Trading is serious business, but it’s hard not to laugh at the absurdity of the system these days. But, hey, as long as we make money from it why not right? I’m of course referring to the late news yesterday that the Turkish Central Bank raised rates to 12% in a surprise move that rattled currencies and jumped $ES futures +10. If has anyone had told me that Turkey would make me money this week……well so it is.
As I tweeted yesterday around close I took the action during the day to be one of constructive consolidation. I took profits in two more of my $VIX related short position and the news from Turkey caused me to adjust my strategy a bit:
As I had indicated I had anticipated some sort of move toward my initial target zone of the 5 EMA before the FOMC meeting with the stated approach to close some call positions when this would occur and let futures run. Yet this 5 EMA tag and 38.2% Fib retrace did not happen during trading hours, however exactly this move occurred on the Turkey news in after-hours. Unfortunately this news happened when one can’t trade options so I opted to lock in my profits on most of the future contracts instead. Why did I lock in profits?
Simple: Risk management. As I had pointed out previously yes you can play these moves trying to maximize your returns being heavily exposed. This can work well for you for a while, but it only needs to blow up in your face once and believe me, you may need some therapy after a counter move like that. As you know from my account strategy article I like to always have a very large cash position and so my move toward a 53%-55% exposure this week was fairly large for me. And as we see futures gave back their entire gain overnight. So the discipline proved to be right move. Opportunity cost.
My process is to lock in profits methodically when they occur. It is a very viable method to keep you ahead of the game and in the game and reduce stress. As it were last night at the close my $VIX profits were large enough to cover my risk on all open call positions, but I was still heavily exposed via futures. Now that I closed most futures I’m looking at solid profits this week no matter what happens.
Now I don’t know what the market reaction will be to the Ben and Yellen show (Bellen). My best guess remains that markets want higher into month end, however I can’t exclude the possibility that they will first move lower on the announcement (i.e. tag the 100MA) and then rip into month end. As a result, seeing futures rip 10 on something unrelated as Turkey is a trading gift that I chose to take advantage of by selling most of my future positions for nice profits. I’m now back to 90% cash with one open futures position ($TFH which I may seek prior to Fed) and several call positions in $DIA, $SPY, $GS, and $EEM.
So now how to treat the calls? I have 2 choices here now given the trading profits this week:
Option 1: The calls are more than paid for with my trading profits this week, hence they could turn to 0 and I would still be up on the week. So technically I could go full risk, let them run and hopefully collect handsome profits at the end of the week. That’s the gambling option if you will.
Option 2: If we trade higher prior to FOMC today I can scale out of the lower strike ones and collect more profit and leave the higher strike ones open as the runners and/or add to higher strikes with some of the profit from the call sales.
Currently I’m leaning toward option 2, but will gauge as the day unfolds. Currently futures have completely reversed the overnight move and are turning negative.
On a closing note before the charts: I’m not taking the Turkey news as bullish. Why? Well I, for one, had no clue until last night that Turkey’s central bank alone could move global equity markets like this. Really? What does this say about the stability of the system? Does this mean Turkey could’ve made a rate decision that would’ve crushed futures? I don’t know, but it tells me that there is more peripheral risk in the system than most people realize. For now the decision is seemingly positive as it signals to the world that some of the $EEM markets are cognizant of their problems and want to address them. Rates at 12%? Best of luck.
$SPY: The 100MA below is my buy zone now for any future and call option trades this week. A negative reaction to FOMC could set up for a quick touch there and then ramp into month end
$AAPL: Just ugly in no man’s land. The chart may want to repair itself higher for a short spot, but ultimately the 200MA may be a good long entry point or the 50MA a good short spot. Lots of resistance between here and there though.
$GS: Bounced off of 100MA support. Showed some choppy strength yesterday. Still see this one as potential rallying hard into month end/February.
$NFLX: MoMo to no end, hit upper trend line and disconnected hard from MAs. Might provide a short entry on further disconnect.
$IWM weekly: Big red flag warning sign as weekly trend line appears broken. Have to reassess after Friday, but bulls need to recapture this trend line in a hurry by Friday if they want to save this chart. As of now serious technical damage.