A Bernard Baruch, Blood in the Streets Moment ~ The Risk Averse Alert

Friday, March 14, 2008

A Bernard Baruch, Blood in the Streets Moment

OEX 5-min
Another day's demonstration of both weakness and strength in the battle for a short-term bottom from which a counter-trend rally to as high as the 645-650 area in the S&P 100 might ensue sometime over the next few weeks...

There's really not much to add to yesterday's comments as far as the Risk Averse Alert's outlook going into next Thursday's March options contract expiration. So, let's take a closer look at today's performance, then consider Monday's prospects and show how March OEX open interest supports a sanguine view in the midst of an expanding shark feeding frenzy occurring on Wall Street.

First, this morning's sharp collapse... Despite it being twice as severe as yesterday's market open sell-off, RSI was slightly less affected. The assumption the S&P 100 is finding buying support in the vicinity of Monday's closing low is supported by this RSI divergence (today versus yesterday). This divergence was further displayed at today's intra-day low coming at about 2:30 p.m.

The rally off today's intra-day S&P 100 low lifted RSI to a point where we can anticipate a final move lower in the S&P 100 on Monday, testing lows registered in the 590 area over the past five days, and quite possibly carrying the index still lower. Of course, expectations are that RSI will further diverge from its lows set yesterday and today. Should this occur an OEX "long" play might be in order.

The March OEX contract, with just four days until expiration, provides an interesting study in open interest supporting the case the S&P 100 is likely to rise above 600, no matter where it might fall to on Monday. Presently, the March OEX 600 Put has 10,415 contracts open, whereas the March OEX 600 Call has only 2,475 contracts open. The disparity between Put and Call open interest at strike prices below 600 is even more stark. (The S&P 100 closed today at 595.50)

This, of course, does not guarantee a thing. However, in the realm of probability, one must assume those who wrote open contracts have a vested interest in minimizing their cost of making whole those holders of contracts with intrinsic value at expiration. That's one reason why it is reasonable to expect the S&P 100 will settle somewhere between 600 and 620.

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Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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