MACD Warning

In understanding the selloff patterns, I noticed that the MACD on the daily chart will show a red bar even though the index has rallied from a low. This does not represent a reversal, but it does serve as a warning indicator to entering a short position that could possible turn the opposite direction for a few days, before the actually selloff begins.

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An easy way to get burned is by entering a put position and then watching the price to rise above where you bought it after a few days, then selling the put at a loss, only to have the price end up moving below where you bought it a few days after you have sold it.

When this happens, patience is the key because the sell off is coming just not as soon as expected. This will create losses by way of time decay (theta), but can turn into profit.

Best Practice: find the lowest price point, then enter a call position and sell with profit after one or two days and then promptly enter a put position. This will limit losses and time spent in positions that do not have optimal profit potential (OPP).