Slingshot!

Quite historic times we live in. Last Friday we witnessed a 1000 point range in the Dow and today, after a whole weekend full of bailout announcements on a international scale, we actually were bestowed a historic 936 point rally! Wow – I wonder if beanie threw his hat in the ring for this one, as for once one of his predictions actually came true – got to mark that calendar. However, as they say, even a stopped clock is right twice a day 😉

This is going to be brief as today’s tape leaves two main options available to us. In order to narrow the probabilities more conclusively down to one, we need to wait until at least tomorrow night and probably Wednesday. Either we are done with minor wave 3 of intermediate (3), in which case we are now deep inside minor wave 4 of intermediate (4). Or we are tracing out minute {iv} of minor 3 of intermediate (3), which means that this rally would be followed by more significant downside action in a short amount of time.

Historic 936 point rally on the DJI.

I’m actually giving the minor wave 4 scenario a bit more credence as today’s strength was significant by all standards – breadth on the NYSE closed nearly 19:1 on the side of the gainers. If we’re dealing with a minute wave {iv} here we should be dropping almost right away – the limit is around 9615 on the DJI. However, the Dow futures are already trading above that on the after market ticker, so I’d be surprised to not see the cash average follow suit in the morning, maybe even with a opening gap. Therefore, as indicated on the chart, I’m giving the minor wave 4 scenario a higher probability at this point. I didn’t want to leave the minute {4} wave scenario off altogether, as the market has a habit of punishing evil analysts eager to jump to conclusions.

We are extremely overbought at this point and one would expect some profit taking and a bit of a sell off. However, as on the short side when we were going down, considering the extreme conditions of late it’s in the realm of possibility to see the momentum to hold and continue. So, I would caution anyone to blindly start dipping into short positions or to go long puts until the situation clarifies a bit. I also want to warn everyone from expecting much reward from playing the long side, should additional upside momentum develop tomorrow. Mr. VIX is still enjoying his vacation in the Alpine regions, shedding a few points today but closing at 55. Thus I recommend that you heed Berk’s advice of sticking to stock positions if you want to go long. I probably won’t touch a call option until I see Mr. VIX at 40 and below, preferably 35 and below (which traditionally is still considered high).

I’m very curious to see an update on LIBOR, the TED spread, and the TNX tomorrow – as none of these were available due to the bank holiday. If we see significant changes on that end, it might also bolster one of the two scenarios.

And yes, Gold had another Rodney Dangerfield day – no surprise there. No matter where the market is going, Gold seems to want to go down lately.

Finally, here’s a headline I caught this evening on Bloomberg:

U.S. Stocks Rally Most Since 1930s on Bank Plan

1930s – mmmh – somehow that rings a bell. Can’t remember, meh – probably not important… 😉

That’s all I got for tonight. I will be in touch as the day unfolds tomorrow – I think by watching the wave pattern we will be able to narrow things down in a day or two. If you must take trades in the interim, keep it clean and contained. This is still a very erratic and violent market, and there is little doubt that it can turn on a dime.

Cheers!