Let’s Short This Bitch

When I fell out of bed today I looked at the tape and had sort of an epiphany. We now have ourselves a kick ass shorting opportunity via a bonafide Scott’s Retest Variation Sell setup. I’m going to make this a freebie to get the rest of you retail rats a taste of how we roll here at Evil Speculator:

Exhibit A is my volume profile on the spoos which shows us no volume participation at all just a few handles above. The tape simply has not much opportunity to run here.

Exhibit B are my Net-Lines on the spoos – the hourly is just about to run into resistance and the daily is soon going to bump its head into a NLBL at 1329.75 – the recent highs. The closer we get to that on little participation (just watch the tiny signal range on the Zero Lite) the better our benefit/risk ratio.

Let’s also take a peek at the AUD/JPY – similar picture but not as extreme. Frankly this thing could run a bit higher on the daily side. However, that does not mean the spoos or the SPX are going to follow suit. Let’s also note that equities have been leading the currency side here, usually a bad sign (for equities).

I already mentioned that the signal range on the Zero Lite has been tiny – I’m seeing almost no participation/momentum strength here. Also remember Sentimentrader’s hedging volume chart I posted yesterday.

This morning Volar posted his RYDEX EFT ratio chart again and the boat seems tilted mightily to one side here. And I have an inkling the sharks are already circling… oh boy…

HOWEVER, despite all this the prevailing medium term trend has been strong and that only gives us a roughly 50/50 chance for a reversal here. Nevertheless (and I can just speak from prior experience – Volar can you quant this?) IF we get a reversal here the odds of it being relatively strong are rather high – I would ‘guesstimate’ it at near 75%. Which means we are looking at a low odds high reward RTV sell setup right here and right now.

So this is what I’m going to do. VIX is relatively low right now and barely scraping 20. Which means OTM options are looking mighty juicy and (if we drop) would benefit nicely from exploding vega:

Here’s an example – obviously you want to be ITM when you close them out, so pick whatever suits you best. I think there’s a decent chance we could drop into SPX 1250 and even if I’m not ITM by then vega is going to boost those premiums just nicely.

Again, and let me play broken record here: This is a low probability high yield setup. But it’s cheap – you have a stop just a few handles away (as I’m typing this the spoos are hanging around 1223, roughly 1227 on the SPX). VIX is low and thus premiums are very affordable. Set your stop a few ticks above the recent high at 1229.75 (you can do that in ThinkOrSwim on a SPY option – research it) and then forget about the trade. Most likely we’ll get our asses stopped out but if we not then it should be madly profitable. Worth a crap shoot with a handful of OTM SPY (or SPX) puts with a stop very nearby. If stopped out our loss should be minimal, assuming of course you stick with SPY, SPX, or any other high volume options, which means your b/a spread is reasonable.

Here’s one quick reminder for my intrepid subs:

Our USD/JPY setup is exactly where we want it right now. Not a very evolved floor pattern just yet but we do have an inside candle on the daily right now. May change but if we get a pertinent close then you know what to do.