Have been thinking about the share market…

Just looking back at historical penetrations of a bull share market below the 200 day moving average and identified where there are large penetrations.

Visually they work out to be between 6% to 13% before it looks like the market is going to turn lower and anything around a 10% penetration below the 200 day moving average seems to be a relatively meaningful indicator that things are going to head lower over the next two years.

Basically I’ve looked at anything that seems like it would be scary to belong in the middle of.

Again in line with previous research the moves of around 6-7% penetration above or below the 200 day moving average are not a good indicator of change in direction (essentially just noise to the larger multi-year trends). If anything they probably indicate that a move below the 200 day moving average of that distance should be bought or sold anticipating that the trend will resume in the original direction.

In this case the sharp break lower, followed by the retracement back up to the 61.8% retracement levels of the down move as well as the 200DMA turning lower and a +10% bearish penetration of the 200 DMA make me think this is an opportunity.

Typically it’s about 3-5 months from the 10% penetration to the interim high before the final decline takes place so I’m willing to take a bit of risk and will continue to buy near dated expiries to replace the below until my view changes.

I’m long a number of equity put options with strikes for early to mid February in the NASDAQ e-mini contract at 6600, 6350, 6100, the e mini s&P 500 at 2590 and Australian dollar currency futures put options with strikes in March at the $0.67 mark and sold the DAX contract at 11187 and went long the VIX volatility contract on the S&P 500 at 17.20. So I suppose you could say that I’m bearish on equity market to the moment…

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