Bluto Gives Popeye An Edumicayshkin ~ The Risk Averse Alert

Thursday, August 18, 2011

Bluto Gives Popeye An Edumicayshkin

As if it had not already been amply demonstrated that, those interests long equities are woefully weak hands, today served up confirmation the likes desperately are in need of Popeye's spinach...

SPX 5-min

Well, blow me down: another deep, intra-day RSI extreme ... just like that kicking off wave 3 down in late-July. All that selling into August 9th bottom bringing bargains galore (at least in the eyes of many a sucker) and still no answer to the call of a bull's nature to step up and buy the dip. They're just too whipped and have been for a long time.

Which is not to say the spirit isn't willing! During today's pre-market trading when it was clear it was going be a rough day, Jon Najarian tweeted: "Fear makes the wolf bigger than he is - German Proverb." To which I replied: "... and fearlessness makes the bear bigger," followed by a link to last night's commentary.

(As per Popeye Heebner, here's what one bear had to say.)

Now, about the fact that, today's opening thud dwarfed that on the worst day thus far (August 8th), here, early on in the formation of wave C down (targeting index levels last seen in the 1987-1994 period). At 10:00 a.m. EST today the S&P 500 had fallen 50 points (mercy!), whereas on August 8th it had "only" fallen 30 points over the first half-hour of trading. Two takeaways.

First, this presents a relative demonstration of "capitulation" fitting a fifth wave down. Likewise did the NYSE Advance-Decline differential hold up versus August 8th's awful reading, further confirming that, wave 5 of (1) of C moved well along in its formation today.

Second, today's resounding weakness right out of the gate and lasting to the finish supports probability that, five waves down from the S&P 500's July 7th peak likely are not the end of sorrows, but rather just the beginning.

Referring back to the above chart of the S&P 500 at 5-minute intervals, we should expect typical technical strengthening during present formation of wave iv of 5, versus wave ii of 5. This, then, is to anticipate RSI rising above the green line I have drawn.

Once this first-sign of underlying technical improvement occurs (as seems likely), then wave v of 5 will follow. Given today's vivid confirmation that, weak hands dominate the long equity trade, it seems a virtual certainty August 9th's intra-day low will be taken out like bin Laden. Indeed, I rather suspect wave v of 5 ending wave (1) down from July 7th peak might prove a persistent bugger, and carry the S&P 500 to its next line of support detailed last Friday in "Support Turning Resistance, Stat."

Yet a part of me also imagines the hopelessly insolvent might toy with the foolishly sanguine, and sooner venture a bottom. Still, any floor will need to be well-hedged. Following today's throttling the CBOE Put/Call Ratio still remains shy of its late-May 2010 peak. Given a far more severe backdrop accompanying the market's decline over the past month and a half, a spike in the CBOE Put/Call Ratio significantly exceeding last May's peak seems an entirely reasonable expectation.

As wave (1) of C nears its completion a test of conviction in the likelihood New York inter-bank lending markets will remain unaffected by a frightfully fragile, imploding euro-zone hangs in the balance. Should August 9th bottom be taken out decisively, then faith in the trans-Atlantic banking system's stability naturally could be thought waning. Such further confirmation of a crisis of confidence yet to reach its zenith would set up perfectly for wave (3) of C soon enough to follow.

Fast Money
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