Tuesday, October 14, 2014

There were no reports to confirm a price in the chat room, but I'll use a 0.72 cost basis for four Nov 22 39-strike calls I'd recommending buying yesterday. It is not a healthy sign that JNK closed beneath the 39.40 target, albeit only by a few cents.  Based on the earlier tout, you should stop yourself out of the calls if they trade for 0.57. ______ UPDATE (October 14, 7:35 p.m. EDT): JNK has taken a modest bounce from the targeted low, but the calls remain leaden. Stick to the 0.57 stop-loss, which is intended to limit the theoretical loss from this play to $60. You should make the stop-loss o-c-o (one-order-cancels-the-other) with an offer to sell two of the calls currently held for 1.40, effectively zeroing out risk.  Obviously, it will take a sustained, powerful rally to get the offer filled. _______ UPDATE (October 16, 12:46 a.m.): We'll back away for now, since I'd rather be shorting this flying pig when it's airborne rather than emerging from a wallow.

The downtrending ABC pattern shown is clear enough that we should have expected more of a bounce from each of the two Hidden Pivot supports circled in red. When Hidden Pivot targets give way this easily, it implies that the underlying trend is likely to continue and may be about to accelerate. This is notwithstanding short-squeeze rallies such as the one yesterday that gave fleeting (and deceptive) buoyancy to the broad averages.  Be aware, however, that an even nastier decline in January gave way to one of the most relentless bull runs in memory. Like the current selloff, it generated a bearish impulse leg on the daily chart.  Is this likely to happen again? My very strong feeling is that it won't -- that the current weakness is the nascent phase of a very powerful bear market. Even so, we should keep an open mind when stocks rally. At the moment, the Dow would need to leap 436 points without a visually significant correction, surpassing a 16757 'external peak recorded Friday on the way down, just to turn the hourly chart bullish.

It has been said that the stock market sees six months ahead, predicting big swings in the economy with the kind of prescience that no single investor could possess. So what does it see now? Clearly, it's spooked by something. Could it be the precipitous collapse of Pax Americana around the world?  The spectre of geopolitical chaos in the Middle East? The dramatic economic slowdown in Europe, China and Japan? An American president's downward spiral, personally and politically? There's even Ebola, which, unbelievably, may now have found its way to... Kansas City.  My own experience as a trader for nearly 40 years has taught me that the stock market, far from being prescient, couldn't detect a lamb chop tethered to its neck if it were a dog. So if the Dow Industrials happen to be trading 5000 points lower by spring, let's not be too quick to credit Wall Street with oracular powers. More believable is that stocks will have fallen simply because, in the cosmic scheme of things, it was time for them to fall. If they do, it will darken our perception of many grave problems and issues that have seemed for years beyond managing.  Markets are the tail that wags the economic dog, not the other way around.