Bounce or Flash Time For The SP500

Update, June 17th 1:30pm: Sold my entire TNA position.  With some timely buys yesterday I was able to lower my cost to $70.76.

Here is the cost, the buys from yesterday and the sell from today:  All in all I lost 1.51 on the stock and stand to make $1.10 on June 74 calls that I sold today, so roughly a total lost of .41 cents.

Update, June 15th-Yesterday around midday we took advantage of the market pop and sold some TNA June 74 calls for $1.10 for some accounts:

Update: June 13th, 2011 9:00am:  Covered our UCO short position for an average gain of +$2.55.  As far as our $TNA position we now have an average cost of 71.76.

Positions: TNA, NUAN June 22 calls, 14.6% invested, 85% cash.

It is very rare when you have the indexes down for 6 consecutive days, normally by the fourth day you have all the mean reversion players looking to get long for a 2-3 day bounce. Unless we get some unexpected news I am expecting a 3 to 5 day bounce.

Here are some key points:

  • The SP500 has now closed below the lower bollinger band for 3 consecutive days, the Composite and the Russell 2000 closed below their lower bollinger band as well.
  • Cboe total put to call ratio closed at 1.19, that’s now 6 consecutive closes above 1, and the 10 day average is now 1.00.  To reiterate in the past closes above 1.00 have been bullish short term for the market (3 to 5 days).
  • Cboe equity only put to call ratio closed at .99, closes above .70 are considered bullish, readings above .80 are rare, a .99 is unreal=in my eyes, this is bullish in the next 3 to 5 days barring any unexpected news.
  • ISEE equity only put to call ratio closed at 125, readings under 130 are rare and have been bullish for the market in the past.  See chart below:

Telechart McClellan Oscillator closed at -207, bounces start from -200 readings, see chart below:

  • The breakout/breakdown momentum indicator is at an extreme low level, a level that in the past has paid as a contrarian bet.
  • What we want to see is an immediate bounce, as trader looking for a bounce, we do not want to see the indexes consolidate this down move by moving sideways for a few days, that would be bearish in our opinion.
  • All we are looking for is 3 to 5 day bounce and then we will reassess.  We believe that it will be a long summer with really no real reason to be fully invested (too many uncertainties: QE3, debt ceiling, Weiner-lol, unemployment).
  • We don’t bet on crashes, they are too rare and far in between…but we do bet on snap-backs.
  • The best way to play snap-back bounces in our opinion is thru ETF’s, and with multiple buys.  If you normally buy 1000 shares of any given stock, we would buy it in tranches: 150, 200, 300, etc…
  • We are looking to add to the TNA at 70 and 68 and make the position no more than 25% of the portfolio.  25% in TNA (effectively the russell 2000) is no different than being invested 25% in 10 different stocks.  The Russell 2000 has all the diversification you need.
  • 99% of investors should sit out these mean reversion type trades, unless you are willing to take a loss and are not known to have a slope of hope investing strategy.
  • Where is the buy the effing dip crowd?

Position 7% net long, 80% cash, NUAN June 22 calls, long 1st tranch of TNA, and short 1st tranch of UCO.

You may also want to read:

Trading Addictions

Mean Reverting into a long trade

Smart Money Looking For a Pullback




The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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