Today’s survey of recent big winners greeted me with parabolic short setups galore. Let’s just say the halls of overbought securities are getting crowded. Bonds, silver, gold, and gold stocks are all beckoning to brave little bears to come and try their hand at the reverse-knife catch.

See, picking tops and bottoms is tough. So allow me to offer up a few of my favorite techniques for fading runaway assets. Bonds look the most tempting here so we’ll use TLT. If you don’t already have it on your watchlist, then shame, shame, shame. Add it.

First, the chart. Bonds are overbought here by darn near any measure. Too many dollars gained in a row? Check! Too many up days in a row? Overbought Stochastic/RSI/any other oscillator? Check!

And, this morning bonds look heavy. Of course, we’ve seen a topping attempt or two in the past two weeks that has failed, so what makes this time different?

Nothing, really. The rubber band is simply more stretched than it used to be. The more you stretch the higher the likelihood of a snap-back, right? Take a look at the accompanying TLT weekly chart. The RSI has only climbed into overbought territory (north of 70) four times in the past eight years.

A rare occurrence if there ever was one. Eventually each one offered profits to the brave souls willing to step up and fade the strength.

My weapon of choice here is a bear call spread. We’ll go as far out-of-the-money as possible while still receiving a 10% return. Selling the Aug 150/154 call spread for 41 cents or so should do the trick. That leaves us with an $8 cushion should TLT keep on a rampin’ before the inevitable pullback arrives.

To further hedge our bets we could scale-in. Suppose based on my risk rules I could sell 9 spreads. Instead of tempting fate by doing them all at once (thereby guaranteeing TLT screams higher immediately), divide them into three groups of three spreads. Sell the first tranche once we get some confirmation that TLT is pivoting.

Suppose you sell the first third for 41 cents. If TLT then rallies higher, maybe you get the opportunity to sell the second tranche for 61 cents, then the third at 81 cents.  Such a plan excels at regret minimization while using further strength in bonds opportunistically.

If TLT ends up reaching $150, then I’ll raise the white flag, concede defeat and crawl under my desk to nurse my wounds.

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