Tough time to be a bear, but the sky is darkest before the dawn.
I think we may have just experienced a big short squeeze.
I didn’t enjoy last week as a bear! We picked up a lot of good entries and with good stop trailing these were able to run at least net breakeven over all trades, but the action was very disheartening. While strategies traded in the main breakeven, I personally bet more into spikes and ended the week at net loss.
Intuitively, by the time the market was closing on Friday I wanted to quit the bear trade. It was really uncomfortable. During my decade in the market, I’ve learned my intuitive sense of where markets are going is bad, isn’t getting much better. I feel the worst about the best trades, and vice versa.
At this point it’s prudent to consider the risk of bull move continuing. To not be prepared for this would cause a lot of problems. When a bull move is developing wat will generally happened with our SR levels is they will break, run a little over there, pullback aggressively and then begin to trend higher. Complicating this, during the bear moves of 2022 we have regularly spiked over the SR levels but then the reversal was a true one. This happening has dictated it’s wiser to have a large zone of tolerance but if this is used and we’re in a typical bull trend, this is going to consistently trigger minimum of three false bear signals that look really good if you accept the breakout, but if they are real breakouts you’re just going to consistently bet against a trend you could easily be benefiting from buy the flash crashes after the failed short signals.
Let’s look an example of this in BTC if you were shorting the retracement levels of the 50% drop. If you added extra tolerance to the zones in which you’d decide if you were a bull or bear, you’d have had to maintain a net short bias for the majority of the up move and by most simple strategies or intuitive senses, get fail signals on the bear move when it’s actually starting.
We kept a running update of our BTC trades in 2021. The first section went really well with us nailing the 50% drop high to low with under 10% margin of error. Generating three entries with tight stops. First two lost, third hit the full swing with a target hit at the low of it.
And after the bounce, a lot less great! I thought the models were obviously working at this point and the BTC crash continuation was a done deal and ended up having a very confusing time over the 76 fib. We would get the trade at the high in the end, but it was uncomfortable. There’s a write up on those trades/calls.
I had this same issue with stocks in 2020.
In 2019 I made a forecast of a crash to come. One of the style of 2008 and a similar percentage decline. Similar to the BTC move, this forecast would accurately hit the high to the low of the move but generate false signals in the bull run. If using tolerance for false breakouts, there’d have to be a net bearish bias for a almost all of the upper part of the move.
These types of moves make me really cautious now as a bear when we’ve done so well in multiple previous swings. Not working out the point at which to cut a short bias ends up dictating you have to have a short bias through the full latter part of the correction.
To have the same thing wrong on SPX here would be worse. At least in the previous SPX crash and the BTC crash I’d been able to give the lows as significant bounce levels and be profitable in the first phases of the bounce. Not done a good job of that in this SPX bounce. Expecting a low at 3400 and it comes from 3500 really threw that off. Otherwise, would have been long a significant portion of the early rally.
Misreading that swing was where all the following false signals / read errors stemmed from. At this point it’s important to have plans to trade upside moves in such a way that will allow us to also bet on the high value bear levels if we do go higher whilst not giving back the profits of the year if the net bear thesis is incorrect.
I’m a paranoid bear at the moment, but the trained trader in me knows there’s a strong probability we could be very close to the start of the next big bear leg. I know I am going to feel uncomfortable into tops. That a top will come with false drops and spikes that’ll I get false signals in. That the bull narrative will get strong, and bulls become cocky. That there will be good news supporting the move.
I know from experience of betting on trend reversals (Literally) 1,000s of times on different assets and timeframes (Most of them in short term Forex trend reversals but many large ones between 2019 - today), I know to expect these things. That I won’t like them. That by the end of it I’m sometimes questioning career decisions, never mind trading direction biases. If you want to fade big trends, these are things you have to deal with.
I explained these things in a set of simple rules before any bear markets began in 2021.
A lot of the stuff you see in media/social media dresses things up in bravado or inspirational cloaks - but the blunt reality of it is when betting on big, rare, highly valuable moves; there’s pain. It’s a painful thing to do. You have to expect discomfort and you have to expect a lot of people thinking you’re wrong and feeling they have a compelling narrative. These all happen before a big move. If a big bear move is to come, retrospectively, it was naive of me to think it would come before us having some event like this and the big sentiment shift.
And as someone who’s bet against popular trends a lot over the last few years, I’ve learned this also happens when you’re wrong. Wrong now, going to be wrong for a while. Quite often (Well, tbh with 100% hit rate at this point) will be right eventually. But being right eventually in theory has very little practical value if you are perceptually short. It’s critical to define levels where tight areas of tolerance for being wrong can be defined.
Understand this, if the bear thesis is wrong the market goes into a trend in which people who have no idea what they’re doing can make a lot of money. Not being ready to implement strategies that can optimise (Thus greatly exceeded average gains) bets following this trend because you have an over-clouding bearish bias had exceptional opportunity costs. It’s just not worth it. I’ve gave a version of this spiel every time the market is significantly down - same thing applies to the macro now.
Let’s talk more about that sentiment shift. Wasn’t it incredible? Hypothetically if the market made a high last week or has nominally higher (Under 3-4%) to go that got almost everyone. Cautiously bullish have become absolute low callers and many of the persistently aggressive macro bears have started to talk about their long positions for the impending bear market rally (Typically 4100 - 4200 is the target here). Peak in people off all persuasions calling for a low being in. Some even using their first low calls of the year. I, myself, feel it’s so imperatively important to have a bull bear plan is makes me feel there’s a really good chance the market has spooked me, and everything will become significantly easier as soon as I am afraid to bet on it being easy. Which gives me the same personal bias as everyone else. But having learned I am an idiot; I take a more trained and structured approach.
I start to plan different ways in which I’d trade a bull move and I go through all my previous bear analysis, and I look for ways to debunk it. Ways in which signals have failed. If signals have not yet failed, the ways in which they usually will fail and the spots I can see it’s failing.
Today I went through a selection of important charts and looked for the ways in which to support a bearish and bullish thesis for the next 20% + move. I done this from an objective standpoint. Spending an equal amount of time looking for bull and bear signals. On the balance of things, it looks net bearish.
Looking at the US indices, BTC and US majors the overall implied trend is dollar up and everything else down. Of the big stocks AAPL was the one I found closest to being neutral (But had a net bearish bias) and many others giving obvious strong bear signals. Most stocks are currently under support levels I’d expect to have had lows if they were in bull trends.
I think in all probability indices made a high for this swing last week. Or if they’re going higher, it would probably be early in the week and end up only being a small wick higher when viewed in a larger context. I think the bear case now is the best it’s been. While everything in price action (And narratives) right in front of us imply the bull move must surely go just a bit higher - bet against enough trends you’ll know that’s how it should feel. When you’re a bet, the best trades are the ones you hate most on entry. And when you’re a bull, you know it’s time to sell because you do not want to.
I believe sentiment currently is complacently bullish. That the bulls are too overconfident, and the bears are overly hedged and in many instances net/naked long. This is a somewhat unique viewpoint from me in the 2022 bear because throughout I’ve felt more many of the swing bears were too skewed to the bear side even at times of obvious asymmetric reward to the upside. While I may be wrong, I do not think now is a time where asymmetric reward is present for the bears as either speculation or hedging.
I think a lot of them have just become overly pressured by being perceptual shorts, not doing a good job of picking entries into rallies and either being in good trades with only corrective moves or getting out of losses quickly in defined risk zones. I think they’ve been squeezed. If you’re new to the market over 2021 you may have learned of a short squeeze being a bullish signal - but short squeezes are what come before the big short. A significant portion of the swing bears were squeezed out mid to late last week. Some with good results to start with - but the market likes to encourage before it punishes.
Betting against sentiment itself is not a viable strategy. Not only is it hard to quantify but sometimes everyone is right. When they are, they’re right big and while they will not be right forever, they will be right just a little bit longer than you can endure being wrong. That’s how that one tends to go. Examples of this in mid 2020 - 2021 are numerous. The most notable ones being the run to ATH in SPX 2020 and BTC 2021. Bulls were hyper confident, and they were right.
I don’t think this is like those moves. A notable point in those moves is they were blitz crashes. Happened really quickly. There was hardly any time for a strong bear narrative to be built up and for bear camp to be setup (And squeezed). In early 2020 I was writing up a detailed analysis on why I thought a bear was coming - and it never got published. The move happened too fast for anything like that to be done.
Instead, we’ve had a very consistent and structured sell-off in indices. It’s went on for 9 months. The only instances you find of these in US indices over the last 30 years are the downtrends before the two 50% crashes. There’s almost no exception to the rule in indices trading history that when trending down for this long they go into a crash. The exception I could find was the long bearish range of the 70’s. This didn’t really crash as such - but it went on for a very long time. We’d be very early in a frustrating and confusing market to last many years yet if we were setting up something similar. All other instances, we’re on the cusp of a crash.
With that being said, whenever you bet against a big trend you should always accept you can be 90% right and that can produce an outcome the same as being 100% wrong. The trend may be set to turn. A big macro reversal coming. And none-the-less (For any or no reason at all) the market might make one more spike. It’s really hard to be sure the high is in until we’re in the unmistakable crash phase over 40% down.
We could be essentially perfect on the forecast of where the high should be and still be due to see a move like this.
If that type of move is going to happen, the strategies proposed deal with that very well. We’ve covered countless times the spots at which we try bear trades and how to go long into the failure of bear trades during this move. A fortune could be made in this style of bull move. An equal amount of opportunity as a crash. While setups on other indices are harder to define the obvious bull trade plan, if this move was to happen, we’d probably be able to catch all the significant RUT swings really easily. To be blind to this opportunity would be foolish.
I think some form of market crash over the next 20 - 30% move is a very high probability event now. But, while it’s lesser spoken of, markets can crash up as well as crash down. A “Crash” is just a move in which the market makes consistent strong moves in one direction. Drops are “Black Swans” and booms are “White Swans” - Unexpected events that move much more than the standard deviation. I think we’re in a situation where there’s extreme reward to be had betting on the drop. A real, true, Black Swan style of event.
We’re going to present trade plans to that end but want to make sure it’s well understood that our concurrent view is if we are wrong, we are wrong big and, in a way, that’d be painful to be stubborn into. That this is a time of extreme opportunity but it’s prudent to understand extreme risk to the other side is possible. When we plan for this, we can severely limit the areas in which we’d have to be wrong as bears and also make plans to benefit from all the best bits of a bull move - And pre-plan the super high value short trade (Which would come when the bear was a real leper trade).
We have a very small tolerance for moves against us as swing bears now but intend to be really strategically aggressive while in this zone. Our minimum downside target on the swing is 3000.
While there are levels above this price we’d consider high value short levels and will probably try more shorts from, failure of entries at this zone will make us a lot more proactive in picking up long positions and defining criteria to confirm near/mid/long term bull breakouts.
I’ve taken my largest bear positions of the year multiple times through the last couple weeks. Took hits on most of the attempts with the market giving little in the way of bear moves off my entry and did a bit better on some of last week’s entries although they were ultimately frustrating, and I didn’t make big profits on big positions.
As I opened up saying, I’ve not fun with it. But I am going to try again. Into next week, failing anything that massively invalidates the bear setups early in the week, I will again go for largest short position of the year with a target of not less than 3100. I’ll again include aggressive bets such as short-term options in this.
If I get the horn again, I’ll be much shier afterwards to take big bear trades.
A more specific and actionable trade plan for the scenarios discussed here will be sent out to our paid members before the US open on Monday. In this we’ll cover the zones in which we aim to bet bigger on shorts, places shorts fail, stuff we’d expect to see if we’re right and stuff we’d expect to see if we’re wrong.
A market crash is like a Final Destination death scene. Once you’ve noticed all the obvious signs, in it comes from somewhere else. It was all just a distraction. The market may have now misled us long enough and caused enough distraction for the real jump-scare to appear.