This is such a tough market to read.
On one hand, I am short (or own puts on….) a wide variety of stocks whose patterns are just gorgeous. They have all the markings of equities that are headed much lower.
On the other hand, all the major indexes I am looking out seem to be positioning themselves for an explosive countertrend rally.
So what concerns me is holding on to all these short positions as their patterns get destroyed by a general upsurge in the market. What concerns me just as much is to prematurely close out a bunch of positions out of fear of a big surge that never materializes. As you can read, I'm terribly conflicted about the entire thing.
One might suggest hedging the entire affair by going long index positions, and that's probably where I'm heading. Of course, I've seen what happens with properly hedged portfolios – – they just sit there, even in the midst of a big market move, which begs the question: what's the point of trading in the first place? I suppose non-movement of a portfolio is better than having it get crushed.
What I keep obsessing over is the inverted H&S forming in just about all the big ETFs. Here's one example:
The power of a breakout from such a pattern could be enormous; in this instance, pushing the IWM right back up to the neckline of the tinted rectangle (at which time you would see me writhing on the floor, trying to control himself from buying the entire world's supply of index puts).
Looking at the ES, you can see similar basing action; take special note of the dotted red line. This is the level above which prices pushed higher late in October. Notice how this week's plunge did not penetrate that line. I believe that is significant. At the same time, take note of all the overhead supply from 936 up to 1,010. That's a lot of crud to push through.
The VIX is still pretty high, but if the market strengthens, this is heading much lower. If the market is terrifically strong,I think we'd see a VIX back in the high 20s.
As a bear, I at least take comfort in the knowledge that any rally is going to be countertrend. I think the likelihood of any rally that begins now representing a new bull market is approximately zero. So, for instance, a rise in the DIA wouldn't get it past the very low 100s.
There are some intriguing basing events going on. Intuitively, one would think the future of financial stocks in the U.S. is pretty grim, but from the chart perspective, there's some enticing action going on here.
As conflicted as I am, I do feel somewhat confident that the Euro is about to push higher (and, with it, most commodities). We're at a decent level of support here for a bounce higher.
Having said that, crude could potentially slip a few more dollars – – but we're talking about a market that has already gone from $150 to $61. The bottom of this channel is around $54, which is quite close. So the downside at the moment doesn't seem too great.
Still on the topic of commodities, I would also refer you to the current wheat contract – – that horizontal line of support seems very strong to me, so I'm probably buying calls on the DBA when the week begins.
As for going long indexes, I guess the best strategy for me will be to buy ultra-long positions in items like those shown below while at the same time holding on to my equity shorts, keeping the stops at sensible levels. This way, even a strong rally will not damage me too badly.
I wish I could give you more clear direction, but I can't. I promise you, though, if we do rally big-time, and we reach the levels I'm talking about, you won't see any hedging on my part. I'll be my old wild-eyed ursine self. At this moment, though, it pays to be opened minded to the prospect of a rally, no matter how paradoxical that might seem in this disastrous economy of ours.
