Anything Happen in the Markets Today?

I ran into a friend at the local coffee shop.  He knows I do a little trading and asked me that very question about an hour ago.  Where do you start?

First things first.  If you made a ridiculous amount of money this past month because you believed any of my posts since May 31 when I suggested this market had “significant similarities” to 2007, take a look at the section over there to the right entitled “if this blog helps you…”  

Take care of that.  Right now.  Write a big fat check to your favorite church, synagogue, PTA, nephew or struggling poet and put it in the mail before you think twice about it.  Karma is a powerful thing… best not screwed with.  And, if you see a homeless individual or kid selling lemonade on your way home, don’t be stingy.

While you’re at it, send $100 of your profits to the Michael J. Novosel Foundation.  George and the foundation help take care of reservists and guardsmen returning from some very bad places to civilian life — often missing a limb or two.  These were guys just like us who left their nice cushy stateside jobs for a quick one-year tour and had their lives forever changed.  Thanks to a government that’s quickly going broke, they often wait months for a wheelchair ramp or prosthetics that fit properly.  You can read more about Mike and Mike Jr. here.

Okay, with that out of the way…

There’s little point in rehashing what happened today.  Suffice it to say, I love rising wedges!  Despite continually taking profits off the table and hedging myself out the wazoo all day, I still managed to be up 60% on the day.  Stupid kind of returns.  I hope some of you did, too.

Today we officially deviated from the 2007 pattern in a very noticeable way. 

In two days, we did what it took 8 days to do in 2007.  We broke the previous low and, in just two days, reached the 161.8 extension of the last rise (I’ll refer to it as XA for now.)  It took eight trading days (Jan 8-17, 2007) back then.  And retracements?  We don’t need no stinking retracements.  At least, that’s the way it’s playing out so far.  Very strange.

We could look at this a few different ways.  It’s possible we’re going to drop straight to zero and not look back.  If you believe this, you’ve already swapped your computer for bourbon and ammo.  This does not apply to you, my friend.

It’s possible today’s market got a little ahead of itself, and will make the retracement in its own sweet time.  It’s also possible we’re due for a snapback rally tomorrow that’ll put hair on your chest (note to sister-in-law: it’s a metaphor.)  Let’s break it down.

In 2007, the market broke through its previous low, tagged the 1.27 XA extension, retraced about 56 pts to the .786 Fib level, loitered at the 1.618 extension before bottoming at the 2.24 XA extension.

From a harmonic standpoint, this was a pretty well-formed bullish butterfly pattern that produced a 56  point bounce at its 1.272 extension.  It then resumed its fall, completing a crab pattern good for a 20 point bounce at its 1.618 extension, and a 125-point, 7 day bounce at its 2.24 extension.  Anyone paying attention to the Fibonacci levels did pretty well.

Okay, 2011, time for your close up.

This is about as perfectly-formed a bullish crab pattern as you’ll ever see (at 1197.25).  Under normal circumstances, you’d be looking at a (practically) guaranteed return to at least the .618 retracement at 1295.  But, these ain’t exactly normal circumstances.

It wasn’t in 2007, either.  The 1.618 extension, remember was only good for a 20-point bounce; it was swifty followed by a 2-day, 80-point shellacking — setting up a 125-point bounce off the 2.24 extension that made savvy traders a few bucks.

Will this be a 20-point bounce, a 125-point bounce or a call to stock up on bourbon and ammo?   Per the Fibonacci levels, a 2.24 extension would take us to 1136 and a 2.618 extension to 1100.

The 87-day cycle with its average 11.06% cycle drop would take us to 1197.65 (welcome!); while, an average 13.01% cycle low would be around 1171.  Keep in mind, those are averages — not extremes.

Looking at trend lines, we have potential support at 1195 and 1155.  Horizontal support is also possible at 1200 and 1173 (from last November.)   And, the huge head and shoulders pattern we’ve been following indicates a downside of around 1145.

Looking at the confluence of all those numbers, I think the Fibonacci levels merit the closest watch.  But, to be on the safe side, I’m marking all of them on my charts.  I’ve also taken the precaution of hedging my bets — literally.  I’m still short, of course, but I’ve added some slightly out-of-the-money calls that will largely protect me from a rally. 

And, rallies are to be expected.  Many similar plunges have been followed by 40-point rebounds the next day, tripping stops and plundering profits all the way up. Who among us doubts that TPTB are gathered around $75,000 taxpayer-funded antique mahogany conference tables, dreaming up ways to safeguard the country’s future their stock options?

One last thought… for anyone out there who’s positive that the worst is over, consider the weekly chart.  Ignore the jumble of TLs and patterns.  Focus, instead, on the RSI, histogram and stochastic picture.  We are far from oversold.  Very far.  Compare 2011 to 2007 and you’ll see what I mean.

If I have any more bursts delusions of brilliance I’ll write more later.  In the meantime, do your homework, make nice with Karma and stay groovy.


Anything Happen in the Markets Today? — 4 Comments

  1. Sorry guys, crashed early last night and just now saw these comments. Zim, I wanted to answer your question at more length, so I put it on today's post. IGP, interesting about VIX. The ITM calls are still relatively cheap, as they trade on the futures and not the index. I'm pretty fully invested myself, but something like the Sep 21's don't seem too expensive… Don't know why I trade these things, though. Been burned more times than not.

  2. nice trading. anybody who had the balls to short an oversold market going into Thu was greatly rewarded. VIX was benign Wed. offering options at a reasonable premium. Now VIX is jacked up so any option bet comes with a steep premium.

  3. Nice summary. The wide-ranging mass of potential short term targets is pretty crazy. I appreciate that you're not making a call for the sake of making a call–it lends credence to those times when you do stick your neck out.

    What potential development which would derail the 2007 analogy most concerns you right now?