Waiting on Short Equity Hedging Bump ~ The Risk Averse Alert

Thursday, September 08, 2011

Waiting on Short Equity Hedging Bump

One thing I have been anticipating in conjunction with the end of the corrective wave unfolding since August 22nd (forming wave (2) of C) is a marked increase in call option hedging of short equity positions, this signaling start of the market's forecast collapse (i.e. wave (3) of C).

Well, we're not there yet...


Red dots mark recent instances when a relative increase in call option hedging of short equity positions immediately preceded a decided turn lower in the market. Being that, the market's collapse is thought likely once the corrective wave currently unfolding completes, it seems reasonable to expect call option hedging of short equity positions to at least challenge, if not exceed, anything seen since May 1st in particular. So, based on this expectation it probably will be some days before wave (2) of C completes.

The period following mid-June bottom (green dot) becomes interesting in the context of yesterday's CBOE Put/Call Ratio dive below its 200-day moving average for the first time since August 22nd's end of wave (1) of C. Let's take a closer look at this...


Oh yes, the fake rally of the century (late-June to early-July) was soon to follow. Seeing a similar technical setup, now versus mid-June, further raises prospect of additional gains over days ahead, this to complete the corrective wave forming since August 22nd.

Now the question is what further gain might we expect? Well, the S&P 500's head and shoulders neckline (not drawn) is in the vicinity of 1270 and 200-day moving average around 1280. However, the 50-day average might prove formidable resistance.

Fast Money
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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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