Market Trades Like Being Slapped in the Face by a Woman ~ The Risk Averse Alert

Wednesday, June 11, 2008

Market Trades Like Being Slapped in the Face by a Woman

Looks like the stock market is in deep, deep, do do. Today, all day, was like the stunned silence that follows when a woman slaps a man. Echoes of Ralph Kramden restlessly sounded throughout the day... Humanna, humanna, humanna.

Vendors hollered, "Get your stocks ... get your red hot stocks!" But the stadium just stared disinterested.

Stunning! Quite a sight. One of the most difficult to wrap one's brain around. An unbelievable fright ... soon to be our sweet delight.

Upon next Friday's June options expiration ... best guess is the S&P 100 will settle out between 590 and 600. Likewise, all indications at that time — the market's apparent momentum — probably will be pointing strongly downward ... just as was the case on options expiration day, October 16, 1987 ... the day before the worst day ever in U.S. stock market history: October 19, 1987.

It seems there's little prospect last Thursday's (6.5.08) peak in the S&P 100 (639.23) will be exceeded. Today most probably doomed that possibility. Thus, odds the S&P 100 could advance to 647 before it spectacularly collapses have been reduced to near zero.

Indeed, I believe the first leg of the most decisive portion of the stock market's meltdown-in-progress unfolded last Friday (6.6.08). The mark-up I made yesterday to the chart of the S&P 100 from 1987 still stands. It shows the market's present position in the grand scheme of things frightfully imminent.

Now, you will notice that, before everything came unglued in October '87, there was a [relatively tiny] bounce early options expiration week. We might expect something of the same presently. The bounce might be a bit more substantial, too.

There remain notable similarities, technically speaking, between now and the latter part of October '07. These support the near-term outlook for a brief rally.

First, look at the NYSE and NASDAQ McClellan Oscillators. The oscillators' present dive to the sell-side — clearly breaking down, and supporting the prospect of a pending market meltdown — sets up for a similar bounce to the zero line as occurred last October '07 ... just before the stock market decisively turned over. Coincident with the recovery of both oscillators we obviously would expect both indexes to rise, too.

Next, take a gander at the differential between New 52-Week Highs and Lows on both the NYSE and NASDAQ...


Just like happened early last October '07, you see, first, a clear break from the prior rising trend in the present period.

Then, late last October '07 came recovery coincident with the market's last-gasp rally.

In both instances the recovery of the high-low differential notably failed to challenge the peak from which it had just descended, despite both the NYSE and NASDAQ Composite indexes rising right back to levels they reached early October '07.

At present we really ought to suppose any recovery — both in the indexes and in the above, underlying technical measures — probably will be a good bit more meager. We are, after all, anticipating the stock market's imminent collapse. So, it stands to reason the recovery we see — both on the surface and under the covers — will be notably weaker than occurred last October '07.


I presented the above chart on Thursday, June 5, 2008, following the last bout of fearlessness to sweep across the market. It shows the differential between advancing and declining issues traded on the NYSE.

The breakout we are seeing from the post-3.17.08 contracting trend — a trend I submit was representative of an unwarranted, underlying complacency — lends weight to an outlook where we are expecting increased volatility.

How much of this volatility might unfold to the upside in a last-gasp, pre-collapse bounce is impossible to say.

June OEX open interest below the market is not much different than I reported yesterday. Put option open interest dwarfs Call option open interest. With seven trading days until expiration there's time for Put options writers to protect their interest if need be.

Contrarily, June OEX open interest above the market might offer clear sailing to 630 (if not higher).

I wanted to raise this OEX open interest situation once again because today's action suggests the Put options writers whose contracts are at strikes below the market might be weak hands. They did nothing today to protect their interest (i.e. ensure the contracts they wrote expire worthless).

Thus, the possibility I mentioned earlier suggesting the S&P 100 might go out the June contract trading in the 590-600 range gained some credibility today it seems.

Despite the open interest disparity below the market — Calls versus Puts — the Put writers are possibly but part of the weak, post-3.17.08 complacency crew ... now being challenged to defend the positions they wrote. Should they ultimately be unable to do so ... and should more weak hands become trapped (were the S&P 100 to settle out the June contract in the 590-600 range, or even lower) ... then the probability the market collapses thereafter is raised to a virtual certainty.

OEX 5-min

I would really like to play the bounce I see coming, despite it not likely taking the S&P 100 anywhere near 647.

625-630 seems a more reasonable target.

The question is when should I jump in? How close are we to a short-term bottom? How much of what has unfolded this week is part of an Elliott Wave corrective pattern?

In other words, I've got the big picture nailed down, but what's immediately at hand I haven't a clue.

No matter. It seems any initial jump higher will be met by enough selling to allow me time to make a low-risk decision.

By the way... the issue I raised the other day regarding the S&P 100's RSI since Friday ... never registering a reading as low as last Tuesday (6.3.08) ... now makes a lot of sense ... with the stock market's impending collapse at hand.

Then, I suggested "[it] might better be viewed as raising the likelihood the S&P 100 will bounce to 647." I thought the S&P 100's RSI divergence was indicating the underlying intensity of selling was not as great as during the week earlier, despite price performance suggesting otherwise.

Now, however, given the persistence of the S&P 100's decline since last Friday, its RSI divergence relative to Tuesday, 6.3.08, supports the likelihood there's much more selling yet to come...

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