Could it be??

Berk here with a number of things that should speak very good news to those with a bearish bias.  We might have a tiny little push higher, but as Mole has said… running on fumes…

$INDU counts

The reason I am leaning towards the black count is that it would make a time proportion of about 50% which would be stellar.  Much better than the proposed I-II, i-ii suggested in the alt count, but it is the next best bearish count.  Fumes on the MACD, notice the final push higher never even ticked into the black, and the rally peak was with less momentum than the wave iv peak.

$NDX count is the same, with no funky I-II, i-ii alternate.

$NDX count

This count has us looking to end minute II on a rally above the 1710 area, and likely towards 1730.  The red trendlines coincidentally align with the 50% and 38% retracement levels.  The market knew before that they were important, and I think it will likely give at least one of the a test before we turn lower.  As I have been saying, should we get this push higher (and hopefully a lower $VIX) it will be THE BEST time to buy your long-term OTM puts for quite some time.  The reason is the $VIX.

Get 'em while they're cheap

Notice that once we broke that triangle in September, the $VIX was trading in the mid-70s by October.   We could have just completed an expanding diagonal, broke to the upside, and are restesting the break-out level now.  I am expecting this signal to not play out, however I will be cautious should we break last Thursday’s highs…

I did a little comparison today that I found interesting.  I measured the date and price of Minor wave 1 down inside I3 down.  I found that from a similar entry point that you might find in the next few days, that there was a 14% drop in 40 days.  That move should end us about 92 in the SPY by mid to late December.  SPY options are trading at roughly 27% IV right now.  If the $VIX doubles like it did in that corresponding move to SPY’s m1 I3 drop, then we can expect the SPY IV to move from 27% into the 50% range.

Looking at the Sep ‘10 SPY 93 Puts, trading at roughly $6 right now, if the SPY were to go nowhere by Dec ‘09 Expiry, but the $VIX were to move into the 55 range, those SPY 93 puts you bought at $6 would be worth nearly $15.  That’s with the market going nowhere.  Add in a 12 point drop to get us to target, and the options are trading at $19.  Now what does that tell you?  $8 volatility gain compared to a $4 price gain.  That should help you understand why I am a volatility trader.

Now for more fun…  If you were to buy the Sep ‘10 SPY 60 Puts at around $.90, with no price move, and a similar $VIX move, your $.90 would be worth $4.5.  A 400% gain on volatility alone (and remember, that’s with the $VIX in the mid-50s!!)!

That last paragraph should make you folks plenty of dough in the coming months.

My final thought on the night is that if we can’t take out last Thursday’s high be the end of the week, or early next week we won’t.  The reason I find Thursday’s candle important is that is was the first large snap-back rally that was MORE than FULLY reversed (i.e. new low on the next candle).  This is a very bearish move, and failure to surpass or even test that level have been telling thus far.  I would be ballsy enough to say that if we couldn’t do it on Fed day, we won’t but I still think we might have a little potential for a small push up…  I expect some downside tomorrow, but we will want to watch closely, if the buyers don’t step up, we could be falling directly from here in a way where as what I have labeled “A” is actually the end of “II.”

Skål!

This entry was posted on Wednesday, November 4th, 2009 at 8:26 pm and is filed under Market Outlook. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.