Monday, October 6, 2008

We are long the Nov 15-20 put spread four times, having legged into it for a net debit of 0.35 per spread. That means the most we can lose is $35 per spread, or $140 on the entire position, with the stock trading $19.65 or higher when the November series expires. However, below that price we'll reap $400 per point, so that with Citi trading $15 or lower, we would come away with a profit of $1,860. One way to even further reduce our premium risk so that no loss is possible would be to naked-short a single extra out-of-the-money put -- say, the November 12.50 put -- for 1.40. If you work the numbers at expiration with the stock trading anywhere between 0 and 100, you'll see that no net loss would result overall. Accordingly -- and assuming your broker permits it -- I'll recommend offering a Nov 12.50 put (CWZ) short for 1.40, good-till-canceled. Concerning Citi, it's difficult to predict how the firm's squabble with Wells Fargo will affect the price of its shares. Whatever happens, we are very likely to make a profit, and if Citi collapses sooner rather than later, it will mean a windfall for us. My hunch is that Wells will buy Wachovia, since it appears to be a real deal rather than a phony like most of the forced takeovers the government has been promoting lately. If the stock slips some more, however, you can try bottom-fishing at 16.60, a promising Hidden Pivot support. Officially, we'll buy December 17.50 calls (CLR) with the goal of legging into a calendar spread on the expected bounce. _______ UPDATE: We bought four December 17.50 calls for 2.62 and blew them out not long afterward a little less. (2.56 is where I closed them out myself --

The bearish pattern on the hourly chart has grown more compelling with last week's destruction, bringing a 1020.00 target into focus. I've selected a one-off 'A' (see chart) to produce this target, but the higher, obvious one at 1291.25 would yield an even more dismal objective at 996.50. We'll know better which obtains by watching the price action at the patterns' respective midpoints: 1097.75 and 1086.00. I've reproduced the chart with annotations to encourage some of our chat room experts to track this one in real time, with the possible goal of scalping a rally or two on the way down. If the lowermost target, 996.50 is achieved -- as why should it not be? -- a commensurate fall of about 1000 Dow points is implied.

So much for Flight to Quality. At first glance, the Ten-Year Note's weekly chart looks quite bullish, with an impulsive spike in mid-September that would presumably set the tone for months to come. In fact, the real impulse leg ended at the first 'B', since the pullback from it more than equaled 0.618 of the k-A segment. What that implies is that the spike to 'False B' was simply a failed rally, and that, at best, any move to new highs would require many weeks of consolidation near current levels or lower.

There are two minor midpoint Hidden Pivot supports just above 820, but if the lower of them at 820.80 gives way I'd infer that more downside awaits over the near term to at least 791.30. Alternatively, the futures would need to print 864.10 today or tomorrow to turn the short-term trend decisively bullish. I've reproduced the chart alongside because the pattern yielding the 791.30 target is somewhat unconventional. Pivoteers should note, however, that if you choose the first 'B' that exceeds a look-to-the-left low, and then let your eye move backwards along the price bars, the ABCs simply fall into place.

The best place to get a read is at 10.640, a Hidden Pivot midpoint support. If it fails to engender a tradable bounce, then we should brace for more downside to at least 10.30-10.40, where some presumably supportive lows were recorded in mid-September. Alternatively, the futures would need to thrust above 13.080 this week to send shorts scrambling for cover.

My gut feeling is that mere central bank support would not suffice to push the dollar into such a steep ascent. Is it possible that we are witnessing the short-squeeze on the dollar that I've written about here and elsewhere on the Web? (See my September 10 commentary, 'Worthless' Dollar Still Squeeze-able, in the Rick's Picks archive. The gist of it is that borrowers of dollars, unable to roll short-term loans at the moment, are being pressed to settle up in cash.) Whatever is causing the dollar's preternatural (and ferociously counterintuitive) strength, we have a compelling target at 84.96 that we can use to tell us where the blowoff is likely to blow out.