Longer term monthly chart confirms negative weekly chart

In my last post, I indicated that I observed a descending RSI on the weekly charts that spans the last 18 months.  I looked at a similar monthly chart over the same period and observed the same descending RSI (see below).  I believe that when a longer term chart mirrors or confirms a shorter time frame (weekly), the signals are more significant.  As shown in the monthly chart below, June will close out with a lower RSI after having made a new high during the month.  In my opinion, this is significant.  Although we have a few more days left in the month, it is highly unlikely (improbable) that the RSI will break the descent.  For this reason, I plan to add to my short position tomorrow on any apparent weakness.  I will add to my position in SH so that its total value is 30% of the value of my long position -- this addition represents another 25% over the 5% position that I established last week. 

After I add to my short position, it's likely that I will not do anything further to protect my long portfolio.  After I make the aforementioned trade, my portfolio will be comprised of the following:  40% dividend stocks, 48% cash, 12% short.  As I mentioned in a prior post, I believe that being net short would be too aggressive.  Time to sit back and see what happens.....

More on RSI divergences and expectations for weakness

As planned, I placed a small, rather inconsequential short trade this morning while the S&P hovered at 2953.  My macro indicator closed out the week at -54.

As I mentioned in my last post, I decided to dip my feet into a short trade because of the negative RSI divergences I've observed.  Specifically, since January of 2018, every peak in the S&P (see green vertical lines in the image below) has corresponded to descending peaks in the RSI (see lower panel) -- this Friday's close and RSI reading was most notable.  For this reason, I expect some weakness in the short-term.

With that said, given the "euphoric" price action, there's nothing preventing the market to break the downward RSI trend.  In fact, if the market trades between 3050 and 3100, a meaningful breakout could occur.  Until that time, as the market makes new highs while creating descending peaks in the RSI, I will add to my short position.  Next week, I will be looking for the possibility of further deterioration in the RSI if the S&P exceeds 2964.15 during the week and closes below 2950.46 on Friday.

Remember, positioning for the long-term takes time -- investing isn't a binary activity.

Have a nice weekend!

Is it a divergence? -- A case for a small short trade

The criteria I set last week for a negative RSI divergence will not be met this Friday.  However, in looking back at the charts from the highs reached at the beginning of May to the highs reached today, a weekly negative RSI divergence will be formed.  Because of the aggressive move over the last three weeks, this divergence hasn't had a long time to form and thus, my confidence over its significance isn't high.  In the spirit of my strategy, I plan to place a small short trade using the ETF SH amounting to only 5% of the value of my long positions (as opposed to 10% as originally planned).  Going forward, I still plan to "ratchet" into shorts with the next increment being 25% of the value of my long portfolio (assuming that a clear divergence forms over a more extended period while the market rises).  The following chart depicts the divergence drawn in white.

Targets for the upcoming week

This uneventful week closed with my indicator declining further to -59.  I didn't place any short trades because the criteria for a negative divergence was not met.  For next week, the requirements for such a divergence are: (1) the market must exceed 2910.61 sometime during the week, and (2) close (on Friday) below 2886.98.  Have a nice weekend!

More preparatory thoughts -- My shorting strategy

As I mentioned in my prior post, I plan to establish a short position over time.  Specifically, I plan to hedge my long holding by no more than 60%.  My incremental approach will be as follows...

As the market makes short-term highs and forms negative RSI divergences before falling into a bear market, I will "ratchet" into shorts using a three step ("1-2-3") approach.  My first purchase of shorts (e.g., symbol SH), will be for 10% of the value of the long portfolio.  The second purchase will be for 20%, and the third will be 30% (for a total of 60%).  This approach assumes up to three purchases.  The number of times the market forms weekly divergences will dictate the ultimate number of purchases.  Thus, it's possible that my portfolio will be hedged by only 10% if only one divergence forms.  Given that my equity exposure is now 42% (in dividend stocks), my net exposure going forward using this shorting strategy will be about 38%, 29%, or 17% depending on the number of purchases (divergences).  Since, dividend stocks typically have a beta less than 1, my exposure will theoretically be less than these percentages.

This rising (1-2-3) incremental approach to establishing short positions is consistent with my observation that trade signals from RSI divergences that form over time are more reliable than just a single one.  Therefore, the more negative divergences that are observed would lead to a greater conviction that the market will likely decline. 

Macro continues to head lower -- treading carefully before shorting

Last Friday, my macro indicator fell significantly to -42.  As I mentioned in my last post, I would consider shorting the market to further reduce my equity exposure if (1) my indicator continued to decline, and (2) the S&P formed a negative weekly RSI divergence.  Please note that because of the precarious nature of markets (in general), I don't plan to be "net short" -- in my opinion, that would be too risky.  Furthermore, I don't foresee placing one large short position; rather, I would build a short position incrementally as the RSI divergence forms -- preferably, while the market rises. 

My tentative plan is to reduce my equity exposure by about 50% with "shorts."  At this point, I would consider placing only a relatively small short trade (approximately 25% of my total planned short position).  Going forward, I will post what the S&P needs to do to trigger the all important negative divergence.  For this week, the S&P would need to close below 2873.34 on Friday.   Stay tuned......