Waaait for iiittt…!!

Are we having fun yet? We are getting closer but let’s not draw any hasty conclusions from today’s tape. Although the 1313.50 high was pushing very close to our prime target, the S&P futures remained short of touching 1320, and I have an inkling that this bullish consolidation still has some life in it. Our chart below now shows the two prime targets as we see them.

S&P cash index pushing towards prime targets.

The 1320 area remains our prime candidate as of now, but we should not discard the possibility of a continued push up to 1345 – 1350, representing the .618 retracement off the June 15 low. On the Dow futures the equivalent targets are 11,975 and 12,250. Also shown on the chart above is a triangle support line that has clearly been forming and was touched on four occasions since the June low. A strong indicator that wave 2 has topped will be in the form of this support line being breached with confidence.

What is clear however, is that this reversal is running out of steam and is weakening internally. 64.7% of NYSE volume was on the upside today but NYSE breadth although positive was anemic at 1.66:1. So far each leg up from the start of wave c (circle) of 2 has been weaker than the previous one, which is a clear sign that this countertrend move is in its final stages.

As many of you know, Berk and I have been staying on the sidelines in the last past two weeks. However, as the evil speculators that we surely are, we could not help ourselves but to pick up some puts on BBT, BIDU, CME, FSLR, FWLT, XLU, as well as some January cubes. Obviously, the idea here is that anything showing weakness throughout this bullish reversal will represent considerable profit potential once the market turns the other way. I can imagine that many of you have become impatient and are perhaps even doubting that this reversal will ever happen. But we all should know by now how consolidation periods can frustrate even the most composed and hardened traders, which is why we urge everyone to keep their cool. There is no harm in the occasional trade along the direction of the market – we ourselves have added some calls to balance things out. But at the same token we would like to caution everyone from going ‘all in’ at this time – in either direction.

Although I am hoping for a ‘bearish conclusion’ of all this nonsense rather sooner than later I constantly remind myself that this is nothing but good news for us grumpy bears. The VIX dropped to 20.12 today and by the time we reach the top of this wave I expect it to be below 20. This will bestow us with comparatively cheap put options and vastly increase our profit margins for the weeks to come. Plus we are getting plenty of added downside potential and who can argue with that?

Remember: Revenge is a dish best served cold 😉