Truth in Advertising: When Risk Averse Passes on Profit Opportunity ~ The Risk Averse Alert

Tuesday, March 18, 2008

Truth in Advertising: When Risk Averse Passes on Profit Opportunity

Today's follow-up to yesterday's turn-around had all the hallmarks typical of a counter-trend rally in a declining market. Marked strength of this sort ... so soon following a new low being set (though nominally so) in the S&P 100's multi-month decline ... is suspect. That's because it is occurring absent the right Relative Strength condition typically preceding a major, trend reversing advance. More on this at the conclusion of today's comments.

OEX 5-min
Unfortunately, the short-term RSI divergence registered last Friday and continuing yesterday (Monday), did not result in the Risk Averse Alert recommending a Call option position. So, we missed a quick profit opportunity despite seeing it coming. Given how rapidly the anticipated counter-trend burst unfolded, a "long" position would have been profitable irregardless of our concern about pricey risk premiums.

We might look at last Tuesday's (3/11/08) monster move up in the S&P 100 and get some better sense of how things might proceed from here. Just like yesterday's turn-around, last Tuesday's advance developed subsequent to typical RSI divergence one should look for prior to a playable move higher.

We see how, shortly after 11:00 a.m. last Wednesday (3/12), the S&P 100 proceeded to sell off, declining to a nominal multi-month low (registered yesterday). So, is the same thing about to happen?

Well, as indicated above, today's no-holds-barred, screaming rally appears to be but the first clue suggesting "this, too, shall pass." Furthermore, two additional clues suggest the S&P 100 might sooner return to the vicinity of yesterday's lows, than bolt still higher from here.

First, is the fact that, at no time did RSI, yesterday and today, extend as high as last Tuesday-Wednesday. Second is today's mid-afternoon RSI breakdown. Nothing so severe occurred last Tuesday.

Both these notable RSI disparities suggest underlying weakness, and lend added weight to the S&P 100's proven resistance here in the 620 area. But wait, there's more...

As you can see, the S&P 100 rose today to meet its declining trend line. Although this line of resistance would not persist were the S&P 100 to reach its anticipated objective in the 630-645 range sometime over the next few weeks, right now it might present something of a barrier with only two days remaining in the March OEX contract.

As was noted in yesterday's Trade Commentary: "Odds favor the S&P 100 going out in the 600-605 range when the March OEX contract expires on Thursday. It could go higher." This outlook still stands.

The real import of today's advance is largely how it supports the Risk Averse Alert's near-term outlook. The strong rise off the lower end of the S&P 100's trading range since mid-January now raises the probability the 630-645 area eventually will be met.

Odds are the stock market is not about to embark on any melt-up yet. However, should the S&P 100 rise to the upper end of its trading range of the past couple months (i.e. 630-645), RSI would likely rise above its December high. This RSI improvement is a prerequisite to ending the stock market's multi-month slide. Following this, the S&P 100 should then set new lows while, at the same time, RSI diverges from its January low (much as happened over the past seven days as the S&P 100 set new lows). Should things unfold like this, then the stock market's melt-up might likely commence.

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

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