Right now the broad market is at the lower end of a multi-month range. The big picture is that the giant bull market has slowed to a grind.
Anticipating a bear market can be an expensive hobby. But at some point you have to be ready to make that critical adjustment to avoid getting slammed by increased volatility and enormous sell offs. But when? and How?
There a couple simple things I like to follow.
1) Weekly and daily TEA indicator — If one or both are bright red… then cut size. If/when that happens, I will reduce my downside risk by more than half.
2) 200 EMA — This is where statistically valid systems go to die. Things that work above 200 EMA, often don’t work below. Call it psychology or call it trend following… it doesn’t matter.
3) Extreme VIX — If the VIX gets above 30, then that is also a reason to cut size. Yes, high Vol is good for market neutral traders… But at some point 30 can turn into 70 in a matter of days. That is not when you want to have a substantial amount of capital in the options market.
None of these conditions have been met. The first that could happen is the Daily TEA. I’m watching each day — but there is nothing I need to do until that happens.
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