If Bottom Is In, What Next? ~ The Risk Averse Alert

Wednesday, February 25, 2009

If Bottom Is In, What Next?

It's possible bottom is in. Of course, this does not mean indexes immediately surge higher, not to look back anytime soon. In fact, there could be some further bump up ... recovering a significant portion of the past two weeks' losses ... followed by a pullback to the vicinity of current levels ... all paving the way for a subsequent upside explosion.

Let me temper yesterday's closing remark about "the mother of all short squeezes." This move higher is likely to unfold in stages — a 5-wave Elliott Wave whose components will be apparent on daily charts. I wanted to make this distinction because you might have assumed "the mother of all short squeezes" meant a straight line up.

Now, a straight-line move of this sort still could develop. It would be during formation of the middle wave (i.e. the 3rd wave ... typically the most dynamic Elliott Wave). Needless to say this is some weeks off.


Note how over the past three months NYSE and NASDAQ Composite Indexes have bottomed days following options expiration. This at present is interesting in light of the fact that, some underlying technicals (like Bullish Percent Indexes, 52-week High-Low differentials, VIX) have improved over the same, 3-month duration, while others currently register "oversold" readings.

NYSE 5-min
NASDAQ 5-min

I am impressed by the fact both NYSE and NASDAQ Composite Indexes have recovered Monday's losses, while at the same time RSI is improving. If by chance the week ends positive, this will bode well for bottoming being in.

Fast Money
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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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