Three Little Pigs

I’m watching today’s gyrations with keen interest. Based on what I’m seeing there are three scenarios – two high probability and two low probability ones – I call them my three little pigs as they all have the same eventual outcome:

Post now free for everyone:

Let me precede the following with a warning: Counting Minuettes is a bit of mental masturbation – just too much tape banging going on to count on such small scale. Which is why I usually don’t but today’s an exception so I’m throwing this at the wall – not sure if it’s going to do you any good but seeing various possible scenarios may aid your trading decisions. But remember, all this is short term stuff, so don’t sweat it.

Anyway, right now we are either done and drop down from here and then complete this motive (Blue) or we drive higher and complete right away. There is a chance that we are done altogether (Green), but that would be one fast correction and would lead to Soylent Red (i.e. the continuation of Minute {3} and a very fast plunge). Sorry for not keeping the colors in sync – but I’m sure you get the gist of it.

The odds right now support more upside for at least another day or two – for one there are playing some evil games in the options pits right now (see below) and then there’s the NYSE A/D ratio which is firmly bullish as I’m typing this. Except for that spike on the 10th ‘s been a while since we saw such a high reading.

Ouch – just looking at those charts hurts if you are an option trader. Early this morning we painted 24 on Mr. VIX – and that’s three days after a spike to 48. Wow – a 50% drop in volatility – folks, that is HUGE and if you sold vega last Friday and bought it back today you made a little fortune.

But it doesn’t end there. Check out those juicy spreads in the Spider Dec 10 options chain – a highly liquid instrument I may add. We are talking 10%+ on far OTM puts. Nasty!

Market makers got screwed in the past few weeks as they completely miscalculated their risk exposure. And they are in no mood for games these days – the gloves are off! Which is another reason that I keep telling you guys to simply stay in the game long term. Chasing things up/down is a dangerous game and often you get left behind – trust me, I have learned this the hard way. Even if you manage a higher re-entry, the spreads may be so far apart that you are paying a huge price just to get back into your puts. Of course had you done it this morning you may have been more lucky.

If you are looking to reload you better pray we are done correcting here and push yet a little higher. As long as Mr. VIX is at such high levels buying puts is an expensive endeavor. But you know what? It’s about to get a lot more expensive – you just watch…

UPDATE 2:30pm EDT: A little warning – after seeing this I must upgrade Soylent Red to a 50% possibility:

EUR/JPY is pushing down while equities are pushing higher. I don’t think this is going to end pretty. Even though we may get more upside for another day or two I would recommend reloading right now while the picking is good. Momentarily they may depress Mr. VIX to new low levels, and that’s a risk we’ll have to live with. The bad news is that it’s back up to 32 right now – but hey, the good news is that it’s down to 32!! 😉

It’s just a matter of time until we turn back to the dark side. The market is pretty jumpy here, the Zero is flat as a flounder and that’s usually not a good sign. Pick your poison – mine is to stay exactly where I am – long term short.

UPDATE 3:06pm EDT: Here is some mental masturbation – please don’t worry about this if you are long term positioned:

That’s the scenario if we breach above today’s highs. Could happen – or it could not – just wanted you guys to know ahead of time. Frankly, the tape is so on edge right now that it’s almost untradeable. Gaps all over the place – just look at this chart! But if the bulls manage to push this higher, preferably by the EOD (or overnight if the MMS are really insidious) we are looking at a 111 target cluster on the Spiders.

I hope I don’t come across as all over the place today. FWIW – I keep saying the same thing over and over again: Stay short and if you’re playing the swings this is not a bad time to reload a little – even if we push higher. No guarantees – ever – and especially not in this market.

Cheers,

Mole

P.S.: In case you wonder why I call them all pigs. Well, in the end they all get slaughtered 😉