Last week was certainly intense. Relentless in fact. VIX peaked @ 76.94. I look at such a move as leaving “air pockets” up and down, but especially up. One mistake I have been making over the past week was not to get short upon significant breaks of support. I was trying to fade these down moves, as opposed to following the trend (down). Dumb, dumb.
As I write this on Sunday night, the afterhrs market is up sharply. S&P +39, DOW +295.
I made it a good and productive weekend. My positions were light, and I had a few hedges on. On friday, saturday, and sunday I attended 2 soccer games, ran 20 mi, rode 55 mi, did some weights. I also read 200 pgs of a few good books, worked on MySnowPro.com, watched the snowfall in Breck, crock potted a nice dinner and saw a movie at home. Oh yeah sold 3 PrePaid Legal / Identity Theft Memberships and helped 4 people start their businesses.Gotta love a productive weekend. Now time to gear up for an interesting trading week.
I like the way the Shadow went over the market technicals. I couldn’t have said it better myself. However, I will put down some of my targets below.
I have been trading very small of late. I my futures trading acct I was scalping well in huge volatility, as the moves were responding well to trendlines into resistance and breaks of support. However, my options, position, and mutual fund trading acct is very small.
On Friday, I picked up a few nice trades.
AIG – Bought 500 2.5p Microcalendars
QQQQ- @ 30.20 on the downtrend break, then sold Nov 35 calls into the strong afternoon rally.
SPY – Sold ALL my short calls @ SPY 84 for very cheap. I hold a number of upside Oct, Nov, and Dec calls.
XOMA – Bought this penny stock @ 1.01 at SPY <84, and on a trendbreak.
SNL VP debate – A little comic relief.
I was very curious with what today may have created. This is just a thought. My scenario below requires a move to break above the Tertiary trendline. This may or may not happen. With the premarket so strong, I wouldn’t doubt we see a little sell the gap. I would then like to see a 38-50% pullback, and then a High Volume rally through the trendline. If a scenarios similar to that takes place, I will look to enter long the SSO, QQQQ, UWM. I don’t like many individual issues for the long haul, but as trades some may workout. MOS, RIMM, AAPL. I am not in love with any issue for more than a month.
Last Sunday I wrote:
“We are approaching a point I have put on my radar since January, break of SPY 139.3. SPX – 1080. This is a 61.8% retracement of our move since the previous bottom Oct 10, 2002 (SPY 77.11), to the top on Oct 11, 2007 (SPY 157.53). The dates are eerie, eh?? And here we are… next friday Oct 10. Hmmm. Does it mean anything? Who knows.”
Well, I picked Friday as a climactic point, however I didn’t expect it to be 250 SPX points lower than forecast.. UNFRICKIN REAL.
I have made two bullish scenario calls recently. On the first, I said a break below SPY 118 would void the scenario. On the second @ SPY 1090, a break below 106.7 would void that call. I lost a few thousand bucks (mostly in mutual fund choices) in trying to pick a bottom (made it up in other hedging plays). My mistake wasn’t in getting aggressively short on each break, and following the trend.
Now here is a third countertrend play… I think we are getting ready for a Wave 4, countertrend bear market rally! IF the SPY holds it’s low from today (SPY 83.43) there are a number of scenarios in which I will systematically dump my long exposure into these (fib levels), including mutual fund holdings and get in cash, bonds, and shorts. IF it breaks SPY 83.43, consider this game plan void.
After I sent out a preliminary version of this plan, I was reading Mish Shedlock’s blog and he wrote a very detailed version the Elliot wave possibilities.
It looks like we are in an Elliot Wave 3 (Impulse wave). I plan on making a very large amount of money in the 2-6 months. On the way back up, here are a few SPY levels that I plan on taking some money of the table. I will become more aggressively long after a few days of rally, then a bull flag breakout
But as we move into the 2 and 3rd fib levels I will be looking for opportunities/patterns/internals to short (HEAVILY)!
The short story – Using Fibonacci retracements a few targets are: I didn’t doctor these in any way (I promise). They just happen to match resistance levels perfectly on the way up. Fibonacci was amazing.
Here are the levels:
38% retracement – 106.7 – Miraculously this equals the breakpoint from bullish scenario 2 (it was a previous low from Aug 13, 2004)
50% – 113.9 – a selloff low from Sept 18, 2008
62% – 121 – A topping high reached Sept 2, 2008.
As a trend establishes itself, I will create a trendline for the move. And I will be quick to dump longs if we break below that level on relatively high volume.
TRENDLINES – Primary (from 2007 highs), Secondary (Mid-May high), Tertiary (mid-sept short selling ban).
This could be a very explosive rally. There is much pent up demand. But DON’T trust this rally long term. We are in an undeniable downtrend, and this IS a bear market rally. I absolutely believe we are ultimately headed lower.
Here are my broader thoughts on trading this market over the next few months:
The psychology of all market players is extraordinarily fearful. The next panic is missing the upside. Hedge funds and mutuals NEED to book some gains, and they will load up. There will be a flood into the market as soon as they see that the train is leaving the station and this market will rally…quite possibly to SPY 114 -121 level, or slightly higher. Easily a 20 to 30% pop in a month or two of time. We may also see a positive election effect during this time (uncertainty about the candidate will be gone). Then look for the market to roll over and fall. Players will want to lock in gains, and a realization that the Gov’t can’t solve market problems will set in.
A gameplan for watching this top happen… Watch daily and short term charts…. On friday, I was using the 5, 15, 30 charts. On the QQQQ break above 30.20 I was a buyer (with a 1/4 allocation), and my stops were set @ the lows of the day.. The Shadow Trader video (above) will offer a entry plan moving forward. As for the sell off down the road. I will be drawing an uptrend line from the eventual low from this wave, I am thinking friday was it (but we will see). As we move into fib levels 38%,50%, 62% I will be working my exit plan. I will also be looking for trendbreak, previous Support/resistance (i.e. IWM 64.5, DIA 103), and candlestick topping patterns.
Final thought, there will be a ton of range to work with and high VIX levels will be the norm for some time. I don’t believe we have reached an eventual bottom as many fundamentals are still deteriorating. And using basic Elliot Wave analysis, we have a doosy of a w4 and w5 to come.
I have respect for McCain and his answers/comments to these naive supporters