Tuesday, May 19, 2009

Okay, let's see FAZ try to hurt us, now that we've acquired four October 10 calls (FAYJB) for 1.20. These pups will require little tending in the weeks ahead, but I may call on you at some point to acquire some call options in another vehicle, the better to effect a strangle-type hedge.  Thereafter, with a few bucks down on the pass line, we'll be better able to summon the proper enthusiasm when rallies happen, as they always will.   This was a strategy I employed on the options floor in the late 1980s, when I was absolutely certain the bank stocks were about to collapse.  They didn't -- far from it, actually -- and I lost a small fortune on the thousands of put options I held. But I made it all back and much more by being very long drug stocks, including Schering Plough in its heyday.  Remember: We want to come out ahead no matter what happens, and we want to have fun while we're doing it.

No, you're not imagining it: Google has conspicuously lagged the financial stocks in the current mania and is even starting to look a bit heavy on the daily chart. We hold a very modest short position in the form of a single _____ put, so we should be cheered

An hour-long bounce yesterday from a Hidden Pivot at 918.10 that I flagged in the chat room ended ignominiously with a relapse to 915.20. This implies the futures will now fall to at least _____, a Hidden Pivot that you can bottom-fish with

Fear that Goldman's psychotic spree could hit $160 seems to have pervaded the chat room on Monday, so perhaps the stock is actually close to a top. Or maybe not. From a Hidden Pivot perspective, _____ is undeniably possible, although it would require yet more of the sort of elongated

Bears shouldn't get their hopes too high over this, but it is a fact that yesterday's short-squeeze failed to clear a series of peaks along the "wall" of last week's decline. This hints that the buying was too gutless to take on any more than the low hurdles posed by a couple of modest highs made on Thursday and Friday. A bullying rally is what it was

The bear rally that wouldn't die frolicked once again yesterday, leaving shorts badly bloodied and hanging from the ropes. The Dow Industrials, for one, opened sharply higher on a 100-point gap, then just kept going with only tepid pullbacks along the way.  The buying spree had been telegraphed the night before when the E-mini index futures appeared to struggle to reach a minor pullback target off Friday's highs.  Because of this, around 1 a.m. Monday, with the June E-Mini S&Ps trading around 878, we warned subscribers with short positions to brace for more insanity: "Bears would be wise to run for the hills if the futures pop above 897.00 today," we advised, "since that would turn the hourly chart unambiguously bullish. A subtler bullish signal would occur on the 15-minute chart at 885.00."  Not long afterward, both of these Hidden Pivots gave way, overpowered by short-covering on thin volume. And here's more bad news for bears: The short-squeeze appeared likely to continue into Tuesday, since there was a whiff of panicky buying in the closing minutes of the session. On the 15-minute chart, the Dow tacked on about 50 points on the final bar, suggesting that at least a few shorts had thrown in the towel. Ordinarily, a price spike on the final bell implies that the last bear has been wrung out. In this case, however, the spike was not quite steep enough to suggest this was the case. In any event, we took a small bearish position in the call options of FAZ, a trading vehicle that allows one to leverage the downside in the Russell Financial 1000. We bought for a pittance (1.20) some October calls that traded as high as 97.30 (!)  just before the bank stocks took off in early March. At the time we initiated