Heads Up: Duck! ~ The Risk Averse Alert

Wednesday, February 23, 2011

Heads Up: Duck!

So far, so good in the quest for top from which the market upon reaching might crater soon after. That top very well could have been reached last week.

Technical evidence supporting an outlook for a broad-based gassing, of course, has been long in the making, accumulating without challenge over the interim of the market's advance off March '09 bottom, and furthermore confirming what now is a decade and running distribution of shares from strong hands to weak (among which finds white shoe firms, as well as countless hedge funds, whose excessive leverage worked beautifully on the way up, but acts as a knife in the back now that leverage can no longer be furthered at necessary rates required to forestall calamitous collapse — pity, and I mean this sincerely, as many livelihoods are threatened, as is the life of many nations including the United States).

Now, being so early in the present, prospective realization of the market's forecast unraveling, all due diffidence is in order, that some last gasp effort extending the market's levitation might be accommodated. Yet given the granularity of evidence supporting the possibility that, a "rising wedge" forming off late-June 2010 bottom, indeed, completed last Friday (2/18/2011), deserving immediate attention, then, is the weight of evidence raising prospect that, a 25-40% collapse over the next several weeks could develop.


Momentum (bottom panel) — now having turned lower in a fashion similar to mid-April 2010 — sets the stage for further weakness straight ahead. Yet given that, this measure remains pinned to the positive side of its balance — a price-supportive condition whose existence has extended over the past five months — some retracement of the market's decline this week along lines occurring over the latter half of April 2010 could be in order. Relative strength (top panel) — likewise still positively positioned — further supports this view.

Still to be seen, though, is whether any near-term bounce might prove "lasting," extending for a period lasting several days and raising appearances that, the market's further levitation could be in store. Yet there's also reason to suspect the market might fall apart more rapidly than occurred last year...


Relatively speaking, the sharp pullback in the NYSE Bullish Percent Index — this following the measure's divergence from prior peaks over the past year coinciding with the NYSE Composite index trading at lower levels — appears a red flag.

No doubt, this measure's break is fitting underlying conditions coinciding with the market's advance since early-December 2010, as the fifth wave of a presumed "rising wedge" forming since late-June 2010 unfolded. Over this duration upside participation notably narrowed (as evidenced by the NYSE Advance-Decline differential). Thus, the NYSE Bullish Percent Index's present, sharp pullback further demonstrates a measure of underlying technical weakness substantiating a bearish outlook whose imminent manifestation might be thought elevated as a consequence.


With only modest increase in hedged, long equity positions (this via put options) as this week's decline has proceeded — these potentially acting to put a floor under the market — we have more evidence that further selling could rapidly develop ... much along lines following April 2010 top.

Judging by positive momentum of the Put/Call ratio (bottom panel), a period of weakness could be at hand sending stocks lower until such time a well-hedged, long equity bid once again enters and provides price support. Most noteworthy is the rightful, coincident manner in which the Put/Call ratio's increasing momentum has been evolving as a presumed rising wedge forming since late-June 2010 has been moving toward completion, quite possibly reaching its end late last week. And now prospect this rising wedge might be rapidly retraced via an imminent 25-40% haircut likewise appears supported by the CBOE Put/Call ratio's return to a positive momentum bias following this week's bounce off that measure's "0 line."

Considering similarity here to early-May, 2010, when the Put/Call ratio's momentum likewise turned decidedly positive, the message, then, might be heads up. Or better yet, duck!

Fast Money
* * * * *

© 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.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!