Thursday, March 26, 2009

Market Edges Higher, Major Selloff Due; March 26, 2009

The market continued to push higher today, led by the Nasdaqs and tech. The financials, best tracked by the XLF, failed to make any real progress upward today except for a surge in the last 20 minutes of trading. The momentum indicators show this rally becoming very exhausted and either being held up by hope, or an artifical buying spree, or both. I believe it's both, and when it's over and people realize they can't push the market higher, it will collapse. As reported by CNBC, the quarter is coming to end in a few trading days so big shots are loading up their books with stocks to mark them down for the quarter. I feel once this has ended, perhaps April 1st, the big correction I've been waiting for will come to be. So that's a time estimation for the big correction downward, the price target is the 867 area for a top because it's the underside of an ascending trendline established months ago. So in an educated guess essentially, I can see the S&P futures possibly rallying until April 1st to the 867 area.

As you can see from the 6 hour S&P futures chart above, all three momentum indicators below are making lower lows while price continues higher and higher. This creates a rubber band effect. Sure, the market can continue higher for days or weeks, but until that rubberband is released, it creates a lot of tension on it and when it snaps, it will shoot this market down hard.

Because I know the larger trend is up and this market may rally for the next few days, I do not want to sit on a large equity position. So I'm using put option spreads to short the market at high leverage and minimum risk. This way I risk exaclty the amount of capital I'm will to lose on this short trade, and all I have to do is have the market fall before my option expiration date.

I'm also heavily short the XLF which is the ETF for the financial industry. It looks extremely bearish and definitely in its last throws of its rally. I can't rule out one more sharp pop rally, but it should be quickly reversed and lead to heavy selling which should take the rest of the market down.

To sum up my trades, I'm short the S&P and various tech stocks through April put options using spreads. I'm also short the XLF using a put option spread.

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