Fat Albert Gore Dreams of Gaia, But I Dream of Jeannie ~ The Risk Averse Alert

Wednesday, March 19, 2008

Fat Albert Gore Dreams of Gaia, But I Dream of Jeannie

Have you, too, been skeptical about global warming being a man-made danger? Shall we let Al Gore in on our little secret? Because, it is beginning to appear neither the automobile nor coal-fired power plants have a thing on the Risk Averse Alert! This baby has been red hot.

Do you remember that episode of I Dream of Jeannie where Jeannie was upset because no newspaper had arrived at the Nelson home, so Roger, seeing an opportunity, suggested she simply blink in a newspaper? Of course, Roger gives her the next day's date. Armed with the day's horse racing results, he proceeds to the track expecting to clean up.

This is a bit like what has been happening here. You practically have been receiving the next day's Wall Street Journal a day early. This is not necessarily what is intended. The purpose here is not to facilitate successful day trading. Rather, it is to identify low-risk stock index option position entry points principally when the stock market is projected to immediately confirm a recommended position's validity. The foremost objective (and this might seem counter-intuitive) is preserving risk capital. This is why positions not immediately validated by the stock market's movement are closed with haste.

Obviously, striving for some reasonable semblance of forecasting accuracy, even over ridiculously short durations, is unavoidable in the options game. Part and parcel with having a relatively refined long-term view of the stock market (and this goes beyond comments you read in the left column), short-term gyrations generally should fit the big picture. So, attribute clarity about what's likely to occur over the weeks and months ahead for The Risk Averse Alert's recent analytical successes.

End of self-congratulatory comments...

OEX 5-min
Something happened today potentially altering near-term probabilities. You will notice on yesterday's 10-day chart a horizontal line drawn across the top of the day's RSI. This was done with the intention of showing that yesterday's strong, late day advance resulted in RSI falling [slightly] short of its reading at the start of trading when S&P 100 shot higher. With this RSI divergence, the expectation was the S&P 100 would be all the more ripe to reverse course.

However, look what happened at the start of trading today. RSI actually lifted slightly above its high set yesterday (Tuesday). Interesting. Here's why...

Yesterday's Risk Averse Alert suggested "the S&P 100 might sooner return to the vicinity of [Monday's] lows, than bolt still higher from here." But you know what? Today's positive start, following through yesterday's monster advance and resulting in RSI unexpectedly lifting above its high yesterday, sheds a different light on things.

Commentary yesterday also noted that, "at no time did RSI, [Monday] and [Tuesday], extend as high as last Tuesday-Wednesday [3/11-3/12]." Further, it pointed out Tuesday's (3/18) "mid-afternoon RSI breakdown," and then went on to say, "[n]othing so severe occurred last Tuesday [3/11]."

These observations led to the conclusion that, "[b]oth these notable RSI disparities suggest underlying weakness, and lend added weight to the S&P 100's proven resistance here in the 620 area."

Well, the S&P 100's proven resistance did materialize in the 620 area today. However, there is reason to view Monday's and Tuesday's notable RSI disparities differently. Yesterday's assumption that, "the S&P 100 might sooner return to the vicinity of [Monday's] lows, than bolt still higher from here" should be challenged.

Consider how last week's stock market advance was accompanied by stronger RSI readings than accompanied this week's advance. You might say there was more conviction to last week's rally. There was firmer conviction a bottom was in place, and greater urgency to buy into a market "sure" to advance. This rather proved a demonstration of misplaced complacency, as the S&P 100 subsequently declined to set a new low.

Now, contrast last week's RSI performance with this week's. You might say RSI revealed a good deal more fear and doubt about the staying power of this week's advance. Precisely the kind of thing "smart money" wants prior to pushing stock prices higher. Today's doubters will become tomorrow's buyers who take shares off smart money's hands.

The S&P 100 settled today right in the range where the Risk Averse Alert projected it would likely finish when the March OEX contract expires tomorrow. Therefore, expect a relatively flat day on Thursday.

Should the stock market generally hold up and not continue Wednesday's slide, we can look forward to the S&P 100 advancing to its objective in the 630-645 range, sooner rather than later.

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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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