Bird Is The Word

Okay, I’m not going to sugar coat it for you rats – this week is going to be painful. Let’s just list the range of horrors we are about to face:

• Yes, it’s that time of the month again. No, I’m not referring to your wife’s menstrual cycle and those dreaded evenings when you dodge incoming missiles containing high explosive war heads packed with high concentrate verbal discontent of your very existence. This is much worse – I’m talking about the monthly ritual of option expiration week (a.k.a. OPEX week), when Hulk-like genetically modified market makers wield x-large nuclear powered cattle prods with the sole intent of chasing hapless rodent traders like you from one end of the tape to the other whilst inflicting as much max pain as possible.
• Then Tuesday and Wednesday the world will eagerly await the words of the Delphic Oracle (a.k.a. the FOMC), culminating at 2:15pm EST when Apollo announce his prophecies through his chosen oracle (i.e. Ben Bernanke). This will be followed by the sacrificial slaughter of your option portfolio.
• But it gets worse – Friday is not only the last day of OPEX, it’s also a quadruple witching (a.k.a. quadruple options expiry). It just so happens that every third Friday of March, June, September and December all of our four food groups – index futures, options on index futures, single stock futures, and stock options all expire together. The horror – the horror….

In other words expect an unhealthy dose of volatility, whipsaws, fake-outs, market maker shenanigans (bid/ask games), and mad mental masturbation in the financial news. I wish there was a way to visualize the level of pain and suffering you are about face – just to prepare you mentally for the inevitable. Wait…. actually… you know what…. there might be a way…. here you go:

Now, don’t fight it – just embrace the pain, which is the only way you might just make it through this alive and with your sanity intact.

Alright, enough of the idle chatter – let’s talk some charts. The bulls pretty much have worn out their welcome and I expect at least some minor pullback starting Monday. Note that the maximum number of consecutive up days we have seen since October 11, 2007 is five. Friday was our fourth day up and we are heavily overbought at this point. Thus, although it is not statistically impossible for us to push a tad higher, the odds suggest that we’re going down either tomorrow or Tuesday, even if it’s just for a day or two. Which brings me to our three horsemen of doom:

Blue: We are done consolidating and almost immediately drop into Minor 5 of Intermediate (5). Target is the 620 – 635 region. Simple and sweet. Note some longer term diagonal support lines better shown on the zoomed out chart below which magically line up with our target zones.

Orange: We just completed {a} of Minor 4 of Intermediate (5) and are now dropping into {b}, leading us into the 720 – 730 region, which constitutes a 23.6% fib retracement of Minute {a} of Minor 4 of (5). We might go as far as 723, which is the 38.2% fib line. This is followed by {c} of 4 of (5), pushing us into 780 – 790. We must not breach that zone and foremost of all we must not even get anywhere near 804.35, which is the bottom of 1 of (5). If we do breach that one we are most likely in the green scenario:

Green: We completed Minor 5 of Intermediate (5) and thus Primary {1} on March 6th. We also completed, or are close to completing Minor 1 of Intermediate (A) of Primary {2}. We will most likely descend into 720 as well but only to complete 2 of (A), which will be followed by a monster rally into 3 of (A). Can you say ‘bear squeeze’?

In terms of probabilities I would give Blue 40%, Orange 40%, and Green 20% as of now. Unfortunately there is still not one scenario that I would give a clear preference (50% or higher) at this moment. We will have to see some more tape before we can arrive at a better estimate.

How to play this mess is another question – here’s a possible strategy I call the ‘triple stretch’:

I think the chart is pretty clear – make a pass down field and then basically cover right at the inflection point where Blue separates from Orange and Green. Priority is to keep possession and and not to fumble (i.e. lose your profits) while preparing for our chance for a touchdown either at 650 or 785.

Once the separation point arrives we’ll have to turn to our momentum indicators to see where we go next – Orange or Blue – and if we push up Orange or Green. The Zero has been very helpful in correlating wave scenarios with momentum – stingy unworthy non-subscribers might resort to their favorite stochastics or MACDs – I would suggest you drop them into a 2-hr chart.

On a more medium to long term perspective one hint may be one of my longer term indicators – the spread between the 30-year T-Bond yield and the Moody’s Corporate Bond BAA yield. On March 8th I said:

Finally, the spread between the 30-year T-Bond yield ($TYX) and the Moody’s BAA Corporate Bond yield was roughly around -4.5 on February 15 and has actually increased to -4.85. This also supports my current wave count as it has been a fairly reliable long term indicator throughout 2008. Once we see this spread decreasing it will be an early warning sign that we are nearing the end of the current Primary wave cycle.

As of March 11th – which is how far back I am able to go with those two charts above – this yield has held steady at -4.8%. To me this indicates further downside as a narrowing spread in the past has preceded a longer term rally lasting more than just a few days. This is one of the reasons why my money is still on either Orange or Blue. Of couse I will keep monitoring this spread on Monday and Tuesday and if I see a narrowing trend develop I will you rats now.

Let’s look at a few more momentum/trend indicators:

Put/Call ratio distinctly points to an overbought condition – that’s quite an extreme reading.

Advancing issue on the NYSE reached some extreme levels – also indicating that we are heading lower soon, even if it’s just for a day or two.

Mr. NYMO is back in overbought territory, confirming CPC and NYUD.

If the NYSE Bullish Percent Index was closer to 40 I would be more confident to anticipate either the Blue or Orange scenario. But those readings are inconclusive and we could easily just drop a day or two and then embark into Green.

Expect the contagion of market volatility to have an impact on precious metals as well. I’m currently holding GLD puts and might have to endure some upside pushing into the 940 zone. However, we are converging towards this diagonal support line around the psychologically sensitive 900 mark which finally must be breached once and for all. This would be a final confirmation that the upside trend which started on October 27, 2008 has finally ended.

Finally, the Yen has been whipping around spasmodically in the past few days, burning theta on my FXY calls. I’ll give this thing some more time as I still believe in some upside here. However, if we drop below the 100 mark I’d probably run for the hills.

I’ll be traveling very light this week due to the ‘unique’ environment I elaborated on in my intro. Also, we are either at the tail end of Primary wave {1} or the onset of {2} – it makes sense to limit your exposure and limit your trades to capital you are comfortable losing. Whatever trades you take – you’ll need very generous stop loss provisions – I suggest a minimum of 2 x daily ATR.

That’s all I got for you rats – time to hit the gym and tend to my luxury body – Candy offers 10% discounts to evil megalomaniacs with washboard abs.

SUNDAY NIGHT UPDATE: Okay, this really riles me:

See the MarketWatch headline above – which is a clear sign that the ‘end is not in sight’ – not by a long shot. Yes, we’re about to embark on a multi-month consolidation rally – but as I’ve made very clear in the past few weeks: Do not let that lull you into thinking that this bear market is over – as a matter of fact it’s just getting warmed up.

Sometimes I want to go out there and bitch slap certain irresponsible people – I even obtained the appropriate tool for the occasion:

Take a number and get in line, bitches!