Feeling Overextended? Gameplan in case of correction.

2021年2月22日

This is not investment advice. Invest at your own risk. Do your DD, and manage your risk.

This may not lay-out properly on your desktop. I recommend you view this idea on your phone for the full write-up.

Recently, I have seen that the price action this week has been ominously similar to pre-Covid crash, and market sentiment has been extremely exuberant, until Friday where some cracks started to show. Could it be a minor pullback, or is there more downside? I still hold long positions, but is important to have a plan in case of any market situation.

Analysis



Weekly
On the weekly timeframe, the Covid crash brought us down to the 100 EMA(orange) before continuation to the 400 EMA(white). The pullback prior to Covid fell to the 200 EMA (red). Weaker pullbacks have fallen to a shallow 50 EMA (green).


Daily
On the daily timeframe, the price action is much more evidently similar. Furthermore, we are also impending a MACD crossover to the downside. Yellow horizontal lines highlight significant historical S/R levels.



Same chart as daily analysis above but with EMAs. Confluence of horizontal price and EMA make for a stronger SR level.

Protection From the Correction: Buy the VIX!

If you do not know, the VIX is the Volatility Index. It measures the ratio of put options to call options and represents market volatility over the next 30 days. Typically inversely correlated, positive moves in equities pushes VIX down, and vice versa.

It is worth noting that we are resting in upper range of the Covid crash gap-up, and we have recently been consolidating between our long-term 1000 EMA (yellow) and 200 EMA (red). A gathering of price action, along with other EMAs, in the consolidation zone sets us up for an explosive move to either side.

Returns on the VIX will be multiples, which is great insurance for any correction. Otherwise, for less volatile movements, you can use any inverse exposure ETFs such as HSD or HSQ. It is a bit more difficult to set price targets due to asset value decay, so you will need to watch the underlying index to determine a sell target.



There is no guarantee of a market crash, but as a technical analysis trader, I look to trends and patterns from the past to make decisions. When warning signs light up, I fear, and even more so now with all these new investors putting their life savings into the market...

Do your DD, manage your risk.

Misc. Thoughts re: current state of market -
To be honest, I feel the market has been frothy. If we thought 2020 was optimistic, this is beyond exuberance. New retail has flooded the market following the GME fisaco and alt-crypto markets are flourishing(which I believe is a marker of extreme greed), but is this capital flowing a result of fundamental investing or pure speculation? How many new retail investors are really doing their research, and how many are buying a stock/asset because it is: a) listed in the "top gainers", or b) someone else told them to? Speculation is the spirit of the market, but without the fundamentals, how does speculation have support?

We may be in a "perfect market" - we have priced in perfection. The Fed's money printer is going BRRR, stimulus is on the way, vaccines are steadily making work, life is slowly moving back to normal, and companies are posting stellar earnings (artificial in my opinion; business shutdowns in early 2020 makes any day of late 2020/early 2021 look amazing).

But investors have been all-in and fully bullish. Record breaking numbers have been hit almost everyday, paper returns are through the roof, 2x, 3x, even 5x has not been uncommon, but investors can only buy so much and hold for so long, and we can't expect every investor to be "diamond hands". Profits have begun to be pulled, and as late arrivals cry FOMO and buy into the markets, there may not be enough go-go juice to keep the bull run go-go-go-ing.

This doesn't mean the market is guaranteed to crash. US stimulus is still expected to be injected into the economy, and the Fed money printer continues to go BRRR as they expand their balance sheet. As long as M2 Money Supply is up, there is room for equities to push higher. Remember, the dot.com bubble took 6 years to pop, however, it is important that we are conscious of the environment and the market and that we understand what is making valuations move, and why. It is also important to look to the past and reflect on their warning signs of previous speculative bubbles.

Thanks for reading. This isn't investment advice. Do your DD, manage your risk. Investments are risky. The market could proceed to make a new ATH, or dump to COVID levels, or do absolutely nothing.