Worst week ever!?!?

This IS the wave 3 of 3 we have been talking about for some time.  We said it would be quick.  It is moving very rapidly, ask anyone on the sideline looking for a traditional entry.  The problem now is that we have indicators at extreme oversold conditions, some at historical highs/lows, warning that a bounce could form at any second.  Friday’s action was a great example of that.  We opened and the elevator was heading straight down.  In the first 1/2 hour, rallied sharply in an [A] wave, declined in an [ABC] corrective action of a [B] wave, and finished the day with a [C] wave which is either complete, or has one more gyration higher, which the futures are now indicating.  What does that mean?  That means that despite the indicators SCREAMING for a bottom, we will continue to lean down on the short term trend.  My main reason for this is that the indicators are still pointing down (or up, $VIX).  So, even though the BPA is a 2.67, it is still heading to 0.  Once these indicators turn back up, a sustained bounce could ensure.  However, here is a close up of wave 4 of 3 of 1, from the first leg of this decline.

This is a quick short term view, before the wave 4 chart.

Keep a close eye on the $NDX as tech and small caps are beginning to have some buying.  As the first chart shows, the market will still be playable if your timeframe is small, but the intra-day swings are going to only get worse, not better.  The good things though, it that we would expect a “trading range” type of movement during a standard wave [4].  Right now I like the range between 1200 and 1325 for the $NDX, and it would take a break of the upper of those two boundaries for me to rethink my downside scenario.

That said, when the ever-immenent bounce does occur, how will you trade it?  The $VIX is TRADING above ranges most people can comprehend, and right now, is probably the hardest part about trading options.  I said before that the game has not changed, and it hasn’t.  It has been sped up and a 4-year old just changed the rules, besides that, nothing has changed.

That is for while the market is dropping.  Playing the bounces are not easy.  With a $VIX at 70, buying calls at the bottom, likely when the $VIX spikes the farthest, is only going to leave you with empty bags.  Selling puts, through a spread would work, but I don’t like to limit my reward.  I WOULD NOT sell naked puts on ANYTHING, because right now, it is just not worth the risk.  With that, I have two strategies I think will work fairly well, and I will discuss the one that any of us can do.  One option to trade this safely is trade diagonal/calender spreads.  I don’t like spreads very much, and they would take some time to explain.  Therefor, I will concentrate on buying stock as short term trades..

Yes, Berk said “buy STOCK.”  I never thought I would, but here are my reasons.  1) Stocks are cheap right now, many have lost 20-50% in the past few weeks.  2) Longer term money is looking at stocks with a “value” eye right now, and moreso as we continue to decline.  3) No $VIX.

Here is the basic criteria I am looking for:

1. Badly beaten stock.
2. 10%/day (or more) ATR.
3. 1 or more divergent indicators.
4. Exhaustion or reversal candle (preferably on high volume).

I have a few good examples right now…some of relative strength (believe it or not) and some of strong relative weakness.  I will start with the weak ones…

We have MTW…Nice cheap little machinery stock.  ATR could make for some quick gains.

Then there is OI.  Now that it has reached our open gap targets, we can look for a little bounce.  That exhaustion candle sure does look nice on a divergent MACD line.

Or NYT.  This little newspaper printed some coin on Friday.  I’d take some down on a break of 14.

Some of the dry-shippers are also showing similar candles, and could be good buys.

Finally, the best relative strength candidate. I already own this gem in my IRA… Will be grabbing some more shortly… CCC.

Hopefully this gives you something to work with, and an idea to pursue on your own accord.  This week will be interesting for sure.  We will continue to take it swing by swing basis.

Skål!