Another Cunning Plan

I may be jumping the gun a bit here but the current price action suggests continuation higher and a spike high breach seems imminent. The prudent and more conservative approach (I presented yesterday) is to wait for a breach of the ES 2736.5 Net-Line Buy Level (NLBL). However it’s going to be a busy day for me and I decided to take out a small exploratory long position right now with a stop < ES 2702.

Here’s the setup and as you can see ISL sits below two prior hourly spike lows. I would have loved to put it < the 2680 SL, however that would represent almost 50 ES handles, which is a bit much.

Caveat

The setup is incomplete for one. Plus the 100-day SMA is still pointing down, which means the onus is on the bulls to prove themselves. Relentless runs like these happen regularly, especially during early bear markets, so this campaign has about the same odds of success as any of Baldrick’s cunning plans panning out in Black Adder’s favor.

As human beings we look at a chart like this and fill in the future with our respective perspectives. A bull looks at this and thinks: “What a run higher – I don’t want to miss out!” Similarly a bear looks at this and see a last kiss goodbye before the bottom finally gives way.

Cunning Plans B and C

The odds would be much better for the bulls if we would first paint a retest of the 2650 range, where a second entry attempt could be staged after a convincing spike low. On a weak bounce I may even consider a short position, if the 25-week SMA would hold the advance.

So plenty of entry opportunities for both sides here IMO and what they all share in common is that we don’t want to bet the farm on any of them. Easy does it – remember we are still in technical no-man’s land.

What works in our favor are the historical stats for week #7, but of course that’s no guarantee and a slight positive bias at best.

Implied volatility has been easing up a bit but the VIX has not yet managed to drop < 15 – which all through 2017 until 2018 was considered a high and pretty bearish reading.

The LT VIX panel shows us the 2018 parallel from a 10,000 perspective. Which does not mean we are going down the very same rabbit hole. Clearly risk is still priced with a premium, albeit a much lower one than let’s say a month or so ago.

Anyone who told you that they accumulated large put positions on the way down is now effectively broke (vega burn is a bitch) and is increasingly hoping for a miracle.

Lottery Puts

That said, IF you are staunchly bearish and you loaded up most recently then this was probably the best timing any self respecting grizzly could have hoped for. Because ten handles higher and the bears are effectively dead in the water, and in terms of IV this is either the floor or the inflection point for a drop lower back toward VIX 11 plus minus.

So given that the acquisition of a few lottery puts would be an excellent way of hedging early long positions plus they may pay up in spates should the market take a turn to the red side. I personally believe that scenario has a less than 20% probability, which is why cheap far OTM SPY puts (240 or lower) would be appropriate.

Expect them to expire worthless (as they usually do), so consider this merely relatively affordable insurance (and a possible lottery ticket) near a crucial bull/bear inflection point.