Samwise Quick Reference Handbook
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Thank you for the analysis today. To be clear, are you suggesting the highest probability way for the market to top (now that it has gone parabolic) would be an immediate crash?
What’s on trade watch today?
No not necessarily. It’s just an interesting parallel. I don’t really have data for this. More just experience.
Here’s the tl;dr of it.
A parabolic move usually just means that when the sell-off happens or when the correction happens, it often only just retraces the parabolic part of the move. That’s it. It doesn’t necessarily mean it will take the form of a crash. It does sometimes like with Covid. But the more important point is that the parabolic part of the move is generally retraced on corrections and that’s all we get. It’s really dark.
Basically, we’ve been expecting a correction from $600 down to $550 right? And that’s what the totality of all data suggested. 99% of all market environments would follow that exact trend. That the QQQ rally was always slated to go to $600 a share, top at $600 a share and then lead to an 8-10% correction down to $540-$550 a share.
So that’s what happens in most environments and what should happen. But in some rare cases, you get the parabolic rally as the thing that finally tops the mark and the consequence are really bad all around.
Here’s my general experience with parabolic moves — I have to run a study on it to confirm — but my general experience with parabolic moves is that the next correction merely just retraces the parabolic move only. So the originally thesis or pull-back target essentially gets f’d. This applies across all assets and markets.
The parabolic move is $589 to $646. The correction then retraces ONLY that parabolic move from $646 down to $589. The market then leaves a disaster for the future to deal with because laws of retracements are violated. So it kicks the can down the road and we end up with a massive bear market later as a result. THIS IS PRECISELY what happened between 2020 and 2022.
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On watch right now is the Sep $550 puts once the QQQ rallies to $640 AND we want to buy the Dec $590-$580 or $600-$590 put-spreads in Baratheon and Targaryen.
The plan, however, is to sell both on that big 5% pull-back from $640 down to $6400.
We can double our money on that pull-back easily. I can see the spreads going from $1.00 to $2.50 or $2.20 or there about.
We might even then go long down there for the inevitable rebound back up. B ut that will depend son a lot of different factors. It’s hard to say ahead of time. But the sense I get is we’ll get deeply oversold down near $605 and we’ll be able to buy call-spreads for a 20-point bounce that we can then unload for 30-50% gains. But for now, we’re just waiting for the process to play out so we can buy the Sep $550’s and Dec put-spreads for Baratheon/Targaryen.
Hi Sam,
In one of your past briefings you mentioned the QQQ testing the 200-day SMA on corrections. The QQQ 200-day SMA currently sits at $535.
Question #1
Are we still expecting the QQQ to test it’s 200-day SMA?
Question #2
If you look at the last few years of the QQQ daily chart you’ll notice there are times it has tested the 200-day SMA on correction and other times where it hasn’t. Is there any benefit of analyzing any correlations between size of rally, type of rally (bear market recovery vs. “regular”), and testing the 200-day SMA on correction?
Thanks!
Could be but I think the debit carry forward is a good way to frame it. No 200SMA, will visit next time when the retrace occurs.
Not sure. As you’ve pointed out, not every correction leads to a 200-day test. Here’s how I view the next correction in my gut. Here are the competing forces I’m thinking about daily on this issue.
If you go back and look at Covid, that rally saw a 14% correction. While 14% is significant across all data sets, it was absolutely minor compared to an 84% run. Like 14% is nothing. It barely retraced any of the gains at all.
So every time I think, a 60% rally should lead to a l larger correction, I remember, well covid only went 14% so what’s to stop this one from doing the same.
What’s more, after that 14% correction, the market wasn’t done going up by a long shot. Covid was just the start. The QQQ tested $300 on Covid, failed and pulled back 14%. A year later, the QQQ was at $400. That’s anther 33% added on top of hte highs from the covid rally and another 67% return from where the rally first started at $150.
If someone bought at the lows during the covid correction, they’d be buying at $150. A $100 move is a 66% return on that. That means the market added another 66% return after the highs in covid measuring from the $150 low point. 33% from covid highs and 60% literally from the lows after the covid correction. The covid correction bottom at around $260 and the QQQ peaked at $408 a year later after that correction. Meaning, covid correction happens, the QQQ falls 14% after having rallied 84% and then the market goes on to put up another 60% rally.
Now the reason I bring this up is because what’s to say that’s not going on here. How do we know the market isn’t going to rally by another 40-60% after the next correction?
We can see the QQQ top at $640, correct to $570 and then rally to $800 by next year 14-months from now. That would a 40% return from $570 versus the post Covid era adding 60% from $260.
So all of that is at play and goes into the calculous for how far we think the next correction might go.
(1) We’ve seen big rallies like covid lead to relatively small corrections a 14% when after an 84% run we should have really seen a 25-27% correction. That would have been normal. Like after this run we’ve had, if it weren’t for covid, we’d probably think the QQQ should decline by 17%. $640 down to $530. That makes sense. Covid tells us not necessarily.
(2) We don’t know how bullish the overall environment really is. If the market demand is still extremely strong, it won’t prevent a correction, but it could definitely make the next correction smaller like we saw after the covid rally when it declined by only 14%. After that, we could see anther major rally just as big as this one.
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Now that’s one set of considerations. But then I often think, well while covid only saw a 14% correction, it did also have 10 major pull-backs on the way up. Pull-backs so significant that they count count as corrections in thier own right. There were pull-back during Covid that eclipsed the size of corrections on table 4.0 and 4.1. The covid rally had multiple large pull-backs, the size of which we’ve designate as being corrections for other rallies.
It’s just that they happened so quickly and the covid rally recovered just as fast that it all looked like part of the same rally. NO different than us disregarding the 7-8% pull-back we saw in January and simply added that entire volatile period to the September rally. It just didn’t seem to be a different rally.
But the point here is this. All of those big pull-back, created opportunities which lead to a smaller correction after the fact.
-7.37%, -6.60%, -6.31%, -6.36%, -5.95%, -5.56%, -5.49% <— that’s the top 7 pull-backs. That’s insane when you think about it. These are HUGE pull-backs.
It would be like the QQQ pulling back from $613 down to $567.82, brushing it off and rallying back to $613 a few days later. That’s what we’re talking about here. And not once, but 7 different times during hte 114-day stretch. That’s how volatile the period really was.
We’d see the equivalent of 40-to-50-point swings up and down on the QQQ from the $600’s 7 different times.
One time the QQQ had back to back 6.31% and 6.36% pull-backs. I fell 6.31%, rebounded back to the highs, fell another 6.36% and then rebounded back to the highs again to only then fall 3.83%. From there, it went parabolic relying from $250 to $293.94 before then crashing to $252 in a few days.
SO maybe the high volatility is what prevented Covid from leading into a major crash liek we saw after the dot-com rally.
Maybe the fact that THIS rally has had those types of pull-backs sets it up for an utter disaster after it ends. That could very well be the case. This market has produced massive returns since the bull market started.
The QQQ has rallied from $250 a share near January 2023 up to $640 a share in just 2-years and 10-months. We’re shy of three years for the bull market and we’ve seen a rally of 156% total returns. That means the entire QQQ is worth 1.5x more than it was worth at the lows of the bear market and 3x what it was worth at hte lows after covid. The entire index 3x its value at the lows of covid.
The point I’m making here is there are two very loud and competing voices that can make a case for and against testing the 200-day SMA. In MOST corrections, we do test it. But the considerations I’ve outlined above could make it so that we don’t test it here in this correction.
Put it this way. During this entire bull market from 2023 to today, we’ve only seen 1 single 8% correction not reach the 200-day. Every other correction either breached it or largely tested it.
July 2023 correction came withn spitting distance of the 200-day. It largely tested the 200-day, but remained just north of it.
The March-April 2024 correction didn’t test it at all. Didn’t even come close. That correction prematurely ended. It was a smaller 8% correction after a 30%+ rally.
The consequence of that is we had a much smaller rally that followed and the ensuing correction was more brutal. The April to July rally was smaller and shorter in duration and lead to a much larger correction of 16%. There we bottomed right at the 200-day.
We had 3 corrections in 2021 after the covid rally and none tested the 200-days. they were all smaller 8-10% corrections. That ended with a 40% bear market.
So it’s hard to say at this point. What I can say is that if this one doesn’t, subsequent corrections will be larger as a result and those will test the 200-day.
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There are and I haven’t done it. But you’re looking this in exactly the right way. The types of questions your asking is exactly how you want to be looking at the stock market.
It’s a numbers game. So of course there’s going to be a benefit in that very analysis. There are so many things like this that can be studied.
Hi Sam,
Apologies for the potentially re-hash question, but can you remind me what was the reasoning / math for picking the $500 strike price for the future hedges? Was it because we were expecting the century mark test to fail and the correction bottom price to be closer to $540/550? Or was it because $500 represents the 50% retracement level between $400 and $600? Why didn’t we pick up the $550s instead of more $500s yesterday now that we’ve broken the century mark test? Mainly asking to establish a framework for picking strikes for hedges in the future.
Thanks again!
Yeah so the reason we picked up the $500 puts is because we were thinking century test failure = 10-12% correction down to $520-$540 in which case we may very well be buying the $500 2027 leaps. That was the target.
Now the target is going to be to buy the 2027 $550 leaps.
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It’s important to keep in mind that when the next correction happens, here’s how we’re likely to do things.
At the 8% mark, we’re likely to buy a substantial long position. Probably the majority of our long positions will be bought at 8% down because we can’t risk the QQQ puling back 8%, bottoming and then taking off. that’s fatal for the publication.
While I personally an be like “no big deal” and wait patiently. Others can’t
So we have to get long at 8% to secure a long position. Because we’re hedged already, even if the QQQ declines from there, we probably end up with a net return as the puts probably outperform.
So if the QQQ reaches 8%, we get long and the QQQ then proceeds to fall to -11%, our puts during that 3% declined would probably largely off-set our long entry such that it won’t even be felt or noticed at all in Arryn et al.
At the 11% mark, however, we’d then add to our long position. And I think we’d probably set the 11% mark as being the place we want to be 100% long + hedged.
If the QQQ drops more than 11%, our puts are still likely to heavily outperform such that we probably won’t see a whole lot of red. Arryn might tick down a little, but it’s still marginal given teh size of our hedge.
If the QQQ then reaches a 20-RSI at any point in time thereafter, we will likely look to close a substantial portion of our hedge at that point.
It would need to be very similar circumstances as we saw backing April for us to exit completely. we’d need full blown assurances essentially.
But the point I’m tori got make is this. The differential between the $550 calls and $500 puts won’t matter at all becuase if we ever get to the circumstances where the QQQ falls under $550, our $500 puts will likely skyrockets — like they did back in April — and we’d probably close them out completely and then wait for the 10% rebound to re-enter a new hedge.
How the correction transpires will dictate a lot of the actions we take.
Sam – Is larger pull back only to 610? Is this really a correction? Is there a possibility of correction like April?
OH the pull-back to $610 is just a minor pull-back. That’s not a correction. A correction is defined as 8% or more.
So a correction from $640 would be a sell-off down to $588. And even then, that would be considered only a minor correction.
IN reality, if the QQQ pulled back to $588 in just 3-4 days and then proceeded to rebound back toward its highs, we wouldn’t even call that a correction. We’d call it a large pull-back.
A correction has a time and sentiment factor attached to it.
If the QQQ were to pull-back 8% from 640 down to 590 and (1) it happens very fast; (2) the sentiment doesn’t really change to deeply negative; and (3) the QQQ continues on as if it’s just a pull-back, then that’s not a correction.
If the QQQ pulls back 10% in that period of time — even if it’s fast — we consider it a correction. A 10% is always pretty much considered a correction. The only expedition being in a bear market where the market might be in a very volatile place where it’s rising and falling by large numbers. In those cases, it’s not.
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So to answer our question, all we’re saying right now is that “short-term” the market is due for a bigger 4-6% pull-back which is larger than the pull-backs we have been seeing in the 3-4% range.
But the QQQ is still due a correction of 8-14%.
An 8% correction is really a correction that transpires over 10-15-days minimum. If it doesn’t last for at least 10-15 days minimum, it’s not really a correction at 8%.
For example, in January 2025, the QQQ peaked at $539 and then fell to a low of $499. That’s a 7.4% drop. We ultimately didn’t classify that sell-off as anything other than just a big pull-back because that’s what it was.
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Yes. That’s definitely a possibility. Though I wouldn’t say 25%. I’d say there’s a very very real possibility of 14-17%. 14% happened in covid. I think this one could very well go to 17% because with covid there were several big pull-backs. We’ve seen none of that here. So I expect 14-17% correction to happen and very soon. Next few weeks as the century test ends on the SPY. The SPY is really the most impotent facts presently in deterring when and whether we’re bout to see a top.
Once the SPY reaches $700, we’re at high risk for a top.
Today VIX is up 3% while SPY and QQQ are both up 0.2 to 0.4% : that’s odd.
Sounds like market participants are anticipating a short term down move and picking up shorter dated put options.
Seems like now would be a good time for the correction, it wouldn’t surprise me if it just happened now because everybody seems to expect it less than a few weeks back..
Fed response very muted
QQQ just went red for the day, although it could always bounce back after the meeting
HEDGE ON
I think today’s rate cut session is just a repeat of the 9/17 announcement. We’ll probably start the next day up about 0.3%, consolidate for a week or two, grind higher, see a small sell-off with roughly a 3% pullback, and then run into the Thanksgiving/Santa rally with high-volume consolidation. Now I see this textbook environment. I didn’t think QQQ would go above 650 before December, but with this momentum, I think we could even see NVDA hit $300 and QQQ reach $700 this year or before Mid term, driven by the gravitational pull from SPY.
Surprised it’s so quiet in here today.
Anyways, I wonder if this is the 1-2% pullback Sam was expecting before it potentially goes to 640
Yeah he definitely got that right. Now we can most likely expect a surge to 647$ and then a large 4-6% pullback if nothing has changed. I wonder when we can expect the pull back. We should be near the end of this segment.
This is correct. The QQQ reached deeply overbought at 632, it reached a price peak at 637 and this pull-back we’re seeing is simply the overbought pull-back happening. We should see another surge to new highs. From there, a sharp 5% segmented rally pull-back down to $605-$610. We have to fill gaps down there. We have a huge gap between $617 and $625 that has to get filled another another gap between $610 and $615. So I think at a bare minimum, down to $610 (4.2%). The pullback can be larger. We’ve seen segmented rally pull-backs go to 5-6% before. So we could see a continuation down to $600.
At this point, if the QQQ ever sees a print under $600, it is likely with the context of a correction because $600 from $637 is 5.8%. So we’re already stretching correction type selling under $600.