Building Up for a Sudden Scare? ~ The Risk Averse Alert

Friday, May 22, 2009

Building Up for a Sudden Scare?

Came close to opening an OEX Put position today. Decided to wait until Tuesday, thinking one more bounce might be in store before the market finally falls through the floor. We'll see. I'll have more to say on Monday (my holiday treat)...

Yesterday's perspective was of levitation possibly developing over the next couple months.

Today, let's consider the levitation we're presently in the midst of. Just because this condition's persistence suggests a relatively buoyant market might result (as put forward yesterday) does not at all mean considerable risks are off the table.


Exactly one week ago I wrote NASDAQ RSI and MACD were suggesting a bounce might be in store.

Bingo. Now, look at the present similarity to early-June '08. How's that for UltraShort ETF comfort?

Here again I put forward the crazy, Helix-like, center line around which the imploding NASDAQ Composite appears to be rotating.

Judging by the condition of things right now (relative to this time last year) a moment of truth could be at hand. If months ahead offer capitulation, then a decided turn lower — holding the 50-day moving average below the 200-day, just like last year — appears imminent.

Obviously, then, last night's targeting of support at the 50-day moving average vastly underestimates selling potential here. That curious center line proves all the more interesting, itself, when you consider a .618 retracement of gains made since March bottom targets COMP 1460.


From March to mid-May '08 a counter-trend rally persisted amid weakening underlying conditions as highlighted above. Ditto March to May '09.

Following May '08 peak a period characterized by increasing underlying weakness developed.

Ditto the present moment?

NASDAQ McClellan

I wanted to get a better sense about how during counter-trend rallies over the past year instances of growing McClellan Oscillator weakness map to periods preceding the bulk of NASDAQ Composite selling.

I'm not really sure how helpful this is. Given the Oscillator's relatively significant deterioration in the present instance ... yet with scarcely a scratch on NASDAQ ... either COMP will not fall to its "center line" (1460), or it might descend there in rapid order.

Judging by the McClellan 5% and 10% indexes NASDAQ's rally off March '09 bottom rightly might be seen (by its limited reach above the 0 line) as a counter-trend rally ... albeit the strongest since October 2007 top ... rather than a reversal of trend.

You might also say the McClellan 5% and 10% indexes are at an inflection point. So, you see why yesterday I suggested another couple months of relative buoyancy might be in store.

Tonight, however, the thought is what if at this inflection point the market falls hard in response to weakening technical conditions?


Not one day in nearly two months have more Puts than Calls traded on the CBOE. See, too, how this condition compares to the May-July '08 period, particularly in light of the Put/Call Ratio's relationship with its 200-day moving average. Per any pending decline's possibility, one might say it is in fact time for a pickup in Put activity.

Then again, which trend is your friend here? And so, what about this pronounced slant in Call activity we see of late (after so much selling over the past 18 months)? Is it largely speculative or is it short position hedging?

Either way the implications are negative (and support the case for capitulation).

So, maybe we're due for a scare...

Fast Money
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