Waiting on Toto to Pull Curtain Exposing Imminent Meltdown ~ The Risk Averse Alert

Tuesday, May 13, 2008

Waiting on Toto to Pull Curtain Exposing Imminent Meltdown

Forgive me if I sound a bit uncertain about the immanency of the stock market's mini-collapse...

Now, don't be discouraged. There are so many indications suggesting a top is at hand. Yet, there also is reason for caution. The next couple days [hopefully] should clear things up.

This is a good time to look at the situation with open interest at May OEX contract strikes near the market...

Today the S&P 100 closed at 643.31. At the 640 strike there are 2941 Call contracts open and 9015 Put contracts open. Therefore, we might conclude the vested interest of options writers would wish to hold the S&P 100 above 640.

At the 645 strike there are 3362 Call contracts open and 3797 Put contracts open. And at the 650 strike there are 7066 Call contract open and only 1887 Put contracts open. Therefore, we might conclude the vested interest of OEX options writers also would wish to hold the S&P 100 below 650.

Now, bear in mind these open interest figures are as of the close of trading on Monday (5.12.08), not today. Also bear in mind this is expiration week for the May OEX contract. As each day passes, then, open interest is bound to change considerably.

Given what we have to go on, though — strictly from the point of view of the vested interest of OEX options writers — it appears the S&P 100's performance today is well-explained.

OEX 5-min

Odds are tomorrow's trading could be something like today's. Ideally, we will see a considerably stronger move lower before there's any recovery. Even more welcome would be little recovery at all (a la last Wednesday, 5.7.08) ... resulting in such further technical weakness as lays to rest my present concern.

(As this possibility seems to defy my above observation of OEX open interest, I should say there still would be two days remaining in the May contract for vested interests — options writer — to protect their positions.)

Were the S&P 100 to decline sharply tomorrow (resulting in the kind of technical damage that further raises my confidence in the immanency of a mini-collapse) ... I suspect this loss would be recovered going into Friday's expiration. Then, I will have to find some pictures of vultures to post here, because we probably would be ready to strike.

NASDAQ 5-min

That's one "close, but no cee-gar" in the NASDAQ Composite's challenge of its intra-day high on Friday, May 2, 2008. In some respects I do not want to make too big a deal about the necessity the NAS remain below it. However, my caution about the immanency of the stock market's mini-meltdown might only be furthered were the index to trade above its 5.2.08 high.

Now, should my concern here vanish — should the NASDAQ Composite turn south from the get-go tomorrow — then, of course, I will be both delighted and emboldened to hope the further technical break-down I am patiently anticipating will occur as well.

I simply would love to see the McClellan Oscillator for both the NYSE and NASDAQ break into negative ground, because this would further confirm the sort of underlying technical weakness suggesting a mini-collapse is at hand. This is not necessarily a vital precondition. It is well enough that, as the stock market has continued its advance off the March 17, 2008 low, the McClellan Oscillator has been weakening, much as it similarly was from September '07 to the market's peak the following month.

Now, this might just be another case of the same great and powerful "Oz" huffing and puffing at the behest of a much weaker figure behind the curtain. Indeed, all the underlying weakness I have cited for some time now is quite real. Likewise, the position of various technical measures I have shared here continue to suggest the stock market is nearer a top, than a point where it might just as likely explode higher.

Nevertheless, I must say the best course of action for the moment is maintaining caution and alertness. Should the market decline tomorrow and give back gains made thus far this week, I might still continue such caution as advises we not start licking our chops. However, I think we probably would be wise to start salivating...

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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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