The nastiness of Monday’s trading session demands a blog post. There are lessons worth learning, and implications worth investigating.

Punched in the Face

Monday started out strong. Tech stocks were flying with the likes of Apple, Tesla, and Amazon continuing their campaign of gravity defiance. Had the Nasdaq-100 ETF (QQQ) finished higher, it would have been the tenth straight candle with a higher daily high and low.

But, alas, it wasn’t meant to be. As is always the case with overbought conditions, the chickens finally came home to roost. Greedy bulls received their comeuppance today. Consider this exhibit #976 of why it pays to pull in the horns and get defensive when stocks are up too many days in a row.

QQQ closed down 2.06%. This was after being up as much as 2.2% in early morning trade. So, that translates into a 4+% selloff that created a monster bearish engulfing candle. And this wasn’t some small fry-led affair. On the volume front, 63.3 million shares changed hands on the session which is nearly double the daily average. Institutions were ringing the register, but why shouldn’t they be?

From the June 29th, pivot low, QQQ was up 13.7%. That’s in a single swing! So, yeah, exhausted buyers finally passed the baton to sellers.

To be clear, the trend of QQQ is still up. This is simply an upswing turning into a downswing. That is all.

What Now?

Let’s talk through how a trader might have responded to today’s reversal. The answer relies in large part on what type of trades we’re talking about.

If you’re a swing trader that had bull trades, then it would be completely appropriate to lock-in gains and take some off the table. Today’s whack could be the beginning of a multi-day pullback and the last thing a swing trader wants to do is give back the hard-fought gains of the past two weeks.

To illustrate, here are a few orders that I had trigger today. See if you can find the recurring theme.

Trade One: Took profits on NKLA bull put spread

Trade Two: Took profits on EA bull put spread

Trade Three: Exited bull call spread on NEM at breakeven.

Trade Four: Deployed new bull put on AMGN.

Trade Five: Sold naked puts on WORK.

Trade Six: Bought shares of WORK on the breakout only to sell them later in the day at breakeven.

The new bull trades I entered were in the morning when the market was running higher. My profit targets hit on NKLA & EA were simply existing orders that finally filled. Exiting NEM and WORK at breakeven were in response to the market rolling over. It allowed me to get smaller and minimize damage if the selloff worsened.

In summary, I reduced portfolio exposure on some of my swing traders. What about longer-term positions?

If I had stock positions, I’d consider selling covered calls. If I had naked puts on core tickers that I trade long-term then I typically wouldn’t do anything on a day like today. Again, we formed a pivot high, not a massive trend reversal.

So, I kept the following positions untouched:

Naked puts on AMD, DIS, DKNG, PFE, WORK, XOM

Covered calls on EEM, IWM

The other action I could see taking is maybe adding bearish leaning trades if I felt my portfolio delta needed reducing even further. The lack of high-quality bearish patterns means I’d probably just layer in something on an Index ETF like QQQ, SPY, or IWM.

I was emboldened by the relative strength out of small-caps and some of the lagging sectors like banks and energy. The drop seemed more like rotation out of tech more than indiscriminate selling striking everything.

And here’s a big silver lining. I have a mile-long list of overbought stocks that will look super sexy on a pullback. Come to papa!

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