Simple Hedging Strategies for Market under Pressure

On Wednesday of last week, we saw market stumbled with huge volume due to fears about possible presidential impeachment. It created technical damages to the SPX chart as shown below, even after a subsequent 2 day rally.

1. SPX price went back to $2400 ~ $2330 range
2. SPX 50 day moving average seemed to move sideways
3. 4 distribution days accounted in the last few weeks
4. Momentum indicator MACD turned
5. Cyclical indicator Stochastics turned below 80

If SPX falls below 2352 in the next few days and register more distribution days, it would require more hedging actions. The simple strategy to use is to sell and/or roll down short call options and minimize weak positions to reduce portfolio risks. Since I have short calls already sold last Wed., I’ll roll down some of the call options in such an event.

In the meantime, if the accumulative new highs – new lows index of NASDAQ & NYSE also shows a top, I would consider the market outlook as going to correction for a couple of months at least. I would continue to reduce positions, as I had already sold the weakest performer (PVH) in my portfolio.

In general, the accumulative new highs – new lows indicators of stock market on NASDAQ and NYSE exchange are effective indicators to signal intermediate and long term market tops.  They usually do not turn down in short term pullbacks.  Therefore, they can be used as a type of filter to market fluctuation noises in the short or near terms to help intermediate and long term traders to maintain bullish positions. If there is at least one of these indicators (on ether NASDAQ or NYSE) trending up, then the market is likely not to go to a correction phase yet. However, this type of indicators may lag other indicators where rapid sell-off occurs during market tops, particularly in climax selloffs.

There is also a possibility that the market will continue to rise. I’ll be convinced of the resumption of the market up-trend if SPX tries to fall then recover to show a bullish candlestick pattern along with improving indicators in the SPX chart. If market grinds higher, I may roll up my short call option strikes to allow me to gain mild profits.