Rock & Roll!

What a week! I hope some of you evildoers were able to bank some coin – let me just say that Mrs. Evil was very pleased and even forgot to administer the weekly rolling pin treatment I receive when reporting my profit stats. Admittedly Thursday and Friday were less fun, but believe me when I tell you that those consolidations were necessary and GOOD for the bearish case. Alright, I’ve been working most of my Saturday pouring over my charts as I couldn’t be more excited. Let’s dig right in:

SPX tracing out a series of 2s.

It’s entirely possible that I’ll have to print and frame this chart a week or two from now, as it may be the moment we have all been waiting for. Judging by the wave count it seems that the SPX has been tracing out a continuing progression of smaller degree 1,2 waves. Now what is supposed to follow such a series? You guessed it – a jumbo 3 wave. Let’s also take a look at where we are from a TA prospective. Berk and I actually expected there to be a push towards 1260 on Friday (remember the previous low of (i) of 3). However, we twice bounced off of 1255, once in overnight trading and once towards the end of the NYSE trading day. We can only guess that some institutionals were stepping in here with some selling action. In any case 1260 does represent strong resistance which is also double enforced by the diagonal resistance line I am showing on the chart above. This should provide extra ‘protection’ around 1262 on Monday. If that one doesn’t hold I’m eying 1275, the extreme of (ii) of 3 as the next support line.

It’s sometimes tough to spot some of those vertical resistance lines but there is actually an easy way of finding them – something esoteric called the point & figure chart:

P&F clearly shows support/resistance zones.

Don’t worry if you don’t know how to read P&F charts – they are not chronological in nature and instead consist of columns of X’s and O’s that represent filtered price movements over time. If you want to know more about P&F charts point your browser here for a great tutorial. The point I’m trying to make is that 1260-1265 clearly represents an inflection point that I would prefer not to cross.

If we do bounce off the 1260 area, and at this moment this is my most probable scenario, it should be a beauty to behold. This drop would be massive and would render Tuesday’s tape puny in comparison.

Serg's Correlation Chart.

Here is a chart Serg, one of our favorite visitors, showed me today and which he graciously permitted me to share with the rest of you. He’s a fractal fanatic and seems to have a knack for finding correlations not only within charts but across markets. Shown here is a comparison between the FXI (China Xinhua index) and the SPX. Can you see what’s going on? It seems that the FXI is about 2.5 weeks ahead of the SPX and thus far the correlation appears to hold just nicely. Looking at what happened next over in the FXI after a large marubozu candle lends additional weight to our case. That’s of course assuming we are indeed following the same path of destruction, in which case the FXI represents a nice road map.

Gold either dropping back to 720 or done with wave 5.

Gold decided to throw me a little curve ball on Friday. I expected it to continue its drop to 720 (and maybe below) but it might have concluded wave 3 and could be on its way to consolidate back up to the 875 region. However, my money (literally) is still on a continuation of the current wave pattern down to 720. If you are still holding GLD or GDX puts I would watch ZGZ8 like a hawk Sunday night and early Monday morning. If we see buyers push gold even higher I’d probably play it safe and close out my puts. Currently the spot price on kitko is 763.70 (Prophet chart shows incorrect data), so it dropped a little bit after nearing 770 Friday afternoon.

Silver ready to rall-aey!!

Long John Silver – all I have to say here. I really have doubts we see more downside in Silver here for the moment. Even IF we’ve got some nice psychological resistance around the $10 mark (it did touch 10.25 on Friday but bounced back). This could be a wonderful play all the way up to about $15. Don’t miss out on that – let me propose you grab some DBS or maybe some PAAS.

Remember that next week is expiration week, which will present us with additional volatility, pinning action, market maker stunts, etc. On top of that the FOMC meeting is on Tuesday and who knows what those boys are cooking up right now as you’re reading this. So, it’s going to get a bit crazy I’m sure – and don’t get caught with too much negative delta in your portfolio. However, at the same token, if all signs seem to indicate the potential of an imminent drop as outline above, let me point out a risky but possibly extremely profitable trade scenario (are those ever ‘safe’?). Let me also point out that unless you are an option pro and have been trading the markets for at least several years, don’t even think of doing what I’m about to describe.

We might find ourselves in a situation where the market decides to give way and, being the greedy and evil speculator you pride yourself to be, you might want to squeeze maximum profits out of your blood money. As we just happen to enter expiration week you also understand that OTM options are going to become extremely cheap as there is almost no remaining extrinsic value (e.g. time value). Now, let’s just assume for a second the market slips on a big banana peel (perish the thought) and you just happen to have loaded up on massive amounts of ‘junk puts’ – perhaps 2 or 3 strikes OTM with only a few days left before expiration, maybe even further out if you feel adventurous. IF those puts suddenly find themselves ITM or perhaps even DITM the profit potential would be something to boast and taunt your fellow trading buddies for years to come.

Personally, I recommend you do NOT do this, just so we understand each other. But I do know a trader or two who might try a stunt like that, assuming the stars are properly aligned. Of course these guys are completely nuts, which you need to be to even consider doing this. For the rest of you guys out there – stick with Oct or Nov options.

That’s it – next week will either be extremely fun or extremely painful. Let’s hope it’ll be the former.

UPDATE: I was just told by somebody over at the slope that there is evidence that I might have been spot on with my Friday evening post regarding the China selling of U.S. assets.

BTW – courtesy of the ‘Fly‘:

Cheers!