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Heather Cullen

Heather Cullen

In The Money

Take action on bear market Heather Cullen

Bear Market Signals

As I sit here waiting for inspiration to strike, the lyrics from the theme song of  Friends, the 90s sitcom, keep going through my head:

‘It hasn’t been your day, your week, your month, your year’

That’s what it feels like! For most of this year, we have been sitting on the sidelines. After getting out safely on the ITM signal, we then had a failed bull signal and then a failed bear signal, getting us in and out of those trades in just a few days. Then, the market had a rise from the bear threshold to the correction threshold but failed to make it through that barrier.

Since that date (Aug 16th) the market has retraced to the bear level, including a fall of 6% since Monday this week. Ugly.

SPY 18 Sep Heather Cullen

If we look at the chart we can see some patterns we have seen before. We noticed that on the 16th August SPY bounced exactly off the correction threshold. If we look at Friday’s trading we notice that the lowest point ($382.11) was almost exactly on the bear threshold ($382.17). What happens next is important; if it drops through then we are once again in a bear market. If it bounces off it doesn’t mean we are at the start of a bull market. It could continue in this trading range for weeks or months. A depressing thought.

What Happens Now?

Obviously, no-one knows. If SPY bounces and heads north then it may have enough momentum to make it through the correction threshold this time, but unless there is a change in market sentiment this seems unlikely. Of note is the fact that the 200 day SMA is now in correction territory as well, which is not a good sign.

Should we do a Bear Trade?

No – not yet. That would be premature. If we check the rules from the ITMB book for re-entering with a bear trade we see that they are:

1. The 10/20 SMA death cross.

Yes, as you can see from the chart below we are already there; the 10/20 death cross was on 29th August and confirmed the next trading day.

2. The MACD histogram is negative and less than 0.5

Yes, it is currently almost -2.0.

3. The current price of SPY is below the bear threshold.

NO – this is what we must watch for.

4. The current price of SPY is below the 200 day SMA

Yes, SPY is well below the 200 SMA.

SPY Bear Trade Setup Heather Cullen

You can see that 3 of the four criteria have been met – now we are watching to see what happens next. As I write this, the futures are pointing to a slightly negative open, but it is the closing price we are looking for. If it closes in bear territory then all 4 criteria are met and you may wish to enter a bear trade.

But – a word of caution – I suggest you don’t use all your capital going into a bear trade. Rereading the Account Management section in Chapter 10 of ITMB would be a good idea. And remember:

‘Bulls take the stairs, bears jump out the window’

If you do enter a bear trade, then remember that it has to be monitored daily. Bear markets move much faster than bull markets and you have to be ready to bale out quickly if it goes against you.

Speeding Tickets?

The market moves faster than it used to because of computer trading, and bear markets can take your breath away with how swiftly they move. Remember the Covid bear? This is not just our imagination. The time taken for the S&P 500 to drop from a peak to a correction (-10%) has changed from:

This year, from the peak on 4th January, it took until 22 Feb to close in correction territory, but intraday trading was there within 20 days. It seems quaint that in early January we were discussing the ‘January Effect’. Hah. If only!

Economic Analysis

I am not qualified to give any commentary on the market which is not just my opinion – and you deserve better than that! But to read a good commentary with charts that you don’t see anywhere else you can go to the Calafia Beach Pundit. 

Q & A

The questions are coming thick and fast, which, I guess, shows that people are worried. If you have a question then please send it using the contact form, because that way it goes into the database and doesn’t get lost in a Spam filter.

I know there is a limit to how long I can make a blog post, so if your question is not answered this week then I will try to include it in the next one.  I’ll make a start:

1. Do you have problems rolling SPY options? Some SPY DITM options have a lot less volume than others, should we stick to the ones with high OI (Open Interest)

No, there is no problem when trading SPY.  The market makers ensure that there is always a bid/ask and that the spreads are the same for all strikes. It is different if you are trading stocks that are thinly traded because then you can be stuck with a position and not be able to get out, but with SPY options that is not a problem. I discuss it more in this blog post:

2. Have you considered writing options against your long options?

Yes, I have done it quite a few times – and always regretted it.  I always seem to pick the time when the market moves up sharply and I am exercised. Not that writing covered calls isn’t a good idea, but it requires a very stable market which we don’t have right now. It is way too volatile for this strategy – IMHO.

Most times when I decide to write a covered call against either an SPY DITM long option or actual SPY stock I choose a strike 4% above the current price – and of course that just happens to be the week it trends upwards strongly. I write more about this here:

3. I’m confused about the ‘Effective Price’ – what does this mean exactly? How do you know the current price of the options? Of the stock?

The effective price is what you are actually paying for the stock if you exercise. It is simply the strike plus the premium. For example, if you are buying a $200 strike and the options costs $75 then the effective price is $275 – i.e. you are effectively paying $275 for the stock / ETF.

You can find the current price of the options on your broker platform – they will have a bid / ask for all the options. Usually you can buy the option for about halfway between the bid and the ask, but often with SPY the price moves very quickly, so you may want to put your buy in at the ask price. Most brokers get you a better price if possible.

4. What books do you recommend about the market now?

Books about the market tend to follow what the market is doing and what people are worried about. If we go into a bear market there will be lots of books about bear markets. You can’t help feeling that most of them are somewhat opportunist.

I haven’t read anything recently that I can recommend – except for my perennial favorite Reminiscences of a Stock Operator by Edwin Lefevre and I have recently been rereading Extraordinary Popular Delusions and the Madness of Crowds: The classic guide to crowd psychology, financial folly and surprising superstition. One is written 100 years ago the other almost 200 but they give perspective on what is happening in the markets (Disclosure: if you buy any of these from this link I get 1% of the purchase price. Woohoo! I’ll buy a house in the country!)

5. Do you have any good stock picks?


6. My MACD on TOS is way over the threshold of 0.5 and -0.5. It's there a setting in the MACD to only show it between 1.0 and -1.0 like in the book?

The MACD is an oscillator (because values rise and fall above the zero line) but it is not normalized to a limited range like other oscillators. In IMTB, the bear book, we don’t limit it to +1.0 and – 1.0. We do, however, only use the histogram part of the MACD. It is discussed in IMTB Chapter 4. The values of +OR – 0.5 were chosen because backtesting showed that this meant that the trend was significant.

7. Have you ever back tested a monthly DCA strategy where you basically buy x number of LEAPS per month (depends on how much $ you can invest) and then roll the older ones when you have held them for say 1 year & 1 day? This strategy would be regardless of current market conditions or chart signals.

This sounds like a strategy called ‘dollar cost averaging’ and no, I have never backtested it using SPY. If the market is going down, then I would hesitate to buy anything with a bullish bias.  I don’t think that that is the time to be buying. I discuss this in a recent blog post, where I look at following Warren Buffett’s advice. 

8. You use 10 and 200 SMA and not other SMAs. Is there some other SMAs out there that we can use for the ITM Bull market strategy?

I am sure that there are other combinations that you can use – many people use the 100/200 SMA cross, others use the 50/100 cross, it depends on the trader. I chose the 10/200 because after backtesting a lot of combinations that was the one that worked. 

9. I know you added an alternative in your bull strategy book to participate in the market without spending as much money as the full strategy. But what about a bear market? I am looking to enter the market when it turns "truly" bearish without putting up so much money given the strategy. Thoughts?

I haven’t tested SPYG on a bear market, and I would be hesitant about trading a bear with a small account if it was your first experience of trading. I would either try to find an SPY option for a small amount of money (say 10% of your portfolio) or stay out of the market until the bull returns.

And finally . . .

I’ve been watching the futures to see what is happening, and now (seven hours before market open) they seem to be dropping, so we may well be back in a bear market shortly. Being a natural optomist, I am more comfortable in bull markets. As I said in IMTB, bull markets are when the market is ‘well’ and bear markets when it is ‘sick’. Bear markets make me uneasy, but the market does what the market does with no regard to my feelings!

If you are thinking of entering a bear trade, then watch for the signals, and always think ‘what if I am wrong?’ and make sure that you can live with the consequences.

On that cheerful note I will sign off until next time.

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