4 to 2.4% range, so a couple of fresh bull swings have gone from small green to max loss in a blink.

Here is why I love options though: the risk was defined on entry, there is no traditional stop to panic over, and a mistimed trade can still come good. For now it is a swift kick to the shins, and nothing to do but let the dust settle.

Market Snapshot

This is a proper risk-off gap. The indices have popped lower across the board, the VIX has jumped over 16% back above 20, and gold has been dragged down with them. The banana skin caught everything, and most of the damage was done overnight rather than in the cash session, which is exactly where the index swings turn.

• ES (S&P 500): 7,435.00 / -1.40% / gapped back off the highs

• YM (Uncle Dow): 51,800 / -0.71% / softer, holding up best

• NQ (NazQuack): 29,858.50 / -2.62% / the hardest hit

• RTY (Uncle Russell): 2,974.1 / -1.60% / planted the flag, then slipped

• GC (Gold): 4,126.4 / -1.98% / dragged back toward recent lows

• CL (Crude): 73.61 / -0.63% / grinding the bear swing lower

• VIX: 20.10 / +16.25% / awake again, back over 20

• BTC/USD: 62,343.72 / -2.51% / neckline cracked

SPX Analysis

SPX left the field yesterday with a bull swing, though technically the system ended the day flat as prices were flipping and flopping. Practically, I’m bullish, and I’m potentially looking at a gap lower at the open.

Technically flat, bullish, watching for a gap lower.

RUT Analysis

Uncle Russell started the day with the expected face-ripper and a bull breakout, woot woot, then ended it with a Tag ‘n Turn setup pending: a push below the red line marked on the chart and a break back into the marked range. Assuming the overnight gaps hold, there is little to be done with the bull swing.

Both of these are new swings, so I have a few days to work out what to do, whether that is to de-risk, hedge or roll. There is no need to panic just yet. Waiting for the dust to settle on the gap and collecting some new information makes the most sense.

Breakout then tag n turn; gaps hold, little to do.

Crude

Crude is my current darling, simply performing the bear swing nicely with a run toward $65. It has handed me a few “oh hell, here we go again” moments along the way, but on the whole it is pulling in the premiums, the options spreads rather than the futures.

The darling runs the bear swing toward 65.

Gold

Gold is buggering around. My early bull swing has been de-risked, with the weekend traded as I mentioned yesterday, so we are back to recent lows and waiting to see if they will hold. I am also questioning whether I have read this chart completely wrong, and time will tell on that. Either way I am still net positive on the trade idea, so no harm, no foul.

Back to recent lows, waiting to see if they hold.

BTC

Bitcoin’s turnaround is developing into a range, and then into a head and shoulders, the same way oil evolved, just over a longer period. It looks like the neckline has broken, so I have to close my bull for a small loss and start thinking about the bear. Could we see that push to $50k? A fresh push below $58.5k will certainly trigger the bears.

Neckline broke; below 58.5k wakes the bears.

Expert Insights

Charlie Munger spent a lifetime making the case for doing nothing well:

He meant it about compounding, but it is just as true on a day like this.

Two of my swings flipped from green to max loss overnight, and the instinct of the novice, smashing around like the bull in the china shop, is to do something, anything, right now. But the risk was defined the moment I entered, there is no stop screaming to be managed, and a mistimed trade can still turn out to be the right trade.

So the highest-value move today is the one that looks like laziness from the outside: sit on my hands, let the gap settle, and gather information before I touch a thing. The waiting is the work.

Fun Fact

Since today handed us a bull in a china shop, here is the twist: the bull is innocent.

When the MythBusters actually released bulls into a mocked-up china shop, the animals turned out to be remarkably nimble, picking their way around the shelves “almost daintily” and refusing to smash the crockery, even with several let loose at once.

They declared the saying busted. So the next time the market knocks the shelves over, do not blame the bull. The carnage, as ever, is the work of the panicking humans.

[Source: MythBusters Episode 85, “Red Rag to a Bull”, via mythresults.com]

Trade well,
T2 Markets

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