I should probably refrain from comment, believing the ancient wisdom that pride cometh before a fall, but this was one hell of a day; one that I happened to guess exactly right. Even though my guess is that we’ll be making new highs later this year (Santa Rally), and that could get started anywhere from after Labor Day to a month from now (if…if…), I don’t think this correction is over yet, even though we may have already seen the absolute low.
This deep of a correction (10%) takes time to stoke up enough fear to shake average guys out of their shares so the big boys can load up cheap. Conversely, in market tops (a-la ’98-2000), everyone including your grocery bagger and barber are picking stocks, and whose stocks do you think they’re buying? Big boy stocks, as so-called smart money rotates their holdings from net long (they are massively — like: record — net long right now) to net short. And so it goes.
But anyway, it just so happens that these corrections tend to follow similar patters. They don’t have to, of course, but it seems to be that way. It’s likely a function of herd mentality. Since people believe price action follows certain patters, they trade off the patterns, and so price action follows the patterns an awful lot of the time, confirming people’s belief in the power of the patterns. It can be uncanny and I can show you tons of examples. But one must be very careful. They don’t always work, so bets must always be proportional.
Anyway, long story short: from Friday’s close I was sitting on some puts. I had been expecting this downturn last Wednesday, already, and instead we went up. But I held pat. So I’m staring at a potential loss of $3,500 on that trade Monday morning, and then we start heading down. By the end of the day, my loss has melted down to only a few hundred. Then, 10 minutes before the close the price and volume action was accelerating to the down and this is always pretty short-term bearish. I loaded up on puts (lots of them) in five of six accounts I trade.
Yea, baby. I got out of my loser trade once it was showing $500 profit around mid-day. "Don’t be greedy" — I try to remind myself. When you get such a gift — to be raised up out of the abyss — take it. Had I stayed in and closed at the end of the day, the profit would have been about $1,100. Oh, well. That’s where the other puts come in. 24 contacts, $5.40 per share (on the SPY). I closed them out 24 hrs, 9 minutes later, a minute before the closing bell for $8.20. That’s one fat $6,720 profit on the day. Yea, baby.