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POSITION: Short Financials (XLF)

I thought the SP500 could easily have tested 1108 on the downside before it tests 1208 on the upside. Evidently I thought wrong.

Across all 3 durations in my risk management model (TRADE, TREND, and TAIL), the SP500 remains bearish: 

  1. Long-term TAIL resistance = 1263
  2. Intermediate-term TREND resistance = 1289
  3. Immediate-term TRADE resistance = 1212 

Given generationally high levels of volatility and abnormally low levels of volume (on rallies), I’m going to use an immediate-term TRADE range to sell into of 1. I haven’t shorted the SPY in a while. Expect that to change if these 3 lines hold in the next 3 days (month end).

We call this a Bearish Formation (bearish across all 3 durations). I don’t play hero when I see a Bearish Formation and buy everything on “valuation.” That’s primarily because my role as a risk manager is to not blow up in the immediate-to-intermediate-term. If you run money with a duration that’s beyond my long-term TAIL and no one is going to call your capital for 3 years of more, we may have different decision trees.

In the immediate-term, Bearish Formations heighten the probability of crashes, big time. We almost had one in August (the drawdown was 18% from April). That doesn’t exempt this market from having one in September or October. The math still supports managing that risk.

Immediate-term TRADE support lines are now 1161 and 1110.

KM

Keith R. McCullough
Chief Executive Officer

Bearish Formation: SP500 Levels, Refreshed - SPX