Today has been a very tough day in the market, as stop losses have cascaded from 2700 to 2650, and trading algos of large fund houses are pumping shorts, while buyers are standing back to understand the situation. This has happened a few times before in last 5 years, including in Jan-Feb 2016. The trading algos reverse their trading from short to long in a second as they have no capital shortage, but we humans take time to get back.
Today is a melt down in the market with stop losses, with nearly 100 points fall in one day! The futures recovered from 2665 to 2690 and then fell again, causing further damage to newly created longs at 2670-2680. Such double hits are very rare within a day. The index is trading is large range, and that is why we have reduced our position size / number of contracts.
Many traders/investors have lost capital this week. The situation is same for both large and small traders. For example: I had 10 contracts. 3 contract hit stop loss at 2680. 5 contracts hit stop loss at 2650. Now only 2 contracts are remaining with a stop loss of 2600.
Today is not a reflection of us as traders/investors, so we should not take it personally. Only those who exit their futures without a plan to get them back at 2650-2700 level, will get a real loss. You may consider today as forced M2M loss.
A confluence of negative factors came at the same time: US Fed policy uncertainty, Facebook problems hitting Nasdaq sentiment, Trump trade war. Large funds have also been hit with stop losses, and they will be evaluating their next steps all through tonight.
In my study of current and past markets, the real risk of a market fall comes from economic weakness and recession. We are not at all in that zone. The US Fed is raising rates because the US economy is growing well, and there is no wall or pit ahead in the near term to stop the US economic growth. Markets will not fall with rising interest rates. In addition, Europe and Asia are also picking up growth. In such a scenario, S&P500 corporate earnings will not fall, and the S&P500 also will not crack down.
The market fall this week is portfolio readjustment by large funds, and they are themselves rapidly evaluating their positions. Once the buying resumes, we will see new highs in S&P500 this year. My target by Dec 2018 is 3000, which is 350 points up.
At 2650, we have 350 points upside, with only 50 points downside, with 2600 as the absolute stop loss (as mentioned previous mail). That is the big picture, which we should forget on a day like today. As long as we have our contracts, we will win. the S&P500 index is built for long trade.
On a day like today, capital will be in short supply. Its always like that. The requirement is to get back 1 contract at some point with 2600 or 2650 as stop loss, to participate in the inevitable upmove, which will come after all this correction.
S&P500 Trading Strategy. My suggestion for next steps is as follows:
You can buy 1 contract at 2650 or 2700 and hold it till at least 2900. Then you can add another contract long from 2750 or 2800. That will give $15-20K gain at 2900, and $25-30K gain at 3000. This gain will come from just 2 contracts. 2600 is the absolute stop loss. Traders with more capital can buy more contracts in the same proportion.
I will not take/expect any fee from our members till futures cross 2800. At 2800 level, markets should stabilize, and we can also do smaller trades of 20-30 points, and 10-20 point stop loss. If you have taken my above suggestion, you would have recovered $5-8K by 2800 level. Please let me know if you have questions. Thanks.