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19th Jan 2021 - Zealous "Risk On" Market May be Ending in Stocks, Crypto and Currencies.
Since the Fed started to inject capital into the markets to support them after the COVID19 sell off back in March of 2020, we've seen a boom and boom again in prices of stocks, indices, crypto and risk seeking FIAT currencies such as the Australian dollar. But in the wall of green, some small cracks may soon appear.
S&P500 Stock Index
The S&P500 could be in the closing stages of a harmonic butterfly reversal pattern on the daily timeframe. Of the family of harmonic patterns I have found the butterfly to be one of lesser reliable ones. So not too much weight should be put in the appearance of this itself, but it gives us an interesting zone to watch.
If the market begins to fall I think the selling will take price down at least 10%. How much further it can go depends upon on strong the selling is and whether there are big fundamental aspects attached to it. I would not be surprised to see price back into the 2,000's on this at some point.
An odd thing has happened during the Corona virus and the volatility it has caused in the markets. While it's appeared that logically all the things happening where bad for stocks, the average investor has remained very bullish and bought more stocks as we've rose; despite the news.
The average investor has been gutsy and followed the ideology of "Buy when there is blood in the streets". They usually do the opposite. I wonder if the average investor is becoming a bit too comfortable. Markets do have a tendency to shake that up for them when they do.
Trades I am making on S&P500
I've closed all my buy positions in assets tied to the S&P500. This has been something I've done over the last months, progressively as price has risen. Today I am starting to take positions betting the market will fall, or at least slow down in the move up.
I'm selling call options with an expiry in near the end of March. To protect my risk I am using call spreads. I'm selling a call for the 3700 strike and I am buying a call for the 3850 strike. The price I entered is 3786.
I am also buying a cheap OTM put for the 3500 strike. Also to expire near the end of March.
I'm also considering a short in the futures market, but I'll wait off on that for a while until I can see if the buying momentum really has stopped. With options I have a lot of time to be right but with futures if I'm too early betting on the market falling I will most likely lose, and can lose multiple times.
The explosion in BTC to $40,000 reminds me in so many ways of the first pop to $20,000 that was proceeded by a big correction. I sold my BTC holdings in the $33,000 to $35,000 range while it was going up. I tried to short it at $36,000 but took a quick, small, loss on that as it spiked to $40,000.
Bitcoin is currently testing a trendline. Whether it can hold or it breaks could be important to the near term price movements. If the trendline holds, we might see a butterfly pattern on this (Like we have on the S&P500).
Trades I am making on BTCUSD
I have some short positions already from 38,100 and am opening some more at 37,000. My stop loss on these trades is $43,000. Target is $16,000. I think we might see BTCUSD back under $15,000. Maybe a little lower, and then I'll start to buy again if we get there.