If you had an inventory of shares you wished to trim and you were aware a relatively strong vested interest had written insurance against falling stock prices (i.e. Put option contracts), would you not be motivated to feed this interest some of your shares and likewise sell Put contracts to small speculators, taking advantage of fear your share sales precipitated, knowing full well the shares you sell likely will be absorbed?
This reasonable question essentially extends through expiration week considerations put forward in the paradox of VIX levitation. Check this out:
The bulk of this week's decline occurred in the first ten minutes of trading out of the gate on Tuesday (2.17.09). TEN MINUTES! Then, for 1,160 minutes since ... the market has gone absolutely nowhere ... today visiting both the top and bottom ends of the narrow range that developed over the duration.
Believe it or not, something of consequence developed during these 1,160 minutes, despite the market stalling...
Put options! Get your put options! Red hot put options! Get 'em while they're hot!
Look at that RSI. Find me one instance over the past, incredibly wild six months when sentiment's relative swing to the negative was so decidedly strong. Why, there is none! Well, what about that? Apparently the frightfully mesmerized haters of government see trouble ahead.
Now, today's intra-day stumble to a new, multi-year low in the Dow Jones Industrials Average ... taking the index below its intra-day low registered on November 21, 2008 ... does raise a red flag. It prospectively alters how to rightly look (from an Elliott Wave perspective) at the market's decline since May 19, 2008. Five waves down ... at least in the Dow ... might not yet be complete.
Still, per what likely lies ahead, immediately, refer back to comments accompanying the chart of the NASDAQ Composite presented last Friday. Even despite this week's gap below COMP's presumed contracting triangle, I do not for one minute believe everything is about to fall apart. That's because an Elliott Wave "contracting triangle" did not form at all.
I continue viewing index performance at present as bearing similarity to Q1 2003. At that time, too, NASDAQ was leading the bottoming process. Like now, it held up relative better than large cap indexes like NYA and INDU.
Straight ahead, look again at the prospective mark-up drawn on the NYSE Composite chart published Tuesday. A trip back up to '09 highs ... and quite possibly beyond ... still is very much in the cards.
The question raised by today's trade is what might follow this anticipated move to new '09 highs? Today's new intra-day low in the Dow Industrials suggests other indexes might join the Dow, setting new multi-year lows sometime in the near future. Again, the thinking here touches on the possibility the market's decline since May 19, 2008 is not complete.
Be that as it may, though, I continue finding no reason to fear an imminent challenge of November '08 lows across the broader swath of market indexes. Technical divergences persist on broad market index charts, while other underlying measures either are at extreme positions which during the recent past have signaled imminent turns higher (like the CBOE Put/Call ratio above), or remain at critical inflection points.
Taking this still-positive technical configuration in the context of the past 1,160 minutes, the market's near-term outlook still looks promising. Ultra ETF positions I continue holding should recover just fine and turn positive in no time...
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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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