So, You Say You Want a Revelation? ~ The Risk Averse Alert

Thursday, July 17, 2008

So, You Say You Want a Revelation?

Forgive me for not appearing very rigorous in my analysis tonight. I have not investigated the extent to which thus far correctly bearish commentators are gnashing their teeth following the counter-trend rally of the past two days. I'll bet there are plenty. In fact, a little earlier you might say I was one of them.

Have you come across anyone railing Chris Cox and the SEC, blaming the rally of the past two days on the "naked short selling" crackdown announced on Tuesday?

There seems to be a considerable degree of confusion surrounding this.

Be that as it may, does anyone really believe that, if our nation's many desperate investment banks were to handsomely profit from naked short positions (were, say, the market to crumble, stat, and with alacrity), the SEC would actually enforce its emergency rule? This does seem to be the most relevant question if, indeed, the trend is your friend.

And what of this emergency rule in and of itself? What does it apparently reveal?

In a word I would say desperation.

Now, what has Pinky Paulson, the Goldman boy, been pushing? Why, a Super Regulator ... obsoleting that pesky FDR relic, the SEC.

Might not a good, old-fashioned discrediting of this much maligned, toothless tiger (the SEC) be in order?


I wonder ... how many frustrated bears still would be filled with tonight's doubt were the market to crater tomorrow? How many have been shaken from their positions these past two days, and are now loath to reenter? How many fail to see why, indeed, they should be doubling down?

You know very well my position. This market has much, much further south to go before it reaches Mexico. And time of departure is NOW. Last boarding call...

What an incredible "reset" these past two days delivered! So many strong recoveries of underlying technicals to levels prevailing some weeks ago when indexes traded considerably higher than they do today. Precisely what one might expect in circumstances such as these ... just prior to collapse.

Complacency, meet your blood-in-the-streets capitulation. I am glad I will not have to say I wish I saw it coming.

Hey, Secretary Paulson ... I found our nation's first Super Regulator!

Kent Dorfman (a.k.a. "Flounder").

[5:00 p.m.]
This morning's view showing the S&P 100's possible position following its unexpected move higher out of the gate was blown out of the water with this afternoon's move to still higher ground. So, let's consider another possible scenario here...

OEX 5-min

This simplifies the view taken earlier (see 11:30 a.m. update below). Here I am contrarily showing the possibility of five waves forming from Tuesday morning's bottom, rather than three waves (i.e. a-b-c) as previously shown. Waves 1, 2 and 3 of these five waves have formed ... wave 4 is in the process of forming ... and wave 5 awaits. These five waves will complete a corrective process that began last Friday at around 1:00 p.m.

I remain of a mind supposing the S&P 100 is correcting its first wave down following its 5.19.08 peak. In other words, the S&P 100 is forming wave 2 of five waves since turning over on 5.19.08. See the July 14, 2008 post for a daily chart of the S&P 100 detailing the first wave down.

It is important I state this, so as to avoid confusion. Those of you who understand the Elliott Wave Principle know precisely the ramification of what I am saying here. Those of you who don't, let me be clear:

By no means has Monsieur Market seen the worst of selling leading to a bottom from which its subsequent melt-up is projected to unfold.

I am mildly embarrassed not to have feared the possibility of what we have seen unfold these past two days. All the more so after having taken on three July OEX 550 Puts yesterday. My lament is not so much that I took the risk. Like I said, this position was paid for with the house's money. Rather, I am embarrassed because those who only recently signed up to my Trade Notification list might feel misguided. To you especially I apologize. And to all of you I do the same.

The past two days have been a rather poignant demonstration of just how nothing is set in stone. Indeed, the ebb and flow of the market's decline since 5.19.08 has brought almost as much gnashing of teeth my way as it has brought the world's finest collection of buffoons who work CNBC. However, an opportune moment when keener insight separates itself from this hapless crowd remains in sight. There's little question a crushing capitulation is just around the corner.

[11:30 a.m.]
Here's a view possibly tempering this morning's unexpectedly huge pop out of the gate...

OEX 5-min

Same channel I presented yesterday ... with this morning's bolt higher demonstrating something called "throw over." Whether this view proves accurate time will tell. I present it only to suggest RSI's consequent push into a buy-side extreme supports the possibility.

Per what's to come... it is more to the effect of showing you the possible form rather than the timing. Given volatility we have seen so far this week, my July 550s are by no means dead. However, the Lady 520s may need some help from W's boy, Darth Vader...

* * * * *

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sdmikev said...

Like I predicted yesterday, today is turning out to be another antacid day. Curious to see if this crazed buying continues through the close like yesterday. If it does, maybe it's time to think about going long for the short term. At this point, I'm licking my wounds, being grateful that I only gambled the house's money, and hoping for a Friday surprise that will prevent me from giving all of the house's money back.

TC said...

Good call on the antacid, Mike. Although the specific possibility presented in the 11:30 update has been blown out, the best of any possible short-term play long Calls is certainly behind us. Would recommend staying away from that trade.

Despite projecting the bounce following Tuesday's hard down open (and doing so before the opening bell) ... and despite having supposed the bounce could continue following Tuesday's close ... if I had seen the possibility of such a large advance as we are enduring, trust me, I would have played it.

There's still some hope for the July 550 PUTs I picked up yesterday. But if anything right now, I am looking for a good entry point to go long August Puts.

sdmikev said...

Yeah, I hear you. That thought about going long was the Tums talking. LOL. I wonder just how MER and C earnings are going to be. Of course, analyst estimates are so low, they'll probably manage a "beat" despite getting completely hammered.

sdmikev said...

Looks like tomorrow might actually be entertaining with GOOG and MER both coming in worse than expected. If C completes the trifecta of crap in the morning, we might finally get the 4-g inverted dive we've been waiting for.

Of course, now that my deep OTM July puts are worthless, I really just feel like "keeping up foreign relations" with the geniuses who fueled this week's bogus rally.

I call shenanigans.

Paul Hanksen said...

I don't understand why you keep looking for the big kaput-ulation before OpEx is over?

If the whole purpose of the rally was to save the arses of the many put writers on Wall St., why would the rally completely reverse before Monday?

TC said...

I'm not sure how you came to your conclusion, Paul. After the past two days, it's painfully obvious expiration Friday probably is not going to deliver me to the capitulation promised land.

But could a good, hard punch to the gut, taking indexes to new, post-5.19.08 lows be delivered before Friday's close?

Could something incredibly wicked get under way before the July contract goes off the board ... taking out 700 Dow points before the close?

Well, wouldn't that be just glorious.

Better still! Such a shocker as this is entirely possible at such rarefied moments as these, when bankrupt institutions at the core of U.S. finance rally some incredible double digit percent in a matter of a couple days.

Can you recall any unique instance since 9-11 when it was the easiest thing to say, "All things are not what they seem?"

I submit to you this: strong-hands are presently short and that is why they expanded their call buying yesterday when the OEX rose 2.75% (if they were long, they would have hedged with Puts).

So, to answer your question ... the rally would completely reverse before Monday because there are no more shorts to be squeezed.

Paul Hanksen said...

TC...Your writing is very sharp and entertaining, but sometimes you are so clever and euphemistic that I am not sure what exactly you are suggesting.

I appreciate the clarification in this reply.