Pre-Collapse Weakness Ahead ~ The Risk Averse Alert

Wednesday, September 21, 2011

Pre-Collapse Weakness Ahead

Up until about 2:40 p.m. today I was of the view that, the market's advance since last Monday (9/12) probably had a bit more upside remaining. However, following release of yet another Fed statement reiterating reality that, the U.S. banking system remains hopelessly insolvent, and subsequent trading resulting in Monday's opening low being taken out, my view toward further upside prospects appeared at risk of being discredited.

So, after spending a few minutes reviewing the situation across major indexes I came to the conclusion that, a strong move lower appeared in store. Yet I was thinking the greater bulk of this apparent, downside risk would not materialize until Thursday.

Bzzzzz. Wrong! Although not without technical substantiation indicating significant underlying weakness, today's final hour provided a lot more hurt than I was anticipating. Unexpected though today's finish was, my immediate outlook remains unaltered. The market's "strong move lower" appears to have only just begun, and the greater bulk of it still could come tomorrow.


Curiously enough, the state of the CBOE Put/Call Ratio finds similarity to recent moments when the market began to come under pressure. This is indicated in the bottom panel.


As you can see, each of these noted, prior instances when the market was on the verge of coming under pressure (early-April and early-July) were but mid-stream bouts of weakness en-route to an ultimate peak (indicated via green dots on both charts above) where strong hands short equities were well-hedged with call options, and ready for subsequent selling of a larger magnitude. Look for the same upcoming.

Given that the current bout of weakness finds the S&P 500's relative strength (top panel) in a weaker state than at those two prior instances, the market's anticipated, "strong move lower" is further substantiated. Just how the market's pending decline and subsequent recovery fits into the development of five waves down from July 7th peak — this targeting index levels last seen in the 1987-1994 period — remains to be seen.

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!