Postcards: Six Rules for The Continued Selloff

The Russell 2000 just broke under a key support level, and selling pressure has taken eight sectors into the red. What now?                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: Six Rules for The Continued Selloff]( The Russell 2000 just broke under a key support level, and selling pressure has taken eight sectors into the red. What now? [Garrett {NAME}]( Jan 16   [READ IN APP](   Dear Fellow Expatriate, It’s been two weeks since the Federal Reserve released minutes from its December meeting, and selling pressure has built steadily across the markets. But now, we’re heading into a much more dangerous environment. Time to turn off the screens? Maybe hit the beach? We’ll know more by Wednesday night. But for now, the trend of the late December 28 top seems correct. And we’re in a bit of a market too similar to the start of 2022, as I’ve warned for weeks. What’s driving this move? We’ll likely find out in the next 10 days. But for now, we know it’s already happened, and retail investors may soon start selling in a panic. As we remain heavily focused on cash (as we’ve been recommending since late December and hedging with covered calls and inverse funds), we must now plan for what comes next. Let’s look at our six rules for Negative Equity Signals. [Upgrade to paid]( Rule 1: Cash Is My Friend You want to have a solid cash balance when momentum turns negative. In my trading account… We like to move to heavy cash. Since I’m an active trader and investor, I focus on key technical levels that allow me to focus on new entry points. The longer this market is red, the better. Take a break. The move to negative momentum is very important as I protect as much capital on the balance sheet as possible. This is how I can buy for a dollar and sell for two dollars multiple times yearly. Rule 2: Don’t Sell Puts, Unless… See Rule 6 If I find myself selling put spreads as an entry point, now is not the time for me to open new positions… If I sold previous cash-secured puts or put spreads, I entered this with the mindset that I was willing to buy the stock at a lower price. If I’m up in my current position, now would be an excellent time to take profits. If I’m down, now might be the time to assess whether I want to sell spreads at an even lower price. When momentum goes negative, selling can be indiscriminate. That means nothing is safe. The last thing I would want to do is have exposure to a $50 put when the downside for a stock is much lower. [Share]( Rule 3: Learn Implied Volatility Rank One of the great rules I learned from my time with tastytrade was knowing the difference between cheap and expensive options. I use a tool on tastyworks called Implied Volatility Rank (IVR). This measures the implied volatility of a stock TODAY compared to its IV during the previous 52 weeks of the year. If a stock has an IVR of 25, its implied volatility is lower than 75% of the trading days over the last year. If it’s at 80, it’s higher than 80% of the days in the previous year. The general rule is that if IVR is under 25, it’s cheap to buy calls or puts. If it’s over 30, I might want to sell calls and puts. And if it’s elevated, that’s the time for me to do exotic trades like Iron Condors. This can also tell me which stock to trade and how to trade it compared to other ideas. Rule 4: Sell Credit Spreads in Negative Momentum If a stock is expensive to short with a long put, there are other “options.” I can sell vertical call spreads on stocks with a high IVR and benefit if the stock trades sideways or declines in value. I’d be selling someone the right to purchase a stock from me at a higher price. If the stock price falls, the underlying call will also fall, reducing the call spread's value. I use a higher call on the trade to protect myself against any surprise upside on a stock — think a buyout or sudden momentum reversal. Rule 5: Look for Oversold Levels on the SPY and IWM Finally, the market tends to sell off fast and furious in negative momentum environments. From June 8, 2022, the S&P 500 ETF went from overbought to oversold in about seven trading days. The market was oversold after the SPY’s move on the Relative Strength Index (RSI) to under 30. Oddly enough, no one had the guts to buy stocks. The same thing happened in October 2022. We had oversold levels on RSI and MFI daily levels in early October of that year. It happened again in December… and March too… Then, one more time in October 2023. Right now, our focus is on the Russell 2000 ETF (IWM). The next key technical support will be the 50-day moving average, followed by the 200-day. Want to know who purchased shares in oversold conditions and made a fortune? Robots. Algorithms — which have no emotion or fear — scooped up stocks in deeply oversold conditions and kept buying for a month. Rule 6: Wait… Sell Puts in Very Specific Conditions The oversold territory is also a very good place to sell puts on stocks I want to own when we’ve reached a period of “peak fear.” If the RSI on a stock is at 25, and it’s a great blue-chip company, I use the high volatility and the fear to sell puts on a stock maybe 15% to 20% lower than its current level. As you know, Occidental Petroleum (OXY) [sits atop my list for this strategy](. If the stock does fall to that point, I’ll have an absolute bargain. But if the stock does rebound from overbought, I can repurchase the option for less and pocket the difference. This will be an interesting few days as selling pressure increases and likely builds further on the Russell 2000. Watch key support levels like the 50-day moving average, and beware of bull traps fueled by light volume and short squeezes. Stay positive, Garrett {NAME} Florida Republic Capital ([Available on Substack]( Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()