Markets are irrational by design. Sometimes we see face-ripper rallies over-extended beyond anybody’s imagination and at other times we see massive sell-offs where the light at the end of the tunnel turns out to be a train! Whatever may be the case, and whichever way the markets get over-extended, they always revert to the mean. That is at least the theory behind mean-reversion. Of course when it comes to trading in real-life, there are so many nuances involved, especially when you are dealing with Options since they come with that pesky expiration date. 

Is this a Bull Trap?

There was so much negative sentiment in the markets for the last 3 months that we kept getting over-extended to a level which was unsustainable. Inflation was already being a Debby Downer on the markets towards the end of 2021 and that is what caused the initial correction in January. But just when markets were making an attempt to recover, the topless man from Russia slammed the world with a totally unprovoked War! This was followed by many online publications and gurus calling for a 70% – 80% correction in the markets.

Now that the market has digested all this news,  the same excessive negative sentiment which caused the markets to fall so much is now giving way to an impulsive recovery. As the “Rat” gets cornered, he can always bite and there could always be ugly Black Swan type surprises but I will ignore that for now.

Having said that, markets usually don’t go up in a straight line and we are nearing a critical resistance level across the indices. Although nobody holds a crystal ball, but we can guesstimate future direction from historical patterns. We are at a juncture, where markets can get rejected at the upcoming resistance levels, do a deep pullback and then head back up. Any pullbacks (on no real material news) should now be considered buying opportunities keeping the overall uptrend in mind. Just be prepared that if a pullback does happen, any expiration which falls on that week may get affected. 

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Spread Tracker tells you the story

An old member of our group shared this with me that they use the spread tracker as a gauge of the market. Think of it like a cheat sheet. A quick glance at the spread tracker should tell you that markets are stable and are chugging along in a certain direction. If you have been gun-shy about resuming trading, the spread tracker should have been an indication 2 weeks ago, to start adding trades.

You must have noticed that I am slowly ramping up trading volume (although still doing 1 contract trades and nowhere near my original trading intensity). I am also making a conscious effort of adding Bear Puts to balance out my expirations in preparation for any sudden pullbacks that we may encounter in the coming weeks.

Market Moving Events next week

Next week is another “nothing burger” week with the usual slew of data which can generate volatility but I am not seeing any planned events of earth shattering nature.

Earnings Season is over!

We just have a trickle of earnings still coming in and BNTX and FIVE are the only 2 stocks of interest which report earnings next week and may generate some trading opportunities.