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The Worst Time To Short The Stock Market
David Frost
October 16, 2023
⚾PRE GAME WARMUP
Happy Monday!
Welcome to options expiration week where "weird stuff happens."
We'll likely see markets go both ways this week, faking out both bulls and the bears on multiple occasions. Now that we have the known known out of the way, let's get into the numbers.
The overnight futures crew had what we'll call a relief rally of sorts. Without any advanced notice of what they'll do after the bell rings, we use the numbers as our guide...
Let’s say she continues pushing higher, [Member Login] is a zone of resistance. Both numbers are important for different reasons, creating a zone defense for the bears...
Above the zone on a continued push higher, the next magnetic place that will draw price in is [Member Login], which should sound rather familiar. It’s magnetic.
The flip side situation has price dropping below Friday’s close which opens the door for another leg lower, which will be handled in a real time type formation as and if needed.
🎬THINK IN PICTURES
Below is a chart of the ISRA or VanEck Israel Exchange Traded Fund (EFT). What a great lesson in how the price action on a chart tells the story before the story is written.
If you look inside the fund, there are many familiar companies such as Check Point Software (CHKP), Solar Edge (SEDG) and CyberArk Software (CYBR) to name just a few. How many people even realized these companies were born and based in Israel? This tiny country has been home to innovation for decades, many of which are household names around the world, especially in the US.
What’s the point? From the bottom in October 2022 until this past summer, markets rallied. Now look at the chart below of ISRA. No rally and steady decline in the same period, let alone falling from late 2021.
It’s not that the chart predicts war, but it certainly was predicting something to be named later. It’s now later…
🌗RECYCLE TIN FOIL HAT
Will the Solar Eclipse on Saturday have a lasting impact? They can take a day or so to materialize and can impact much more than financial markets. How about Geo Politics? (Think middle east)…
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💣RECKONOMICS
They have a plan to stimulate the US economy. This one is easy to see and understand. They’ve issued grants targeted in local communities to provide sustainable jobs for low income workers.
Sounds great on paper, let’s help the people.
But before we do, let’s notice a key word found in the title of the article above. It’s “sustainable.” They slip that one in.
It’s pretty close to one of those oxymoron deals. You would think a grant is a one time thing for a specific purpose. Sustainable is ongoing.
So what, you say…
The what is another hidden tax by expansion of government with money they don’t have. Where will they get it? Guess. (hint: tax & borrow)
This one is small on a relative basis, however multiply it by countless government agencies and programs you’ve never heard of and start adding up all the “Grants” that end of in the sustainable camp.
🩺PSYCH WARD
Traders should avoid short plays during certain market conditions. Todays version is called “shorting in the hole”. We know this one. markets are falling, the news is terrible and it sure looks like she’s going to collapse farther.
The first thing to realize is what draws you to the trade. It’s the opposite of buying a breakout or trying to catch the beginning of a rally, only flipped on its head, with a twist. Exactly at the time where you decide enough is enough, you say “if I don’t take the position now, I’m going to “miss the move.” FOMO.
What really happens is by the time you’ve decided to get on the train, it’s already at the next stop, the majority of the time. Consider each stop as support where first the market stops going down (phase one of support), and the next phase is either to run sideways for a while, or bounce back in the other direction (phase two).
Phase two is the culprit. It’s the one that shows up around 3 minutes after you’re in the trade and is the beginning of the relief rally from the most recent decline. Traders who were already short are taking profit which is also buying back the position they sold causing a pop in the market. Next come the traders who realize their position was wrong and also need to buy back in. This one is called forced buying. The rapid buying creates a quick mini intraday squeeze operation, throwing mama from the train while issuing a self induced pie in the face. (you’re mama in this example).
We short resistance and buy support. If you don’t know where they are, you don’t take the trade…
Professional traders are much quicker to take profits on a short than they are to shed long positions in a bullish rising market. Why? Because they know the ebbs and flows of a down leg. You’re much more likely to get a sustained and prolonged move higher than one in the southern direction.
We solve problems just like these in the LIVE Trading Room each day.
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DISCLAIMER STUFF: Nothing found in this communication is financial advice. This newsletter is strictly educational and not intended for or should be thought of as investment advice or a solicitation to buy or sell any assets or to make any financial decisions whatsoever. Please be careful and always do your own homework.