Market Madness

Financial markets are known to push people just past the breaking point before reversing strongly back to the larger trend.  This is perfectly normal for wave 2 behavior, which I believe is over at this point.  While our line in the sand laid forth on Wednesday was pierced to the upside, the utter lack of strength in our once leading indexes, the $NDX and $COMPQ, certainly beared watching.  As I write, the $NDX is down a little over 2%, while the larger $COMPQ is down just under 2%.  Yes, I know that DELL had bad earnings, that accounts for one stock.  Something else had to give to get the reversal in breadth, and price, that we have this morning.  For those of you who use pivots also, you might note that /NQ (Nasdaq futures) opened below the S1 pivot this morning, rallied up, and turned down from a little beneath it, a strong bearish sign.

This image represents a complete reversal in breadth from the past 2 days.  The chart below indicates that the price is confirming this reversal by breaking through the lows of 8/26, a previous 1st wave low.  As Elliott allows it at this point, the probablities of a corrective pattern taking us to a lower low is almost solely contained to an expanded flat.  As it stands now, that is still a possibility, as the market has only had 3 waves down thus far.  If this is the case we should be looking for around yesterday’s high for a target, as illustrated by the other chart below.

And the best working alternate…

On Tuesday I mentioned that everyone was watching FRE and FNM.  I told Mole yesterday that their momentum and/or rate of change was falling off a cliff, and that that was a strong bearish indication. Today, they have both finally decided to turn down.  While this is just one day, it ends the four day uptrend in which these stocks have almost doubled.  We need moves like that in a bear market, otherwise we would have nothing left to short.  While I wasn’t happy to see it, I am happy to see it coming to an end.  Here is a quick chart of FRE, 20day 10minute.  I used the most recent move down and up as a reference.  There are other highs that I could base this off of, but the implications remain the same no matter which high you use.  Notice the break of the trendline, the A=C equality, the retracement to the 23.6% fib, and the beauftiful gap rejection.

This is another chart I posted on Tuesday night.  While the major two that we have been watching (FRE and FNM) are breaking down, we need some confirmation by the rest of the sector.  As soon as the $BKX breaks that lower support level, we would have great confirmation in that the financials are moving lower collectively.

Lastly, I will toss out an interesting trade that I took yesterday.  This is not a recomendation to follow me into danger, but I think there are some interesting elements that combined to make this a high probability trade IMO.  I grabbed a small put position on MBI.  Let me throw up a chart, and I will walk you through my reasoning.

After rallying nearly 500% since it’s June lows, MBI gapped up and ran an astounding 30%+ yesterday.  It made a higher high on a slight divergence in the RSI.  It pushed outside the 20Day 2.0 Bollinger bands, as well as outside the 2.5 Bollinger band on a 100Day setting (not shown).  A move back inside either of these would be a fantastic reversal signal, as we are outside of the range of 95% of the past 20 days, and 97% of the action in the past 100 days.  That is a pretty good indicator that this rubber band is stretched to the breaking point.  I think this stock can easily head back to the $5 range in a short matter of months, as soon as it closes inside these levels.  As I said, I only picked up a small position yesterday, but here is why I did it…

Notice the IV in the back months.  100% for OCT and 133% for NOV.  These may seem very high, but looking at the average implied volatility, we would see that these levels are relatively low.  I also notice that by the end of the day, the volume on the OCT 14 Puts had pushed about 15K contracts changing hands on ZERO open interest.  This is a tell tale sign, while not always correct, it is a great indication of an explosive move. I ran through some quick calculations, and found that certain options could potentially double on volatility alone.  Then when you throw in a 60% loss or so in stock price, these things have fantastic potential.  Here is how they are trading today, with MBI down between 5% and 8%.  Notice the IV’s today…

With a vega of .02, a 50% gain in IV should translate to a $1 increase in option price.  That alone is a 30% to 50% move in option price depending on your strike.  I got a chance to get these options at a low IV yesterday, and it is much higher today.  Ideally, you would look to enter positions with a low IV, especially if in the past the IV has exploded above 200.  Typically, I do not trade options with IV over 100% because I trade OTM options, and that IV greatly affects the time value in my options.  I decided to go ahead and take this because I liked the set-up so well, and liked the “multiple streams of income.” (delta and vega)

That said, the market is treating the bearish case very well today.  In fact, given the action of $NDX and $COMPQ, the indexes I follow closest, I am forced to return the near term trend to down.  Almost everyone that I have heard expects the “big boys” to come back and squeeze the shorts out of the market.    Since that is what everyone expects, I am not surprised to see the market selling off hard today.  It should be an interesting day on Tuesday.

Hopefully this can spark some interesting discussion.  I would love to hear thoughts or questions.


Where did he go?

I will apologize for my absence tonight, I had a few things come up.  This will be quick, but I will follow up with some more commentary during the day tomorrow.

As the market stands right now, we have breached Fridays highs on some of the indexes ($SPX, $INDU, $RUT), leading us to seriously question our wave 3 count.  Here’s what I mean.



While losing status quickly, the true EWT rules allow for a retracement of up to 100% of the first move down.  Any sharp turn down could quickly accelerate lower.

The probabilities of the near term bearish case are waning rapidly.  Any break of the uptrend lines of this rally (not shown) with conviction should be monitored closely.  Likewise, any push above critical levels should be viewed bullishly into the 12200-12400 range at this time.  That said, near term trend indicator is set to mixed (with positive overtones), while longer term remains firmly down at this time.

I will be back tomorrow with some longer term ideas that you might find interesting.


Two Lines in the Sand

I’m going to make things extremely short and sweet tonight as our comments counter indicates that the majority of our audience is either enjoying a week in the Hamptons or has simply walked away in disgust until after Labor Day.

I’m not going to sugarcoat it – today was not a fun day for the bears. I expected a little rally today, but low volume or not, the breadth was very strong and the bulls were in complete control. Even though we had a bit of a pullback late in the day, we closed not too far from today’s highs. So, the one question in your mind is probably where do we go from here. The answer is in the only chart I’m going to post tonight, which pretty much tells the story:

SPX in limbo land.

SPX in limbo land.

Tomorrow should be extremely interesting, as we are at a fork in the road on a short term basis. You know as Yogi Bera once said: ‘If you come to a fork in the road – take it!’ :-)  In all seriousness: If we wind up breaching the Friday highs we will need to completely revise our wave count, and in that case our upwards target on the SPX would be the area around 1350. Now, that is the scary scenario for us bears, but the highest probability remains a drop towards challenging the July 15 lows and that very soon. In order to put the bullish scenario to the sidelines we would need to breach the 23.6% line which marks the 1257 zone. Once we get there things should speed up quite nicely.

The one thorn in my eye is something that became more apparent when I was drawing the ‘fancy’ chart above. As you can see we have been spent a LOT of time inside 23.6% – 38.2% zone. It’s about time that we push outside of this ‘limbo area’ with some confidence otherwise this implicitly would defeat the wave 3 of 3 scenario. For the EWT challenged, let me explain: According to EWT this third wave down is supposed to be extremely violent and put the fear of God into those pesky permabulls. However, if we forget the wave count for a moment things are still looking pretty sideways as of now. Berk and I have been arguing about that point today and I concede that the wave count can be interpreted that we are moving down fast enough. But I personally need to see a bit more conviction – pre Labor Day week or not. At some point we are running out of excuses and need to see a monster drop that whipsaws the bulls for a change. That’s my personal opinion and I have tried to visualize my prospective in the chart above.

As a final point: The treasury yields ($TNX) actually finished down today after rallying up in the morning. We had the same situation happening yesterday, when I was looking at the treasuries after the market closed and liked what I saw as a bear (e.g. dropping yields = bad for market). However, in early morning trading they pushed up strongly and that in combination with futures in the plus (@ESU8, @YMU8, @NQU8) gave me a strong indication that the market was going to rally today.

So, my plan is to go to bed early tonight and get up 1/2 hour before the market opens (hey, I live in CA – I need my beauty sleep) to make sure that those yields don’t paint a rally again while I’m not looking. If you are short the market right now (and Berk and I are) and you see a situation forming where the futures and yields are pushing up ahead of the opening bell, then you might want to get ready to grab a hedge position to soften the blow (e.g. IWM, SPY, QQQQ calls). This will give you some profits to enjoy while you start closing out the short positions you don’t want to hang on to. In the case of Berk and I that’s a lot of negative delta to close out, so we plan to sacrifice a few chicken tonight to sway the market Gods to our favor. Be aware that we might see a fake-out as well – the market might push up, we back up the truck on some index calls, and then we bounce off the 38.2% line and trace back down to new lows. Hey, who said options trading is easy? Unfortunately there is not perfect answer right now and if we see a meek pre-market action to the up side tomorrow you might want to hold off with loading up on those calls until we do breach that line with confidence. After all, we are not that far away.

But enough with the doom & gloom – chances are we drop like a rock tomorrow and party like that until the weekend. But now you’re armed with a baseline of what to do when, so adjust your trading according to your personal risk/capital/exposure levels.


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