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Tales of a Technician: The Nightmare Before Christmas

December 18, 2018

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If you’re wondering if we’re in a “bear market,” we are. If you’re wondering when it will end, nobody knows. If you’re wondering where Santa Claus is, stop it. He’s been eaten by bloodthirsty and unholy bears. And that means his rally likely isn’t coming. Unless, of course, Jerome Powell spontaneously sprouts a beard ala The Santa Clause and releases a flock of doves tomorrow.

It could be a Christmas miracle.

But even then, I suspect it would be short-lived. What with the heap of resistance looming overhead and all.

Scary stats, you want scary stats? I have them in spades. Or, I should say, I’ve borrowed them in spades. How about this one?

Poor small-caps. And just so we’re clear, “on record” means “in history.” As in, we are on pace for the worst December ever for the Russell 2000. Side note, with yesterday’s bloodbath the RUT reached the -20% threshold officially qualifying for Wall Street’s definition of a bear market.

But maybe it’s just the little guys. Perhaps their balance sheets lack the wherewithal to survive adverse winds. What of the S&P 500?

Even though the Index is only down 13% right now, the majority of its constituents are already traveling in bear country. Like I said – bear market dude. If we look past December and assess the entirety of Q4, we discover equally dismal stats.

Meanwhile, crashing oil prices continue to depress the energy sector bringing 2008 comparisons to the fore. Feel free to quibble over the cause of crude’s nosedive. Too much supply, too little demand, global growth concerns, recession fears, etc. The why doesn’t matter. Crashing oil prices typically aren’t bullish for equities.

So what’s a trader to do? The answer as always is it depends. And I’ve outlined numerous ideas recently here as well as over at my beloved Options Theory blog. But allow me to review a few highlights.

First, don’t just do something, sit there! Consider the emotional status of a hyperactive trader trying to nail every swing during the last two months versus one who went to cash at the first sign of trouble (early October). The former is likely exhausted, the latter is poised and ready to pounce when new opportunities arise. Here’s a quote from the great Jesse Livermore:

“Don’t try to play the market all the time. It can’t be done; too tough on the emotions.”

Second, deploy more bear trades. If you’re a trend trader who thrives on going with the flow, then you should be a lot more active on the bear side. You may even dispense with bull trades altogether. They are challenging for all but the nimblest of traders when the S&P 500 is submerged beneath every major moving average.

Third, focus more on volatility trades that rely more on movement and less on direction. These could be long or short volatility strategies like condors and butterflies or straddles and strangles.

Fourth, reduce your position sizing. If you usually risk $200 a trade then drop it to $100. This will limit the ability of market turmoil to wreak havoc with your portfolio.

Fifth, be nimble. When there’s elevated volatility in both directions, it’s important to take profits sooner rather than later. So don’t be afraid to take ring the register if you get a quick move in your favor. Because there’s a good chance it will be gone tomorrow.

Sixth, never forget the seeds for the next great bull market are sown during a bear market. This will pass and extremely profitable opportunities lie on the other side for buyers.


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One Reply to “Tales of a Technician: The Nightmare Before Christmas”

  1. JacobAgbor JacobAgbor says:

    PREACH!!

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