FAQ: Where are those big gains on the Short side?
A: One weekly bar away.
Ever since the major top in late January the market has been trending lower. It is best illustrated by the DOW weekly price bar chart:
Do not underestimate the power of this trend. The numbered price bars identify the largest range bars and all of them have been to the downside. It is an indicator of trend seldom used in market timing, they are too often overlooked and not given the respect they deserve. It is easier to simply look at day-to-day fluctuations and base conclusions and emotions on these ephemeral, often random price movements.
Between Feb 2nd and Feb 8th the Dow fell 2500 points from intraday highs to lows. That is represented by weekly bar labeled #1. In the ten weeks since the market has been digesting that loss, oscillating from the bottom to the top of the downward sloping channel. With that movement there were two more notable long range down bars, labeled #2 and #3. The next price leg down will break through the bottom of the channel, taking out the lows of all of three bars and very likely exceed in size the prior 2500 point high to low range.
What will that mean for our trading models?
Under the assumption that our models will be short at the initiation of that decline or soon thereafter, our option returns will exceed the best returns seen in February, including but not limited to the 1148% intra-week option gain reached in VXX. The average Short-Term option gain for all models at that time reached +283%, while the average Intermediate Term option gain reached +92%.
Those returns are based on the next decline being just equal to the February decline. But as suggested above, the next spike down should be larger, faster and steeper. Consequently, expect the next round of this bear market to offer the absolutely best returns of the year and will likely be the best trades since the inception of this service in January, 2010.
Disclaimer: This forecast is based upon a new leg down deeper than that of early February. How likely is that? Look again at the chart above. A rise above 25,000 will call this premise into question. But unless and until that happens, the downtrend of the market laid out above, including the returns that will accompany it, is alive and well. Lets keep our eyes on the prize.