by Nathan-T1
Notes on last week:
Ended up not seeing the dip I was hoping for to start off last week but some red candles early on made it worthwhile to be short at open. I was hoping for a gap fill to 285 to start off last week but as I mentioned here: www.reddit.com/r/wallstreetbets/comments/bzwqgf/what_are_your_moves_tomorrow_june_13/eqy9fza?utm_source=share&utm_medium=web2x I started to go long delta/theta last Wednesday. It has played out well so far.
Results from Forecast:
I included two forecasts, one including the previous Fridays close, and one without. I think there may be a bug in the model that causes a gap between the last value in the data set, and the first predicted value leading to the overstated drop predicted last Monday. Perhaps it is just confirmation biases, only time will tell.
This week:
Buy the rumor sell the news. I will not be looking too close at the model for this DD given the extraordinary circumstances we are seeing with FOMC this week. Instead let’s look at some other data as to why I am selling the news.
- imgur.com/a/yaUHrgg This is a 50-period correlation between SPX and VIX. When the correlation spikes like it did before Feb 2018, October 2018, May 2019, etc. one should be looking for volatility. Right now, the correlation appears to be bottoming out and starting to curl upwards. Something to take note of.
- From a technical perspective, SPY, IWM and QQQ all have bearish divergence on the 1- and 2-hour scales. imgur.com/a/PWu1wWe, imgur.com/a/FsOEgul. This is essentially the opposite set up I saw when I made my first post www.reddit.com/r/wallstreetbets/comments/bum65c/short_term_bullish/?utm_source=share&utm_medium=web2x. Looking for this to play out after FOMC.
- Finally, imgur.com/a/gQ3SRiY. The DIX and GEX. DIX has fallen dramatically the past week as SPX has soared and is now at the lowest level of 2019. This is a huge red flag for me, though not a sell signal in of itself. But when you pair it with the fact that we have FOMC tomorrow, I think it is a sign big players aren’t going long here and are taking off risk. Last time we saw a dip this hard in DIX was before the China trade war blew up on May 3, I will not be going long anytime soon.
From a fundamental perspective, I believe that they market is pricing too many rate cuts too soon, and I am not the only one who thinks that. Goldman, BofA, MS, UBS all have told clients to not expect an overly dovish Fed, Goldman and I believe MS see no rate cuts this year.
If you think they are saying this to try and stoke fear and sell some puts to retail, then I can’t stop you from believing that. But I think that this, combined with DIX is a pretty clear indication not to expect JP to cut rates in June and maybe even July or allude to more accommodating monetary policy.
All of this being said, I am merely speculating as to the most likely outcome and can’t say for certain what will happen. I picked up some 298 6/28 SPY puts this afternoon and am up modestly. Will add more before FED most likely. I will be holding as long as bearish divergence holds on the hourly SPY chart. I would say that the safest thing would be to sit this week out, but this isn’t r/investing.
Right now, I have stepped away from my model and have started working on making a database with option data such as Greeks, IV, volume, etc. Here is something I whipped up: imgur.com/a/kpGOPOD. Right now, I can download and store the entire option chain of any stock and calculate Greeks and back solve for IV. More on this latter.
As always do your own research before making any play and know that FOMC will swing the market hard one way or the other. The possible losses and gains will be exacerbated this week and this month, know that before opening a position tomorrow.