Thanks for the very good summary of the market situation after your well-deserved break.

I'm just puzzled by one thing.  You seem pretty convinced that the Nasdaq will continue to go down for at least a while.  Yet you say one should have a very small short on it.  Why only a very small short, why not a big one? Regards

 

Eoin Treacy's view

Thank you for this question which I believe related to the Friday audio. My concern arises from the reflection of investor sentiment I witnessed at The Chart Seminar. Investors still want to buy the dip. That strategy works well in a bull market. It can decimate a portfolio in a bear market which is what we have now. So how do you sit on your hands when the temptation to buy is so strong and has been such a positive experience for the last 14 years?

The answer is to go a little short. If that strategy works. Buying the dip won’t. If the short grows to become a bigger part of your p&l then you are being provided with an additional warning.

Going big on an initial short position in a leveraged market is very risky. The intraday volatility means there is scope for large swings. Over coming days, it would not be surprising to see a rebound after such a deep pullback over the last three sessions. It is also true that some of the biggest upswings in the market occur during broad declines.
I initiated my short closer to 15000 on the Nasdaq, I took a partial profit a few weeks ago before putting it back on a day later and I increased it on Friday. My breakeven is now above the early June peak.

This is a leveraged trading position. My aim is to both make money and hedge my risk of loss in my other positions. So far that is working out OK, but I’ll be a lot happier if the precious metals sector turns around soon.
Meanwhile, the VIX Index is well shy of levels that normally signal market lows.
The Advance-Decline for the NYSE is trending lower. It will be hard to argue a meaningful low has been reached until it turns about.