Silent Market

As expected today’s FMOC day was a snooze fest – which why I frankly spent my time catching up on some (charting related) chores that have mounted up. The final announcement late afternoon was good for a emotionally laden 23 second HFT spike. You could literally hear the vuvuzelas go nuts in the NYSE pits – unfortunately we reverted back to VWAP as there were no players on the field.

The ensuing silence was deafening – and remember, in the NYSE pits, nobody can you hear you scream 😉

The landscape has not changed by much but my counts have matured and I can now provide inflection points at which we know the direction we’ll be heading in the next few weeks. Also a few long term indicators are starting to move. This is by no means a complete review but here are a few appetizers ahead of the weekend:

The McCellan to NYSE Bullish Percent ratio chart is already turning. This is good as it’s usually early and equities can melt higher before the turn comes. As a rule of thumb: the longer equity traders postpone the inevitable the bigger the price to pay later. So, it seems right now that a drop is coming – sometime in the next few weeks. I doubt it’ll take two months like earlier this year – but keep in mind that we could sail through Soylent Green while this chart keeps dropping lower.

My CPCE Deluxe chart is painting an interesting pattern. Remember, a week ago I was wondering whether or not we had to go all the way to the bottom of the orange/red lines before seeing a high or if we would not even bother and instead continue to push up to new highs (afte which we probably would paint some kind of low). Thus far it seems we may be getting the latter – which is bearish. But what bugs me is that there is not much space to run – unless of course this chart will be overwhelmed by some super bearish event. We shall see – but I find it interesting to see that signal reverse so early in the game. Also notable is the fact that we never even made it to the half way mark on that down channel (i.e. 0.55) despite the fact that we rallied for over a week. Instead we are close to where we turned – so this signal has been pushing up while we were rallying.

Fascinating to see the stochastic on my EUR/JPY chart turning embedded – as this is exactly what I was postulating about yesterday. I am surprised to see such a lack of strength. Which leads me to think that even if we get a drive higher it may be weak. Thus far the currency pair is crashing through one support line after the other. Unless it can catch itself (or Euro bankers intervene) next stop is 109.

Frankly, right now today I have no choice as to count this as an a-b-c to the downside, which would support Soylent Green. So, in order for Orange to gain credibility we need a fifth wave to the downside and that means a breach of the 1085 mark. So far we stopped right where I thought we might – hey, am on a roll lately or what?

The good news is that we will probably know fairly soon. First there is that long term support (now resistance) diagonal and we don’t want to push beyond that. Very close is also the bottom of Minuette (i) down at 1108.24 (assuming Orange) and we cannot breach that either. So, based on what I’m seeing this is where Soylent Orange breaks down. And it is probably the point at which I would roll into March puts as the theta burn ahead would be too much to bear.

Why not wait out the push up? Because it may not be a push up – it may be a sideways diagonal – or something else that resolves quicker. Bottom line is that I’m more worried about missing the train than about the super perfect timing and calling a top.

A Few Words To The Wise

The next few days will most likely be difficult for us bears. Even if we drop we’ll probably rally up right away – and some might mistake that with bullish action and get left behind. The inflection points and my long term strategy presented is the best I can offer in terms of sitting through this relatively unharmed (unless you’re nimble and short term oriented).

Trading Strategies

Long term – what Mole said.

Medium term – if you think we are done dropping and Soylent Green is in the works then here may be a great spot to slip into a bull call spread. Why would we do this? Because Soylent Green would represent the second leg of a 2nd corrective wave – ideal for scaling into verticals. Upside is limited – which is what we want as we don’t think we’ll push that far – so all we are doing is to limit our cost. BTW, keep the buying side ATM and maybe a 109/112 or 109/113 spread may work:

Cost basis – $1.49 – that’s your risk. They expire in 23 days, and that’s a lot more time than we need for the anticipated move, so unfortunately your profit is about half of what it would be at expiration. Of course you can shoot higher in anticipation of making it to the final {c} leg up into 115 or 116. But that’s a bit too far ahead for me. Of course one could try one’s luck at the quarterlies which expire in seven days… that’s what DudePlunger might do (I kid the kid!)

If you need a refresher on debit spreads and when to trade them I recommend you re-read my Friday post, which is only a first in a several week series. There’s a lot more to come, and you guys better study up, or you’ll fall behind and fail Steel Rat Academy!

To all spread pros – feel free to chime in – we are open to various possibilities. But I would prefer we keep the discussion limited to debit spreads as the more complicated stuff gets covered in the future.

Riddle Me This

Before I go here’s a little riddle inspired by a chart Bob The Horse sent me today. He reminded me of concept in options I am familiar with but rarely bother to look at. Which is a mistake and I decided to remedy. Anyway, take a look at this chart:

The first person (or stainless steel rat) able to offer the best explanation of the meaning of this chart will receive a free month of Zero goodness. Please post your answers in the comment stream. The comment with the highest vote (i.e. like count) wins. BTW, this will not be judged by interpretation, but purely by technical knowledge and ability to explain the concept above.

UPDATE: Graphite won the contest – congrats and enjoy your free month of Zero goodness!

Have fun 😉

Cheers,

Mole