Yesterday's Risk Averse Alert reported, "it looks like [Tuesday's] advance might be largely retraced over the next few days." Obviously, this expectation should have been stated a bit more broadly. It should have read, "... sometime over the next few minutes to the next few days." All things considered, the stock market could continue experiencing similar volatility as today, leading into next Thursday's expiration of the March OEX contract.
We have seen evidence of both weakness and strength reflected throughout this week's trading. Both were most notably demonstrated today.
Today's opening swoon quickly took the S&P 100 to the very spot yesterday's comments set as the probable objective of any "short" position we suggested might be initiated today. (If we had opened a Put position, we were "[looking] for a bottom in the 595 area.") Considerable underlying weakness was demonstrated as a result of today's start, with RSI challenging its Friday, 2/29 low (a day whose sell-off during the opening minutes of trading was quite similar to today's).
Not surprisingly, buying came in to save the day, ending any similarity to trading on 2/29. Thus, the present expectation that Monday's low is a point from which a counter-trend rally will develop, possibly lifting the S&P 100 to 645-650 range over the next few weeks, was verified (as much as this is possible). As such, the stock market's underlying strength likewise was demonstrated today.
Now, is today's strength suggesting Monday's low could not possibly be taken out sometime before next Thursday's expiration? No. But if this should happen, we would expect a reversal soon after.
In fact, this past Monday's low could be taken out tomorrow (or Monday next). If so, a quick "long" trade might be in order.
And to reiterate comments made over the past couple days, resistance in the 620 area should continue to materialize until the March OEX contract goes off the board next Thursday.
Broadly and generally speaking, we continue to look for the S&P 100 to rally as high as the 645-650 area before dishing out a final dose of pain. (You can read more about this here.) Although the stock market's path of least resistance, near-term, is up, its multi-month decline likely is not yet over.
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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.
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.
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