Refinements on Certainty ~ The Risk Averse Alert

Thursday, June 24, 2010

Refinements on Certainty

One thing can be concluded here with relative certainty...

Five waves up from June 1st bottom thought forming wave c of (2) surely must be complete. The market's fall from Monday's top simply has gone "too far" for this move lower to be reasonably considered part of a fourth wave of five waves up from June 1st bottom.

So, does this mean Monday's "Yuan a be a sucker" peak marks the precipice from which will begin a steep decline forming wave (3) of (C) — a throttling likely to challenge March '09 lows?

This certainly is possible. However a further period featuring more or less sideways trading, extending the formation of wave (2) of (C) also is in the realm of possibility...


The above view portrays this possibility.

Likewise, once wave (2) finally completes, we might also expect waves 1 and 2 of wave (3) to form within the range established during formation of wave (2). In other words, sideways trading since late-May could persist for several weeks more before, at last, wave 3 of (3) of (C) unfolds in what should be a breathtaking collapse producing some of the worst technical readings in recorded history. (Seriously)

So, why am I raising this possibility?

Well, because it fits the spirit of observations presented over recent days, particularly as these tie into that slightly revised Elliott Wave view put forward Tuesday ... wherein only wave (5) of (C) is projected to form below March '09 lows.

Consider my thesis of a decade-and-running spent building bull traps — these having served to draw in the greatest number of suckers at the highest possible prices. It stands to reason that, at this late hour following formation from March '09 to April '10 of but the third bull trap since October 1998 every effort again will be made venturing to accomplish much the same as before: drawing in the most suckers possible before springing the trap door.

As I have said, and we all understand this, there are more vulnerabilities than you can shake a stick at threatening to reek havoc throughout our world's hopelessly insolvent financial system. Indeed, one would have to be either stupid or a lying thief not to grasp this. Yet until such time as something gives — and it's plain something big will give — we might better anticipate that, in the interim every effort will be made to postpone inevitable collapse.

Yet make no mistake ... collapse is near. Have you ever in your lifetime been exposed to such a fair number of relatively sane souls cogently revealing the emperor has no clothes?

Such, then, is the background to possibility raised above, wherein over the next several weeks a more or less sideways trend might further develop. I suspect that, over this interim the world will be lulled to sleep to an even greater degree than is evident right now.

So, where does this leave my $50 Mega Score? Well, first and foremost, still sitting like a vulture, holding to as much plump promise looking out at its prey as was the case yesterday and the day before.

In fact, the goal I have established with this proposition — quickly multiplying your $50 initial stake ten times and returning you $500 — might easily be met well before wave 3 of (3) of (C) unfolds. Thus, your prospect for taking the $500 I return to you and multiplying this into something in the neighborhood of $50,000 appears to be exceptionally good.

I want to thank those of you who stepped up today, as I encouraged you to do. Inasmuch as I challenged you to demonstrate the courage of your conviction, mine too is bolstered in boldly taking you to task. I would not dare venturing this proposition targeting what is thought reasonably called a "Mega Score" were I not perfectly convinced this object might be easily attained risking but a pittance.

Manning the "Prop Desk" during tonight's Fast Money was Barry Ritholtz. At the start of this year he published a post at his "Big Picture" blog discussing his New Years resolutions. One of these was to cut back his options trading to only those moments when he had relative certainty about the outcome. "Certainty" in options trading crosses a fine line you come to know with experience. If I might enlighten you, I would say it is not so much about "knowing" you're right, but rather having little doubt about the manner in which your speculation will evolve.

Before I fell asleep last night I was thinking about the lessons I have learned in my many years experience trading stock index options. I was visualizing their applicability to the opportunity at hand. I felt no fear these lessons would be forgotten or ignored. Visions of successfully navigating this moment of truth that, for all intents and purposes is upon us right now rested in my contemplation of how the trade would unfold. Never did I doubt the outcome or the reasonableness of my goal. Quite the contrary. My confidence was bolstered in pondering traps of old.

This might seem intangible wisdom if you lack experience trading options. Yet the gist of confidence you should desire is not much different than what you generally are better off recognizing prior to making any substantial investment. The sensation you know is a measure of certainty that raises investing to an art form.

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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