Floor Building Early in a Bear Market ~ The Risk Averse Alert

Tuesday, October 11, 2011

Floor Building Early in a Bear Market

The most surprising development this week has been the CBOE Put/Call Ratio's turn higher. This is quite opposite my expectation. Taking a closer look at this measure in the context of the Elliott wave currently unfolding relevant conclusions follow...


At this point in the midst of a massive, 5-wave decline from July 2011 peak (this targeting index levels last seen in the 1987-1994 period) put options might best be seen a cheap means of controlling the rate of descent. Rights converted become short sales to be covered, which act puts a floor under prices.

So, first, given what lies in store over months ahead, a marked increase in material assurance a floor can be established confirms an increasing risk the market will need picking up from the floor.

Then, consider the hedging dynamics pattern indicated by successive red-green-black dots marked above mapped to the S&P 500 below.


The setup for creation of a new floor is in place. The S&P 500's underlying technical state only the more raises the probability that, bottom will soon fall out...

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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