For the first time all year I am short the market via March 1st $150 SPY puts (avg cost is $1.26). I like what I’m seeing from the VIX in terms of bearish implications. Unlike previous consolidation periods this year, which is what the market has been doing lately, the VIX is not rising sharply. Those previous increases proved to be contrarian bullish as volatility eroded paving the way for higher prices. However, today the VIX slid more than 2% even as the indexes remained flat. There was no reason for the VIX to slide today yet it did, I’m reading this as contrarian bearish.
Here is what I am looking for to stay with this short trade:
- Need S&P500 to remain below 1,515
- The VIX must avoid a move higher without a correlated move lower in SPX
- 1,495 must break within the next 5 trading sessions
- A move down to $147-$148 in the SPY as that is the home of the 2012 highs and previous resistance so I’d expect resistance to be tested as new support
As I pointed out yesterday, my main reason for putting on this short trade is due to the increased daily ranges we are seeing in the S&P500 with the VIX near 52 week lows (5 year lows at that). Back in April this had bearish implications. As a trader, I have learned to look for similar patterns with as much matching criteria, and position yourself to benefit if a similar outcome unfolds. Some people will point to the wide ranges SPX experienced towards the end of the year that ultimately resulted in a huge rally, in response I would point out that those ranges came with the VIX elevated near 20.
Something is brewing in the VIX, the ranges say so. Can the VIX move go to the 10-11 range? Of course. Does recent history suggest it will? No. Until the recent history changes, such as the VIX does indeed make that move down to the 10-11 range, then this is how I am going to be positioned. If the VIX does move down to 10-11, then I will be able to use the new recent history (because it will have changed) to formulate a new trade idea at that time, but until then this is how I am approaching the market at current levels.
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