Crash or Rally Day 2

I have missed out on substantial downside profits the past couple of days by moving to cash. I can't complain though. I tenex'd my Apple position by buying puts in mid-August, sidestepping that big rally in early September, and then re-entering. My smaller trading account, an old Roth IRA that I converted to YOLO status this year, also increased nearly 10 times in the past six weeks. I sold the bulk of my remaining Apple puts yesterday. I also sold my EEM puts which were an 8x. I lightened up on XLP, which had been YOLO sized. I plan on getting back in after what I suspect will be a rally, along with a few new and old positions such as my Canadian bank puts.

I come into the day with some small positions on DOW, FCX, ASHR and XLP, along with a small OTM runner call position on SPY which I may daytrade into size today, along with a substantial long position in TLT including what are now 0 DTE calls. I bought 20ish delta calls for October and November which could remain.

The market has developed a diamondy pattern this week. Diamonds are rarely clean, but the form is there. The moves out of diamonds are typically powerful. There's a case either way because a move down will bring many many put positions into the money negative gamma effect will kick in as market makers have to hedge. There's also a case for rally because the market is overdue for one. Since the market failed at 3750 two days ago and has struggled around 3700, bears have been emboldened. Almost every rally was sold yesterday. Yet from around 10:30 AM and 3:10 PM, there were two powerful rallies of about 40 points on the ES.

What I was watching most of the day was the up minus down volume. Both of those rallies came on brief interruptions in the selling. Not net buying. You can barely see the 10 AM rally on the volume and you can see a small shift into up volume buying late in the day, but on net it was a small move. My sense of the market here is that it will take something like a panic to shake more sellers out, but there is a high risk of panic in these conditions. I'm not downplaying the possibility. On the other side, all it will take is some positive net buying to unleash a ripping rally for as long as the buying lasts. I suspect something like 100 points would come quickly if they buyers finally step in, if 40 points came when buying and selling volume were merely in balance. My bias here is to buy a dip, but it is not strongly held.

Bonds will rally if stocks rally. There is a rather sizable inverse H&S pattern formed on ZB and it has a target at the former mid-June low. That is about a 3 percent move. I could see that being traversed today if the market rallies. Conversely, it won't take much weakness to invalidate this pattern. The core PCE was higher than expected in August and increased the overall inflation rate, not bullish for bonds, although perhaps it wasn't bearish enough with home prices and rents now falling in September...

I like ZB and TLT as longs as the calendar turns to Q4. Not because I expect the Fed to follow the BoE with a new round of QE, but rather I see a combination of inflation coming down, potential stock panic fueling some safe haven buying and less room for losses. As long as inflation doesn't reaccelerate, it's at a level where there isn't substantial downside on the long-bond in late 2022. On balance, that can fuel a rally for a time even if it heads lower later this year or next.

BTC still hasn't cracked.

The Dollar Index looks similar to March 2015, but as I've been saying, "it ends when it ends." Assuming the stock market goes lower in October, there's still risk of massive depreciation in export currencies including the Chinese yuan.

The market will be easier to trade if it rallies, but the market doesn't have to make it easy to trade. The trend is down because this is a bear market. Tesla broke support on Thursday. The market has shown Apple is not safe. Both stocks are overloaded with bulls who still think this isn't a bear market. Yesterday, both stock showed they can wreck the market if they lead on the downside. I think both will fall hard in the next month or so, though maybe not today. If you've held puts/shorts until now and you have enough time, the coming rally shouldn't develop into a profit-crushing move. I use much shorter-term options and therefore have sold out. I would see my profits collapse if the market rallies. If it turns out I am wrong and the next move is a larger rally, I would have seen my profits completely wiped out.