The Thin Ice | Tackle Trading
≈ Right under your feet. ≈
The S&P 500 E-mini futures contract hit the all-time high 2947 mark on September 21st, 2018. Its doppelgänger, the S&P 500 Index (SPX), hit its high — 2940.91 — on that same date.
History is already recorded in the candles. From 2947 to the lowest 2316.75 two months later a –21.38% drop. All levels of support were consistently broken for two consecutive months until one held the trend. You could’ve shouted “Oversold!” but candles are deaf.
The problem with many traders and investors is that they become increasingly optimistic as the market rises. A little bit of hesitancy here and there when a level of resistance is near but, in general, they are as deaf as the candles they are forming. In their minds, a constant reaffirmation of their own beliefs in a bright future ahead. As a consequence, positions and leverage are increased. Geniuses multiply like Gremlins with water.
However, a bull market is like a frozen lake. The more people walk on it, the thinner the ice becomes.
Wise traders become more cautious instead of more brave, deleveraging and decreasing their positions instead of the opposite. A portion of the profits gets redirected to portfolio insurance as they become increasingly pessimistic while everyone else is popping champagne.
When the ice cracks under everyone else’ feet, the wise trader is ready to experience the huge money transfer machine the markets are.
“Don’t be surprised when a crack in the ice
Appears under your feet
You slip out of your depth and out of your mind
With your fear flowing out behind you
As you claw the thin ice.”
Chart of the Day: Ice formation
This is a 1-year S&P 500 E-mini futures chart showing the ice formation and cracking under everyone’ feet. Don’t be surprised when a crack in the ice appears once again.
Video of the day: What is Hedging
A hedge is a strategy to reduce the risk of adverse price movements in an asset. It can be used to minimize or offset the chance that your assets will lose value. It also limits your loss to a known amount if the asset indeed does lose value.
Originally published at tackletrading.com on March 26, 2019.
