Zero Confidence

Today’s tape was horrid, as expected, but based on the input I was getting throughout the day our new zero indicator seemed to be pulling its weight just nicely. Apparently many leeches are clamoring for some kind of time stamp when the indicator started signaling and I will do my best to make that happen. Please understand that I am limited by the TOS coding environment, which I hate to say is a bit limited.

Alright, on to tonight’s market wrap up:

Although we had a bit of a whippy start the day ended strongly bullish, pretty much the opposite of what we recorded yesterday at the closing bell. The S&P clearly ended in the hands of the bulls as breadth closed at a ratio of 10:1 positive.

Now, on the surface not much really has changed since my weekend update. As a reminder I’m showing once more an approximation of the tormented wave pattern I am expecting for intermediate wave (4) – again for more details check the Sunday post. So far we dropped pretty much exactly to where I think we would end up, and then rallied into what could either be a b-wave of an unfolding zigzag, which in turn would be the larger degree a-wave of a flat ending around 811 on the chart. Or it could be the beginning of the zigzap up ending at 950, which in turn would be the b-wave of said flat.

Let’s take a closer look at this. I used the words ‘on the surface’ because yesterday’s drop was extremely violent and Berk reported one of the most negative breadth ratios in his own records. This did not feel just like a corrective b-wave to me, and thus put the wave (3) scenario back into play. Now, had we kept going down today I would give this probability even more credence but today’s tape leaves us with some uncertainty. Of course there is a line in the sand which is around 774 on the SPX. If we drop below that then, according to the rules in Elliott Wave Theory, something else is going on. Which would most likely be a large ending diagonal and that would paint a target at somewhere below 740, the latest bottom (more clarification if we actually start moving in that direction). Anyway, I’ve highlighted the areas which separate the two scenarios for your leeching convenience.

The next few days will bestow us with additional clarification – in the meantime we’re a bit in limbo land, quite frankly. I mean, we got that huge gap down yesterday, many of us barely grabbed a handful of puts and it was over before we knew it. Now we’re bouncing back up and nobody really knows what tomorrow will bring. If we drop, will we punch through 810 and hit 768? That would be a nice move and I’d be sure to ride that sucker down as there is nothing much in between holding things up. If we rally from here it’ll get a bit more complicated – there are tons of short and long RLs (call it the retracement zone from hell) and it might get a bit bouncy. Berk posted a few long candidates yesterday and maybe playing some spreads on those might work as Mr. Vix is yodeling back up in the 63 zone. 860 or 887 would be spots where I would start dipping into puts though – and I might just wait for one of those targets.

In general I’m a bit burned out by the options market by now. Volatility is back in vogue and the market makers are not giving us much of a break. I tried to play some ITM diamonds uphill and got screwed when the Dow dropped back by only a few ticks. At the same time I was paper trading a futures contract and that sucker had racked up $400. So, I’m really starting to wonder why I’m bothering with options right now. UNLESS we are at a defensible entry and are expecting a multi-day or multi-week drop/rally – as outlined in my Sunday post. Those are the times I love to dip into options as risk is more clearly defined and I also know where to draw my line in the sand. And I am determined to start taking more long term positions going forward.

Where we are right now makes things tough for option traders. I’m not worried about theta – heck when’s the last time I held an option for more than 3 days? Slippage is what I’m worried about as well as widening bid/ask spreads as things move against you. Pretty toxic environment if you ask me, on top of everything else. With futures you’ve got none of those problems – except for margin requirements of course. But if you trade one e-mini contract at a time and don’t hold overnight you should be okay.

I have mostly been paper trading the ES futures in the past few days based on entry/exit signals on the zero. Got a green line and bought one mini contract – then forgot about it. Next time I look the damn thing is up a grant! 🙂 Got a red signal, so I sold two to be short one. Bought that one back when we swung back into green. I’m going to keep paper trading like that for a little while but if I keep making profits this way consistently I’m going throw more real cash at it (so far I’m only snacking).

Before I go – I’m not touching Gold with a ten foot pole right now. It’s still in that limbo zone it’s been bouncing around in for over a month now – and the tape before that was pretty conflicted as well. Once we move outside that I’d be happy to jump in either way. Still expecting a drop to 650 here but I’m not going to burn theta on this sucker and get whipsawed around. Correlation is with the market right now it seems. Here are Trader’s Dan’s musing on the topic:

Okay – let’s try to deeply divine this incredibly sophisticated and complex trading program that is being employed by the marvelously inept modern hedge and index funds – ready?  Stock market UP – BUY COMMODITIES… Stock market DOWN- SELL COMMODITIES… I know it is hard to wrap your mind around such a complex algorithm, but I think that if we concentrate really hard and apply ourselves we will be able to grasp the vagaries of this amazingly sophisticated strategy. I sure am glad the best and brightest traders on the planet are handling this strategy as I for one would no doubt be lost in its complexities.

That guy cracks me up – I could be wrong but this sounds like cynic 😉 I sometimes feel for those poor gold bugs as they keep going through their own little hell on a constant basis. But I long ago decided to just follow the tape and try not to make sense of it. And the Elliott Wave count so far has won the day consistently in the past six months or so.

Finally – without posting any more charts – the credit market remains broken. The Moody’s BAA vs. TYX yield spread painted a record high again yesterday – TED spread keeps hovering above 2, and the BDI is flat lining. Bernanke is now buying massive amounts of long bonds, which explains why the TNX is completely unreliable as a market indicator lately. Just ignore it for now – and never underestimate Helicopter Ben 😉

Cheers!