Added Substantiation on a Wave Count ~ The Risk Averse Alert

Tuesday, May 10, 2011

Added Substantiation on a Wave Count

The CBOE Put/Call Ratio might offer additional substantiation supporting the prospective Elliott wave count put forward here over recent days...


Recall that, the dynamic consistently revealed via the CBOE Put/Call Ratio since March '09 bottom has been one where covered call options written beget a CME-driven short squeeze, beget call options exercised, beget long equity distributed.

Well, first off, it appears call option buyers are becoming scarcer. These would be the suckers looking to add to long positions — their interest in exercising their call option rights piqued by rising prices. A persistently declining volume of shares traded on the NYSE speaks of their dying interest — a crowd "all in."

Fittingly is this revealed during formation of wave 4 of (c), when technical weakness typically increases. However, such increased measure of hedging as one might expect when weakness builds has not yet materialized. Peak hedging registered during formation of wave 2 of (c) (late-August 2010) has not yet been exceeded. That distinction might come as wave e of 4 completes sometime over the next few weeks.

Seen in the context of the above described technical dynamic underlying the market's counter-trend advance since March '09 bottom, the trend of "call option pushing" during advancing waves since late-June 2010, and "put option hedging" during corrective waves reflects typical Elliott wave character for each respective wave thus far to unfold, and this particularly when considering each wave in relation to the others. For example, in keeping with a third wave typically being the most dynamic Elliott wave, wave 3 of (c) (early-September 2010) saw heavy put option hedging early in its formation (indeed, more than at any time since late-June 2010 bottom!), and this soon was followed by several months spent at peak capacity pushing call options, this as wave 3 of (c) completed and wave 4 of (c) began unfolding with its upward bias.

Now, as higher lows have been established in formation of wave 4 of (c) (since early-November 2010) an increasing measure of put option hedging has been required to bolster the market's floor. It seems a safe bet this trend will continue as wave 4 completes sometime over the next few weeks.

Should this occur as expected — with increasing technical weakness relative to wave 2 displayed — the prospective Elliott wave count discussed here over recent days only would gain further substantiation.

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.

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