Thursday, November 6, 2008

Just before the Cubes began to freefall yesterday, we bought four December 36 calls (QQQLJ) for 0.75 off an opening bid that had been lowered from 1.02. For now, continue to offer four November 36 calls (QQQKJ) short against them, but bring the price down from the 0.60 originally suggested to a more realistic 0.48. In retrospect, it's clear that a stop-loss was warranted, since the breach of the 32.90 support on which our call bid was based implied further weakness. We may have to contend with still more selling today, since QQQ looked bound at the close for a minor Hidden Pivot at 31.76 that lay 0.16 beneath Wednesday's intraday low. If you hold no position, I'd suggest bottom-fishing at that last number, using a stop-loss as tight as 6-7 cents. It is a double Hidden Pivot and should therefore be expected to show some stopping power. However, under the circumstances, if it does not it will be warning bulls to flee for their lives. _______ UPDATE: There's no additional play here, since the Cubes have traded well below the support in night action, with put and call options unopened.

Let's see how a Hidden Pivot support at 9076 performs before we assume the worst. It would seem to lie too close to yesterday's bottom to survive heavy selling on the opening, but perhaps Beelzebub will show up at the bell to rain perversity on those who went home short and complacent yesterday. _______ UPDATE: With no campaign headlines cluttering up the news, investors' focus has returned to the grim reality of a global economy headed into a Depression. Although an old Dow rally target at 9955 is still theoretically viable, the short-squeeze that would get it there seems to lack a credible catalyst at the moment. We should consequently view a downside target at 7549 as equally credible. Its midpoint sibling lies at 8667, so the Dow will need to find traction there or else.

A Hidden Pivot support at 9040 is equivalent to the one I've flagged in the QQQ -- and probably just as delicate. However, unlike QQQ, this vehicle trades all night long, and it therefore lends itself to traders with a delicate touch. If you're comfortable playing the YM, I'll recommend bottom-fishing 9040 with a bid two ticks above it and a stop-loss at 9034. The order can be deployed at any time before the day session begins, but I wouldn't attempt it later, after the tempo of the market has picked up. _______ UPDATE: The 9040 pivot showed no pluck whatsoever, hinting of the weakness that was yet to come. At 11:52 a.m., the futures looked bound for at least 8774, having made a low so far at 8812.

We've learned not to get our hopes up that Citi will allow us to short some fat pivot at the apex of a rally. This time around, we might have been holding out for 15.18 if we'd been paying close attention to the stock. That's a Hidden Pivot target, and it sits well above the 14.80 actually achieved on Tuesday's close. There would have been no reason to get short at that price, since we'd have expected Citi to rally the remaining 38 cents to the 15.18 target on yesterday's opening. Lo, the stock gapped down on the bell, and then it plummeted. When we characterize Citi as "un-shortable," it is evasive maneuvers like yesterday's that make this very nearly so. Such deviousness is what we should expect of a stock that everyone "knows" is headed to the zero axis. Incidentally, the pasting that Citi and Goldman received yesterday was a dead giveaway that the broad averages were going to come down hard. Because these stocks are both perfect bellwethers right now, I will continue to suggest that you watch them closely to understand what is on Mr. Market's devious, evil mind at any given moment.

A midpoint support at 735.90 was my minimum downside expectation as trading continued into Wednesday evening, but any lower would imply 722.10. The latter number would not be particularly useful for bottom-fishing, however, since it coincides with some visually supportive lows made earlier in the week. If they, and the pivot, fail, we could expect a test of the 681.00 low recorded on October 24. Alternatively, we should reserve our bullish excitement for a thrust that creates a solid impulse leg on the hourly chart. For today, that would mean a print at 782.30.

With silver holding its own against weakness in other precious metals, my immediate outlook is unchanged, given here earlier as follows: "The futures are struggling to stay above a midpoint resistance at 10.265, but they'll need to close above it, or exceed it by at least 50 cents intraday, to signal their readiness for a move to the 11.330 target that has served in recent days as our rally objective. Swing traders should consider taking profits on at least half of any long positions at that price, and long-term bulls should also adjust in anticipation of a pullback."

We spent considerable time during yesterday morning's tutorial session examining reasons why we should expect another big leg up in the dollar. That is not to say it is about to turn higher tomorrow; in fact, technical signs are still short-term bearish. But as the Dollar Index continues to ease, keep in mind that it could come all the way down to 80.43 before encountering the midpoint of its giant C-D rally leg from the September 26 low. That should be our minimum downside expectation for a proper correction within an ongoing bull market. However, if an impulsive turn were to occur on the hourly chart before DXY has reached 80.43, it would suggest that a quite powerful new bull leg is under way, with potential to the low 90s.