The Dow looks to be in the throes of a 420-point plunge, even if sellers were unable to deliver the haymaker yesterday that would have put bulls down for the count. At the final bell, the drop amounted to only 144 points, although it would have been closer to 200 points at the day’s lows. If our prediction of a further 276-point fall over the very near-term pans out, pushing the blue chip average slightly below 10000, that would be just a very small downpayment on all of the plunging the Dow will still have to do to catch up with a U.S. and global economy that have begun to relapse into deep coma. Dow 5000, anybody? Whatever happens, it seems clear already that the highs » Read the full article
It’s explosive days like yesterday that serve to remind us of Bonds’ strong propensity to go against weakness in the broad averages. To the extent I am increasing the drum beat for the “sky-is-falling” argument, I am implicitly saying that a powerful upthrust awaits in this vehicle. More immediately, and considering the ease with which the 134^09 Hidden Pivot gave way, I’ll hang a 135^09 target out as a minimum upside objective for now — and 140^20 if it fails.. The provenance of the first number is shown in the accompanying chart, but there are any number of other bullish ABCs that I could have used. Anyway, we are not trying to short this vehicle so much as find explanations for the behavior of other markets that take their cues from it. Meanwhile, it cannot make anyone feel “safer” that so much of the world’s investment capital is pouring into one allegedly “safe” haven. As Marc Faber has said, people will want to cross the icy river where the greatest number of people are crossing it, but that’s hardly the way to ensure one’s safety.
This week’s consolidation has occurred entirely below an 83.03 peak recorded on July 23, so the potency of the larger, bullish pattern begun on August 6 is suspect. It projects to 84.30, but because the pattern itself is sausage-y, we should assume for starters that more consolidation is needed before much of anything happens for bulls.
I drum-rolled a 1040.25 downside target in the chat room yesterday, and it still looks like a no-brainer. A plunge to that number should be viewed as likely if and when the midpoint support with which it is associated, 1069.25, gives way. The so-far three-tick penetration of the support was not sufficient for us to have inferred that the jig was up yet for DaSleazeballs, who were hard at work near the close attempting to make a distribution opportunity out of a pathetic five-point rally.
The futures at least crept past the lower of two rally targets we’ve been using, 1236.70, and now presumably will take on the second at 1244.20. As noted here earlier, scale-out profit-taking is advised for swing traders still long, as well as the use of a “dynamic” trailing stop as described on this site’s educational page.
Subscribers are working two bullish calendar spreads (x16), but I would suggest increasing the size of the position if TLT corrects down to the 115.18 target shown. For now , we are long September 20 118 calls against short August 19 118 calls that we will roll into August 29 calls this Thursday and Friday. We’ve already done the roll twice, reducing the cost basis of the spread to 0.04. This week’s roll will entail covering (buying back) the short calls and shorting a like number of August 29 calls, effectively selling the August 22 118/August 29 118 calendar spread.
It was marked on Tuesday at 0.17, off a 0.26 offer, but any price higher than 0.04 will effectively turn the position we’ll have – long the Sept 20 118/August 29 118 calendar — into a credit spread. This means we can’t lose – will make a profit no matter what TLT does. Ideally, come September 20 , TLT will be sitting at 118, our spread will be trading for around 0.50, and we’ll be carrying it for a credit of perhaps 0.50. The imputed profit would be $1600 — not bad, considering our risk is already close to zero.
My long-term outlook for T-Bonds is very bullish, a view that goes sharply against a consensus which clings to the belief that interest rates – and the stock market — can only go up. That is a bet we should be eager to fade. We may have a chance to do so at still better odds if T-Bonds continue to sell off on the manufactured idea that the Jackson Hole conference will open the floodgates for more stimulus and inflation. _______ UPDATE (10:38 a.m.): The Sep 20/Aug xx calendar spread is recommended at this point only for those who did the original spread, since there’s not enough time left on it to roll its cost basis down to zero or less (i.e., a credit). If you are new to the spread, try buying the Nov 20/August 29 calendar for 0.90 with TLT trading around 115.80. The spread has a delta value of 0.20, implying that being long one spread is equivalent to being long 20 shares of stock. This means that, using a spread price of 0.90 as a benchmark, you should adjust the price you pay for it by one penny, up or down, for each 5 cents that TLT moves away from 115.80.