Thursday, August 6, 2009

Prepare for Wave 3 NOW, Just in Case; August 6, 2009

The market has reached a crucial point and all signs are pointed to a decline of significant magnitude either right now with the high in place at 1007.75 in the S&P futures, or that it will do so in a couple weeks most likely. Right now, the Nasdaq indices have lagged the blue chip Dow and S&P indices almost all week. The Dow and S&P made new highs yesterday and today while the Nasdaqs have not. This is an aversion to risk, which usually occurs at major tops. Also, NYSE breadth has been funky yesterday and today with more up volume than down volume but there were a lot more decliners than advancers. This all tells me the market is fractured and weakened. This may all resolve itself with a sharp rally higher after tomorrow's jobs report, but the evidence now suggests that a major top may be in place and I can short aggressively against the high established today at 1007.75 S&P futures.

Many other markets and sentiment indicators are lining up for a major selloff as well. Although I still think the market will rally close to the 1100 level before wave 2 ends and wave 3 begins, the market always fools the masses and surprises us. So I want to be ready for wave 3 NOW. Sentiment is at an optimistic extreme as measured by various technical indicators as well as just watching TV. The president has pretty much taken credit for an economic recovery, most TV talking heads are bullish and the only question is "how fast will this new bull market move", and everyone suggests buying on dips now. These are all signs of a major top at hand and positioned accordingly:

I'm buying longer term (June 2010 and Jan 2011) put options on the SPY, QQQQ, XLF and the SLV well out of the money. The reason is that if the market falls now just temporarily, I'll make money and take profits. But, if the market rallies from current levels in the coming week or so, then I know that wave 2 is in its last stages and wave 3 will begin shortly causing a catstrophic collapse and putting my options well into profit. So buy buying far out put options, I'll either profit from a short term decline now, or from a massive collapse over the next several months.

I only used half of my available capital so if the market rallies or moves sideways I can add to the positions accordingly.


Gustavo said...

Congratulations for your trades!!
I need your help one more time.
I can see in the zone of puts on qqqq Mar 10 of Yahoo Finance, the next options:
31.00 QAVOE.X 0.86 2,284
31.00 UYQOE.X 1.00 2,260
Wich is the difference between QAVOE and UYQOE? QAVOE is better because is more cheap or it's a mistake?
Thank You.

Todd S said...

UYQOE is a "Q1" option where as QAVOE is a regular option. I am not familiar with Quarter based options so I can't comment on the differences. I only trade regular options. So I would only trade the QAVOE option. If you trade the UYQOE option, research that type of option before you do. There is no "free value" out there. If something is cheaper, there's a reason. Understand what that reason is before you buy.

Good luck!

Gustavo said...

Thank You!!
I understand what do you say. Your comment was very usefully to me.
For the moment I increase my position in FAZ. May be we don't will see more interventions and regulations in the leveraged ETF's and other products how forex and we can stay investing with peace of mind.