The markets have an awesome way of repeating patterns… patterns that have existed for over 100 years.
We’re now finding ourselves in the middle of one of those patterns again, Gang. This is a pattern that we saw not even a month or so ago in the Russell.
The Russell’s entered an overbought zone.
When this happens there are several things you could look to do…
STEP ONE: Time-Tested Truths and Tools
I always like to come back to time-tested truths and tools — like how we’re finding ourselves in a Charles Down market phase. This is 140 years of the market testing and deciding that over a century later, Dow is still relevant to the market.
Another useful tool?
Darvis levels (which are around 60 years old now).
These help automate support and resistance on the charts. (You can grab my indicator which is called the Darvas Box in the sidebar for free.)
Now the broader picture…
I acknowledge that we have an underlying choppy market. You can see this all the way back in May, Gang. Back in May, you can see the market continuously hitting different zones of resistance, getting knocked down, and doing it all over again.
But when will we ever know that the level is going to hold, instead of dropping back down?
That’s an unknown.
STEP TWO: Shorting the Russell
However, if we’ve been in this position before, we can look back to what worked then and further evaluate the situation. Like shorting the Russell, or shorting the Russell mini (or micro).
What I personally like to do?
A combination of IWM long puts as well as, shorting the underlying futures.
“But Ragh when will I know this catalyst is coming?”
STEP THREE: Don’t Get Long Just Yet
I look for several things…
1: A +1 standard deviation on the V Score
2. No sign of taking out the +2 standard deviation
Based on my analysis, I think this move won’t be valid anymore when we take out the +2 standard deviation resistance that we stopped at in July and in September (when we had a similar market setting up). Both those times the market took out the +2 standard deviation.
Then if that happens, at that point, there will finally be some size behind this move, Gang.
But right now?
I don’t consider there to be a lot of size behind this move. So I’ll continue to stay bearish until I see more significance from volume.
The Russell did, however, get back up to this overbought zone. That’s why I wanted to alert you because you can determine based on what happens to either try your luck playing short (like before), or see to wait for some more upward movement to play long.