Wednesday, October 8, 2008

The accompanying chart shows a target at 8851 that implies a 596-point plunge is coming. Ordinarily we'd infer that's a bit steep for a day's action, but not now. The midpoint associated with the target lies at 948, and so we shouldn't be surprised if a last-gasp rally overnight or perhaps in the opening minutes of Wednesday's session, tops out near that number. Alternatively, the Dow would have to hit 10562 to convince us that DaBoyz can turn the short-squeeze into a more durable rally. (Note: If the selling accelerates, we should expect it to better yesterday's 508-point decline. For that reason, here's a target to hold in reserve if the Indoos blow through the 8851 target: 8479.)

If the Diamonds fall in lock-step with the cash Dow, look for a tradable bounce from 88.48, exactly. You can try getting long by naked-shorting two October 85 puts, but only if you feel nimble enough to bail out of them if the underlying stock exceeds the target by 20 cents or more. If implied volatilities don't get whacky -- a big "if" in this case -- the puts should be trading for about 4.60. I have not featured this recommendation as a Pick of the Day because it involves the naked sale of options. In my estimation, the strategy is far more likely to produce a profit than buying out-of-the-money calls, but that is not the way the regulators and your broker see it.

The futures have been dancing with our pivots as Astaire with Rogers, so we must infer that the breach Tuesday night of the 984.00 target billboarded in the chat room yesterday will have bearish implications going forward. The new target is 926.00, and because the ES bounce precisely from that target's sibling midpoint, 1002.00, we should expect an equally precise bounce from 926.00. This implies a commensurate decline in the Dow of about 800 points, which would put the blue chip index somewhere between the two targets identified in today's tout. In practice, though, we'll analyze each in a vacuum, since it's possible they won't sync up perfectly. Alternatively, no short squeeze that fails to top 1095.00 today should be taken seriously.

The bull has been renewing itself daily by pushing past two prior peaks with each new thrust. Most immediately, upside to a Hidden Pivot resistance at 906.20, at least, is in prospect, but any higher would imply 918.60. If the futures were to close for two consecutive days above the latter number, they'd become an odds-on shot to reach 1014.70.

We've set a bullish benchmark at 13.085 that would signal the creation of a robust bullish impulse leg on the hourly chart. However, a less ambitious threshold at 12.565, the midpoint pivot of the rally cycle begun in mid-September, would serve nearly as well to tell us when Silver is ready to move. Let us therefore stipulate that a two-day close above the lower number be taken as a sign that Silver's intermediate-term trend has reversed to bullish.

We are long four Nov 15-20 put spreads for 0.35 and short one Nov 12.50 put for 1.20. The bear spread has the potential to widen out to 5.00 at expiration, producing a gain of $465 per spread, but if we can capture 80 percent of that five weeks before expiration, we should try to do so. Accordingly, I'll recommend offering the spread for 4.00, good for the remainder of the week. If you are working the order via direct access, you should leg out of it by selling the November 20 puts first, on the offer, then paying the offer to cover the short November 15 puts. This would effectively permit an exit at a price midway between the spread bid and the spread offer. If you are able to execute the spread, simultaneously cover the short Nov 12.50 put at-the-market. Incidentally, another way to lock in the equivalent of 4.00 for the put spread would be to buy the November 15-20 call spread for 1.00. That would leave you with a riskless, four-side position called a "box," and when the box expires on October 17, no matter where the stock is priced, you would realize a gain of $365 per -- $500 for the box, less the $135 you paid for it. The $120 received for the Nov 12.50 would be added to your total profit of $1460, provided Citi is trading 12.50 or higher.