Saturday, July 17, 2010

Saturday Rock Blog: Shine (on the Sun Bear)

Everything about this chart says that a new trend has begun. The six month S&P charts has increasing volume on down days, decreasing volume on up days. A cross of death and a series of lower highs. The stochastics and CCI are both about to give renewed sell signals (market worked off oversold conditions). We held the flash crash low barely on Friday but I suspect op ex had something to do with that. Watch for a close below 1040 to confirm what everybody is wondering: Has a new bear mearket begun? If so, I'd guess it doesn't take as long as my patience to get to that head and shoulders target at 860. Enjoy the beautiful weekend everyone!

The Malaysian Sun Bear:

Disclosure: I own SPY puts, plan to hold them for a while.


C said...

I tend to agree with what you are saying. In fact, I bought some SPY puts for September last week.
In hindsight, that probably isn't far enough out to capture the bottom of the downward move, which I tend to agree would be about 860 on S&P 500.

Looking at all of the charts for the indices, and head and shoulders downward price targets, it looks to me like the downside would be contained at the first major correction from the March lows.

The options are priced to where if you buy December options you are looking at only a potential 4 bagger, considering only intrinsic value with the given price target. As the VIX is presently not on a spike, I figured now is the time to buy the puts. My dilemma is that once we get a few days of big downside moves, none of the puts will be cheap, but even now, the longer dated puts aren't exactly priced for a potential grand-slam the way IWM puts were before the original market meltdown.

As an aside, if you go to and pull up monthly charts of the major indices, $COMPQ, $INDU, $RUT, $SPX, going back to the 80s, it sure looks like head and shoulders formations! The price targets would be a negative number in that case!*($# Going to zero???

You were right, as was I, in predicting the original market meltdown (especially in the IWM). I lost my chance to make thousands then because my limit order for puts was set too low.

Also though, as John Murphy makes clear in talking about H&S, it's not confirmed until we break the neckline, and if we go back over the neckline afterwards it's questionable. What do you think the odds are that we get some QE or some other nasty trick to bail this formation out from happening? How far out are you going on the puts? We have the elections coming up in November...

pythagoruz said...

Hey C,
Thanks for stoping by and for your thoughtful comment. I own January 2011 puts but so far I'm underwater on them. I bought them when the VIX was higher and the SPX was lower so... its not too surprising. I do have a couple long positions and those have hedged me somewhat.

Frankly, I probably should have exited my position when we failed to get back below that neckline (1040). I could be happily re-entering here-ish for lower risk. Pretty much every stock index, FX and commodity chart has the same bear flag look. All of it seems to have been led by a firming and even reversal in the euro. And in fact, the EUR and the AUD both have retraced nicely and maintain their crosses of death.

To emphasize a few observations:

1. everything has the cross of death still (50/200 dma cross)

2. most stuff has rallied on declining volume

3. economic indicators have reversed

4. SPX head and shoulders is NOT confirmed

5. I feel comfortable adding to shorts here, in pretty much anything

6. Nov. elections will be the catalyst for the next major move

pythagoruz said...

By the way, I really enjoyed reading your blogs!

C said...

Hey thanks for the response and the comment - it's funny I ended up finding your page in the vast expanse of internet when I was trying to find other people who saw what was brewing before the original market collapse.

I like checking out your blog, hell you were right with IWM puts, while all the talking heads were celebrating Dow 14,000...hah

I still kick myself for having to have a "real" job and not really being able to monitor my limit order on those R2K puts!

Well, for the moment I can join you on the underwater put club, but I do note the crappy volume on the upside. I have a small position only. I am basically an amateur investor, though I have been at it for several years, reading everything from Benjamin Graham, John Murphy, Tom Dorsey (point and figure). Nice chatting with you, I'll be around.


C said...

Hey I hear even Cramer is talking about the H&S, even that can't spoil my bearishness, puts may pay off fairly handsomely.