Wheeeee – this is going to be exciting!
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
We put on our Stock Market Parachutes and went bearish on our Mattress Plays as well. Not so much because we are long-term bearish but because the run-up ahead of the Fed decision seemed very overdone as pretty much EVERYONE is now predicting QE2 so what kind of market mover can it now be – even if the Fed does drop another Trillion or so on us this afternoon? Later in the day we added an SDS spread, similar to the logic of the QID but longer-term (January). As I said in my closing comment to Members: "We haven’t got 666 on the RUT yet so the risk/reward favors rolling up to the Dec $110 puts and staying naked through tomorrow. If we are over on 3 of our levels tomorrow, then we can cover."
When we are near the top of our ranges (see Charts from the Future: 5% Rule Update) we can assume there will be upside resistance so we have less risk shorting the indexes we think are over-extended compared to the potential reward of what happens if the news that had been pumping up the market on rumors turns out to be a big disappointment and causes us to retrace.
This is not contrarian investing nor is it trend following as we make our bets very much against the trend (ALWAYS sell into the initial excitement) – it’s simply our attempt to apply logic and statistics to a volatile situation. Also, keep in mind we are still long-term bullish and that’s where the bulk of our open trade ideas are aiming so we lean towards shorter-term bearish covers to keep us safe through…