When Bullish Is Bearish

Some of you over eager grizzlies might have become a bit frustrated with all the whipsaw. I do see renewed signs of frustration in the comment stream and although I can surely empathize I must point out that I have been insisting to play this thing on a long term basis. Some of you have been waiting for something along the lines of Primary {3} for almost a year now and the writing is finally on the wall as the trend has clearly changed to the downside. Heck, even Goldman purportedly got burned trying to short the market prematurely – how’s that for sweet irony?

Bears have to learn to be patient – timing is everything, especially when trying to trade the tape to the downside. But if you know where to look you may actually get excited as the short term bearish case has strengthened greatly since Monday morning.

The first thing that stood out when I checked my SPX chart this morning is that this morning’s drop bestowed us with a beautiful motive wave – it’s almost textbook. The Zero readings accompanying yesterday’s and today’s tape are also very flat – which pointed toward a short term bounce. And that again may just be a small second wave as Minor 3 in our Clockwork Orange scenario keeps sub-dividing – which is another expression of a wind up in momentum that would release quite strongly to the downside.

Of course Soylents Green and Blue are not out of the picture by far – after all the time cycle charts I am looking at keep insisting that it’s simply not time just yet (see cartoon above). Frankly – I have more time (theta) than I’ll need to catch the big wave down and I am already mentally prepared to sit out another spike up. However, if it comes now I will be the last person to complain 😉

That fractal on the NYSE A/D ratio is almost eery in its similarity. Based on this pattern we should push up a little bit and then drop hard for the remainder of the week. Not what I’m saying will happen necessarily – but what this fractal claims will happen. To be clear – Soylent Blue would interrupt this fractal but so far it’s quite exciting to watch.

I’m seeing a similar situation on the daily Zero – for your convenience I have used color arrows to point ou the steps in the repeating pattern. And again the pattern points toward a massive slide looming ahead.

Maybe this is all just coincidential and the pattern breaks here – meaning that the fractal does not ecompass the big move down. But again, one can’t help but wonder if this pattern may play out sometime this week.

Bottom Line

I still must caution everyone to be accumulate too much short term negative delta. If you lean bearish make sure you sit on sufficient theta to ride this thing out. Yes, I keep repeating this mantra, however based on the comments I’m seeing it seems that is one many of you guys seem to be catching on to, which is encouraging. Short term we probably push up a bit further – that’s what makes the most sense for all scenarios I am proposing above.

Another reason why I am still cautious (at least short term) is that the pattern right now looks like a textbook pre-3rd wave release chart – and my Spidey sense keeps warning me that it probably won’t be that easy. Always remember that most of the cards are usually stacked against the bears – sudden plunges happen rarely and only when you least expect them. Trade accordingly.

1:40pm EDT: A quick update inspired by a new face named ‘elliott_surfs’ who complains about the stomping his long term puts took since he got them around 1088:

See, the game is all about perception – n’est-ce-pas? Watching your long term puts melt away despite the trend moving in your favor is typical of the type of machinations you should expect ahead of big moves to the downside. Case in point the chart above. Where was the SPX trading around May 21st? Around 1055 – and yes, it snapped back quite quickly. Nevertheless the ‘risk’ put sellers and call writers assumed at that moment drove the VIX to 48. Where is the SPX trading exactly two months later? 1073 – just a few handles higher after having traded in the same 1055 cluster this morning.

But look at the VIX now – it’s around 24 – 50% less! Now, I concede that the drop from the top back in May was violent and all – understandably you would expect risk assumption to be a bit higher. But double of what it is now?

If you wince every time you look at your put premiums then understand that this is exactly the type of reaction market makers want you to have. It’s all part of the big game aptly called ‘shaking out the weak hands’.

The good news is that put options are as cheap as they were two months ago 😉

Trade accordingly.

Cheers,

Mole