Drip Drip Splash!

Shit just got real on the equities side – quite a bit of downside acceleration today despite various calls for an imminent bounce (you know who you are). See guys – that’s why I stay out of the prediction business. A sudden bout of chronic leptokurtosis can really blow your pretty little charts into pieces. And we haven’t seen nothing yet – if I may say so. This is but a teeny weeny pimple on our ass – just wait for those clowns in Washington to introduce us to the joys of a bonafide bond market default. Yes, the odds for that to play our are minuscule but heck – they may just be dumb enough to pull it off. After all, they’ve gotten away with playing brinksmanship so many times before.

Anyway, you may recall the mantra I have been repeating all week now: We’re painting lower highs and lower lows – until that changes there’s nothing to hang our hats on. If you’re short you stay short and if you’re out you stay out. Now today we are looking at possible support but I’m not so certain that it’s going to be as procedural as some may expect after five years of bullish bliss. Anyway, for the record there’s the 100-day SMA which the S&P 500 cash touched briefly today – on the weekly we’ve got the 25 which hails a few handles lower at 1655. Should those two go – well, then it’s anyone guess.

My P&F is pointing at the 1625 mark and as you know I rarely question those as they’ve treated us very well in the past. However, IMO all bets are off in this environment – a sudden slide could happen and there are practically no bears around to take profit on the way down. Ponder about that for a second and position yourself accordingly. Yes, I know what your thinking – ‘out of the money puts’. Sure, maybe worth a lottery ticket or two but be aware that (as with most OTM options or the lottery for that matter) the odds strongly favor expiration on worth-nothin’ mountain.

The VXV:VIX ratio is dropping into reversal territory – however in the past we usually saw a signal divergence before the SPX responded to the upside. Again, don’t expect things to play out linear – over the past few years the marines usually managed to pull the cart out of the mud at the last moment, but things are so screwed up out there right now that I would not want to make any big bets on the equities side.

I know it’s very tempting to call for a bottom here but whatever you do – don’t go long vega here as we’re scraping the 20 mark. Not that we couldn’t see 25 by tomorrow – but if Congress finally gets the message and equities suddenly shoot higher then you’re going to experience vega crush par excellence. Which will turn both your puts and your calls into Monopoly money. Be smart – shop Evil-mart – okay?

Quick update on yesterday’s NG setup – which nobody probably took as most of you guys were too captivated watching the gyrations on the equities side. Well, we got our long entry and the only hurdle in the way of a nice squeeze higher is that 25-week SMA. This will probably be the spot where this trade either falls apart or takes off like gangbusters. I put my stop below that NLBL and am eagerly awaiting resolution.

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Cheers,