Samwise Quick Reference Handbook
To streamline our daily blogs and conserve space, we’ve organized key resources into a convenient, collapsible dropdown menu below. A sort of Quick Reference Handbook if you will -- as our friends in aviation might call it. By clicking the menu below, you’ll have qu...
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thank you Sam
Thanks Sam. Can you put guessing odds on the three possible scenarios playing out from here:
Thanks so much!
It’s impossible to give odds on any of those things beyond what the data tables tell us. All you can really do is prepare for all contingencies simultaneously which can be done. It’s being done in our long-term portfolios.
Bear Market
What we’ve done is to make sure we’re hedged to such a degree that if a bear market were to happen, we make a profit. The bigger the sell-off, the bigger the profit.
Once the QQQ pushes up to $500, we’ll be examining and stress testing our long-term portfolios in the March Briefing (Daily Briefing for long-term portfolios) and we’ll make adjustments to our hedges accordingly.
A bear market is to the stock market as life insurance is to the nuclear family. You can’t know when a bear market is going to happen, you can just prepare for one by making sure you’re well insured in the event of one. Those who try to make grand prognostications on when the next bear market is going to happen are almost always wrong. They’ll have made 50 previous failed predictions about how the next bear market is around the corner and they’re always invariably on the sidelines waiting for it to happen as the market rallies 200-300-400%.
So the best way to face down a bear market — the way professional do it — is to hedge. We’ve outlined it all in investing basics. You have to hedge it out. Read the strategy section of the website. Read investing basics. It tells you how to deal with one and making predictions isn’t the way to do it.
Second Leg Down Forecast
Second leg down is a crap shoot. There’s conflicting evidence but it tells in favor of a second leg down. We’ve outline those reasons numerous times now. The way to handle that in a long-term portfolio is to hedge. The same actions taken to protect a portfolio against a bear market.
For a short-term trading portfolio, we lighten up as the market rallies and then put on a strangle trade to capitalize on the move. A strangle trade doesn’t so much capitalize on market direction, it capitalizes on the idea that the market is about to make a big move up /down. That is precisely what will happen at $500 on the QQQ. If we crash into a second leg down, our puts will go up in value faster than our calls lose value and the same happens in the other direction with the calls appreciating faster than the puts. All we do is simply trade out the puts at the end of the 2nd leg down into call-options and we’re good to go. So we don’t try to predict it, we just prepare for both eventualities.
V-Shaped Recovery
V-shaped recovery is probably the default case. Almost every correction ends in a full v-shaped recovery. Almost every single one we’ve seen going back 15-years has been v-shaped. But whether we get a retest or a second leg down and v-shaped, or single-legged and v-shaped is unclear.
The RSI and correction data table tell you what to expect in terms of timing. I’m not going to give you any sort of extra data here beyond what the table’s already say. Sort the rally duration in the correction table. It’ll give you the answer I’m going to give you. The table says 25-50 sessions. That’s how long most post-correction rallies last. The ones that last longer than that have much larger rallies. For the RSI table, it’s 20 sessions I the median.
what does that mean? It means the meat of the rally happens in the first four weeks. So while the full rally might take 25-50 sessions, MOST of the gains happen in the first 20-days per the 30-RSI table. Take a look at those tables. Sort the data points and make inferences. It’s why they’re there.
What’s more, beyond that, you have the intermediate-term rally analysis which tells you that most QQQ rallies last 70-100 days after a correction ends. That’s how long it could take for the QQQ to sustain another top and another correction. The intermediate-term rally table tells you how far the QQQ is likely to go. 30% is the extreme outlier cases. 20-23% is more likely. That’s how far the QQQ goes in the next rally.
For example, from the August 5th lows at $422 to the $541 highs this past February, it was 28.2%. We also had two other mini-corrections since then (September and December). If you count from the September correction lows, it’s 23% or something like that.
Hey Sam, thanks for your thoughts!
So do you still anticipate a second leg lower or is that now less probable?
We simply won’t know until we get there. It’s just impossible to predict what hte market will look like at its peak. For example, suppose the market surges past $500 a share and up to $508 and a huge $16 up day and we get ultra positive news and the momentum is just crazy strong. No second leg down.
Alternatively, imagine a situation where the QQQ limps just past the $500 mark all battered and bruised with multiple sell attempts kind of like we saw a few days ago. Probably we get a second leg down.
It really depends on HOW the rally progresses.
Ok thank you, I just asked because a couple days ago you pretty much said a second leg is all but guaranteed, I guess judging by the available evidence at that moment
Yeah so there’s a lot of evidence for sure pointing in that direction. A lot of evidence. But that can be bucked very quickly with how this rally progresses. As of now, we are operating under the assumption that we get a second leg down.
Nothing about today lesses the probability of that. There’s nothing in this action that is ultra positive so as to invalidate the evidence. But as we get closer to $500, that can change.
you had me worried we were going to wait in nvda and I’m glad we didn’t that’s not coming back to 100 unless we actually see a 2022 style bear market play out is it? even a 20% correction could see it hold 110 levels if we have another leg down.
So it could easily come down to the lows again on 20% correction as we noted above. We’re short of a real big correction or a bear market, Nvidia is not return to the “low $100’s” again. It’s just not going to make substantial new lows. Like this range down here at $100-$110 is a huge wall of buying.
Also, when I say the lows are sort of in, I’m not saying the precise $467.01 low is in and can’t be breached on the QQQ. I’m saying that even if the QQQ pulls back toward those lows again it’s unlikely to see substantial new lows.
For example, the QQQ reached a low point of $468.40 or something like that on Monday right. yesterday it reached $467.01. It was $1.39 lower than Monday’s low. Does that matter in any real meaningful way? In the end, that $467-470 zone ends up being the bottom zone for the QQQ. And really it’s a range of like $5. Anything in that $465 to $470 is a bottoming range or zone for the QQQ. For Nvidia it’s $100-$110. That’s where all of the support is in the stock.
If the QQQ sustains a 20% correction, then it will get back down there of course. But it will find A LOT of buying resistance all throughout the $100-$110 zone supporting it such that it will be difficult for Nviida to push down through $100. You need a bear market for that.
That NVDL play has been fire so far.
So, there is a gap between yesterday and today for QQQ between ~469.25 to ~476.15. In the case where a pullback occurs at the ~500 area, it makes sense for this gap to be filled in the short-term considering it is so close to the lows (~466.50) of this correction.
Also, when projecting the short-term price target from this probable double bottom, it is quite close to 500.
Short-term target = (Neckline – Lowest value) + Neckline
= (~481.10 – ~466.45) + ~481.10
= ~495.75
I would think that a small rally and positive investor sentiment that a correction is over would push past this closer to 70-RSI bringing it closer to potentially 500, and maybe even 500-508 when also considering outcomes of previous 30-RSI short-term rallies for complex bottoms.
Sam. If there’s a Government shutdown how does that usually affect the markets? Thanks
Look at how we’re doing today. If the market was super worried about it, we wouldn’t be up like this. The QQQ is up nearly 2% right now.
Thanks Sam!
Given the risk of a second leg down, and we might head to a bear market. What’s your take on our Tesla July call spread ?
So as I mentioned above, we probably expect the QQQ to rally to around 505 a share. There’s a gap up there that needs to be closed. That’s also the 50% retracement mark. Also, we did reach a 30 RSI which typically leads to a 10% rebound.
All of these things point toward the NASDAQ 100 rallying to 505 – 515.
Really when you look at the RSI chart, the rebound should go as high as 515.
Now, once we get to those levels, we will probably close out all of our long positions in the trading portfolio and then reposition into a strangle.
After the strangle trade concludes assuming the QQQ goes down instead of up, from there, we will then re-enter positions we like
Included in that might be the Tesla July spread. If the QQQ rebounds to 505 then our QQQ May 525 535 call spread goes to $3.00 a contract or thereabouts being roughly $20 out of the money on the lower strike.
That’s about a 50% return on the recent position we put on in the QQQ.
That should offset some of the short/term losses we take in Tesla and in other positions ahead of the strangle trade.
So we will probably exit all of our non-NASDAQ 100 long trades for a short period of time.
Then, once the strangle concludes, we will re-enter the Tesla and Nvidia trades after that.
When you say long, are you meaning just the options(99% certain that is what you mean) or are you meaning sell the actual stock?
Yeah, I mean directionally long. The trading portfolio involves calls and puts. So when we say that we will exit all of our non-NASDAQ 100 long trades we just mean all of our long call options and call spreads.