Thursday, March 25, 2010

Yesterday's spirited leap brought the Dollar Index within 0.14 points of the 82.17 rally target I flagged here yesterday.  It remains shortable, but you'll have to choose the vehicle and interpolate the target.  Since there is always the possibility the target will be exceeded, I'll note that a close above the target would be warning bears to dive for cover.

  A fall to at least 16.365, the target flagged in an update to yesterday's tout, looks imminent and unavoidable.  You can bottom-fish there, but the stop-loss would need to be below 16.360 to encompass an alternative 'D' target a tick below the one at 16.365. If you are keen on shorting the predicted decline, look for camouflage on the 5-minute (or less) chart. The futures were slightly buoyant Wednesday night, so you must trust the first bearish impulse leg that comes your way to get on board with stealth.

 The pattern from which the 1073.20 target disseminated yesterday was derived looks too pretty not to play out as drawn (see inset).  You can bottom-fish aggressively, and this time I'll leave the stop-loss up to you.  It can be as tight as 4-6 ticks.  If the target gets bombed, we'll need to consider the 1044.50 structural low -- early February's bottom -- as a minimum downside objective.

Just as we can attempt to understand this crazy world by asking ourselves what Brian Boitano would do, we can try to understand the market on a given day by asking what will happen if there is absolutely no one selling shares.  Under the circumstances, and as should be obvious to all, the broad averages would rise on the buying of Larry Kudlow alone.

In the absence of even a speck of buying interest, the 1175.75 rally target is still the most compelling choice we've got. Short there with an 1177.25 stop-loss -- a pittance if you were on board for the nearly $2800 ride we got from Monday's 1146.75 low. Alternatively, the futures would need to fall to 1157.25 today to turn the (very) lesser charts bearish.

We exited a bullish position in the E-Mini S&P yesterday on a trailing stop, expecting to reverse our strategy and get short at a slightly higher price.  The futures need only have tacked five points onto Tuesday’s highs to trigger the new trade; alas they spent all of Wednesday going nowhere as we sat on our thumbs, bored half to death. The charts suggest the market is tied up in knots -- and what’s a trader to do? We are given to infer once again that there is virtually no buying interest right now other than from bears covering shorts; moreover, when demand from that source is absent, stocks cannot make even an inch of headway to the upside. Just as obviously, there is no selling power whatsoever, and any market that has declined even moderately for a few hours is ripe for bottom-fishing. Under the circumstances, our most successful trades have involved buying or shorting futures contracts at, respectively, swing lows or highs. It is in fact possible to short repeatedly into a strong rally and make money consistently, provided your timing is right and you are quick to take relatively small partial profits on pullbacks. We have done this over and over – not so much because we expected to catch the Mother of All Tops, but because we might have; because it’s easy to do; and because we risked little or nothing in trying. Time Decay But attempting the same trick with put and call options is another matter, since time is always working against the retail customer, who is more or less forced by margin rules to be on the long-premium side of option trades. While there is no way for option buyers to eliminate the problem of time decay, we can try to mitigate its