Reminder: The market is closed on Monday, but global markets remain open. Absent exigent circumstances, next update(s) will be on Tuesday.
Since Christmas the market has recovered a little over half of all that it lost from Sep-Oct peak. That is about 3 months down and 3 weeks up, and a Fibonacci 50% retracement. This is consistent with the premise that we have entered a bear market, one that will involve steep declines interposed with sometimes fast moving but mostly short-lived retracements. As we are seeing so far is 2019, short-lived or not, those retracements can be painful for individual trading accounts. Our fix for that is to make the most of swings in our favor with staggered profit taking while having modest stop protections along the way.
Profit-Taking, The Lottery Ticket and Stops
The best returns that were generated in November/December trades with January expirations were seen in December. Whether you took those gains or not it is clear that early profit-taking is a critical element of swing trading with options. Whatever you have or haven't done with past trades, this lesson should have been learned and now reinforced. As future trades are triggered and then unfold, take at least some of your gains along the way.
A few guidelines:
(1) Take profits at no less than +50%, but the closer to +100% as you can justify based upon your trading capital and tolerance for risk, the better. If you have enough of an initial position, consider staggered exits at increasingly higher levels.
(2) Because some of the trades go on for substantial runs, i.e., almost half of the Dec/Jan trades hit +300% or better at the Dec 24th lows, leaving on even a token position can end up generating significant additional returns. View the remaining position as a "lottery ticket" with limited risk, but huge reward.
(3) Stops: They need to be wide enough to give new trades an opportunity to unfold yet relatively tight enough so that even a series of bad trades in a row will result in salvaging some capital before exit. There is no science to the setting of that level, it's more of an "anything is better than nothing" concept. For general purposes, no less than -50% stop per trade, and no more than -75%. In other words, a stop-loss somewhere between a 50-75% loss salvages enough original capital to go on to trade another day.
Big Picture Analysis
A deep retracement, Fibonacci 50%-61.8%, is common for Wave 2's of a five wave pattern. As shown above, the S&P is well within that window and strongly suggests that the next major move will be a Wave 3 down. As painful as it has been to sit through this 3-week rally while holding a boatload of puts, there is a payoff almost immediately ahead. I don't like Friday's break-out above the trend regression channel, but it now provides this pivotal, "Heads-Up": When price drops back into the channel it will be a compelling indication that the countertrend rally has ended and Wave 3 down, the most violent leg yet of this new bear market, has begun.
USO
An analog to end all analogs: Crude Oil and US Stocks. Let's keep an eye on this one as USO is in Sell-Pending status in the Standard Intermediate Term portfolio. A drop below $10.50 triggers the Short and do not be surprised if the stock market follows:
TRADING PORTFOLIO AT JANUARY EXPIRATION
*All new option strikes should be at or just out of the money