Sunday, April 26, 2009

Let's Look at the Big Picture Again; April 26, 2009




With the short term trade not working out, let's look at what's happening in the bigger picture. Above is a daily S&P futures chart showing a nice 5 wave decline from the October 2007 high. With 5 waves down it tells me the largest trend is down now, and that the lows put in earlier this year WILL NOT HOLD. But after declining so massively over a 17 month period, a correction is due. We are in that correction now, which is one reason why it's so hard to trade it. Clearly the rally from the March low is not impulsive (5 waves), so it's some type of correction, which fits with my wave count on the chart above and the thesis that the March lows will not hold.

So what do I do now? That's the big question. I tried fighting the current trend, which is up for the moment, and shorted this market for weeks. It didn't work. So I want to focus on the largest trend which is down. I decided to establish an SDS (ETF double short the S&P 500) position and sell calls against it real in some premium and give me a little cushion. Plus, it's a longer term trade so if I hold it at the end of the quarters I'll recieve a dividend on it. I know there is slippage in these ETFs, but that's fine, I'm not holding it for a decade. I entered a 25% position of the total position I want to have to get fully short the market in preparation for the next collapse in prices that will break the March lows and send us into the modern day Dark Ages. As the market rallies, I'll add to my SDS position, and as time passes, I will continue to sell call options against he position and collect dividends which will improve my positioning. I'm doing this because for the short term the trend is up, but for the longer term the trend is down. I tried timing the market and it didn't work. So instead, I'm going to short and hold with an easily sustainable and comfortable short position to where I can just patiently wait for this market to roll over again. I estimate this won't happen until the latter end of this year though.

One more strategy I put in is to buy an option butterfly on the S&P just above current levels. This also gives me some protection with my current short position in case the market continues to rise slowly or move sideways.

So there you have it. My new stance is to focus on the long term and position myself slowly with the largest trend, which is down, and PATIENTLY wait for the market to finish this bear market 'fools rally'.

I welcome any questions anyone has. Also, the part about the Dark Ages and the next very massive and destructive decline is inspired by the work of Elliott Wave International and Bob Precther. Please take the time to go to their website and read their material. They have a lot of free stuff and good EWP educational tools. Bob's book "Conquer the Crash" is excellent reading for anyone who wants to know how to protect themselves on this huge decline that's coming later in the year. EWI's website is: http://www.elliottwave.com/

3 comments:

jozef said...

Hi, great analyze.

The question. What level is for you attractive to begin shorting.

Todd S said...

Good question. Unfortunately, I don't have a good answer at this point. It's too early in the correction. I want it to play out further and see optimism and bullish sentiment rise big. We're not there yet.

But as for now, if the market continues higher in this straight line structure, I will look to short fully very soon, i.e. within a couple months. But if we get a big correction within a couple weeks, like I've been expecting, then I will look to short much later in the year.

Both scenarios have me looking at prior 4th wave resistance in the 1050-1100 S&P futures area. That would be first target, and I think that answers your question.

That's my "guess" as of right now.

Thanks for the question, Jozef.

Todd S said...

...one more thing, I've already shorted 25% of a full position near current levels (S&P futures 866). Another good entry point will be the 940 area, and 1010 area.

So I will probably enter at the following levels:

940
1010
1067
1135

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