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.
Follow signals from the Prophet4Traders system to identify turning points in the U.S. stock market
The purpose of this site is to share results of a trading system that I use for identifying both long-term and short-term trading opportunities. I take the time to do this because of my passion for investing and helping others succeed. The system helped me avoid the "Crash of 2007/2008" and every major correction since then. The cornerstone of my trading system are analyses of market liquidity to gauge longer-term market sentiment and equity and index options (put/call ratios) to identify short-term entry and exits.
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