Samwise Model Portfolios
The portfolios below are separated by launch dates. Each portfolio is entirely independent and has no bearing on any other model portfolio. We launch entirely new portfolios during each market correction as an illustrative tool for new subscribers who weren't present during...
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So even if the QQQ doesn’t roll over completely into the low 490s, the fact that it fell back to 497 before a potential rebound still somewhat lowers the risk of a correction?
No. We’d need to have seen the QQQ push down to the low $490’s. The reason that lowers correction risk is because it breaks the continuous downtrend chain we usually see in a correction. It increases the probability that the low 490s represents the lows of the entire pull-back that we’ve seen from 515.
Usually, in a clear-cut developing correction, the market has a big leg down, forms a clear bottom at oversold conditions, has a clear cut bounce that lasts like $10 and then we get another clear-cut hard leg down as big as the first. There’s no dithering or forming double touchdowns of any kind. It’s a nice clear-cut pattern of selling-rebound selling-rebound.
The QQQ forming a type of double bottom in the low 490s slows that pattern of selling and reduces overall volatility. It decreases the chances of the selling, turning into a larger 10% correction.
Corrections are supposed to happen somewhat swiftly. Now today’s action so far hasn’t really disrupted that pattern in any meaningful way. In fact, the rebound that started on Friday is still ongoing. We’re still very much on that single leg up off of oversold conditions.
Had the NASDAQ-100 fallen to the low 490s, creating a second instance of oversold conditions, we would end up with two separate rallies, both going into the 500. That’s a weakening factor for the correction.
The action so far hasn’t really done any of that. We’re still on a simple rebound off of Friday’s oversold conditions. That rebound hasn’t gone far enough yet.
Hey Sam,
I was wondering which period you are looking at for the RSI? I have it on 14 and the RSI is at 53 at the moment.
Hourly chart. You’re looking at the daily time frame. The daily is at 53.35 right now. The hourly is at 48
Thank you!
I guess we will know tomorrow whether there will be a correction or bounce?
Forecasting the bottom of a correction is a relatively high confidence prediction. The indicators we have for forecasting a bottom on the hourly chart like you saw last Friday are the same for predicting the bottom of a correction.
We even have stronger indicators. That’s why on August 5 and September 4, we were able to confidently conclude that the selling was over.
You have daily RSI going oversold, you have the New York Stock Exchange McLean oscillator indicating a bottom at -100 to -140, the VIX pushing overbought, the average percentage loss per day, the put-call ratio, advanced decline line, accumulation/distribution curve and a host of other high-confidence indicators to help predict bottoms.
And we will consistently predict when the market has bottomed and be able to make meaningful investments every time we get a correction.
That being said, the hard part is predicting that we are actually in a correction. That is the hardest thing to do and there aren’t a lot of indicators that give us guidance on whether we’re in a correction or not. It’s not until we’re near the end of a correction that we can start making clear cut forecast due to the indicators.
You usually don’t even realize you’re in a correction until it’s like half over. That is because there are a lot of instances where the market pulls back and then bottoms at -5% or -6%.
Consider where we are now. The QQQ has a rebounded and fulfilled all of the conditions that are required of it. When the QQQ pushes over sold, it is almost fully certain to bounce. There aren’t a lot of cases where we get oversold on the hourly and no rebound comes. I can’t even think of any examples. It’s almost a 1+1 = 2 type situation.
But now that the QQQ has fulfilled that essential requirement, we have no idea where it’s gonna go next. There’s no way to know.
And even if the QQQ rolls over down to 483, there’s no way to know whether that will be the final bottom or not. We probably get oversold again on the hourly and there’d be another big bounce. But whether the QQQ just ends there or continues lower is uncertain in most cases.
It’s not until the QQQ hits oversold on the daily or the VIX becomes overbought or the NYMO goes to -100 that we start to see signs for a full-blown bottom develop.
The good news is, we can actually play the uncertainty like we’re doing right now. One thing we can be confident about given the higher volatility, and the oversold conditions is that the QQQ is gonna take a hard direction one or the other. We are positioned to profit whether the QQQ goes higher or lower.
If the QQQ were drop to 490 this week, I think we make even more money because the puts would go to $1000 and I don’t think we’d lose that much on the long call. We’d make $750 on the puts on top of the $350 already secured. That’s an $1100 gain at $490.
The call that we own at $15 might drop to $10-$11. We’d end up making about 500 on the trade as a result and it would allow us to continue holding our long position or reposition.
If the QQQ continues lower next week as would be expected, we would get oversold conditions and another long set up. We could buy calls again, but this time more aggressively. Play the bounce and hedge the same way we just did.
Eventually, we will get to a point where the daily indicators start to point toward a full bottom. It is there that we will switch to vertical call spreads.
The takeaway here is this. It’s often not easy to predict whether we’re in a correction or not until the correction is nearing its end point and we have oversold indicators. But depending on your strategy, it doesn’t matter because you could still play it in a way that produces profits like we’re doing with Targaryen.
For other portfolios the smart thing to do would be to sell cover calls or calls against leaps like we’re doing with Lannister. And obviously buying existential hedges that protect against a potential crash are critical.
If the QQQ were to crash down to 400 a share, we’d be OK because we’re hedged for that possibility.
If the QQQ has a correction, we’re also OK because a correction indicates that the market should soon rebound back to its all-time highs.
Another way to think about this is like so. We can know if the market is not going to correct based on the size of the rebound. We can know if the correction is ended based on oversold indicators. What we can’t know is whether we’re in a correction as it’s happening because each leg down could be the final leg down and won’t know until we see the size of the rebound.
That’s where we are right now, sort of in no man’s land. QQQ goes back up to 510, correction over. The QQQ fall to 490 no way to know until we see the next rebound.
Thank you very much for this detailed explanation. It looks like I need to start trading options more to adopt a similar strategy (currently only long only and at most leveraged ETFs).