Wednesday, April 22, 2009

The bull trap has been sprung...

I'm guessing all the weak hands for the bears covered today, probably somewhere near the highs. When it was all said and done, today was just a sophisticated bull trap. While the NDX hit marginal new highs, it was not confirmed on any other index. Sellers stepped right in and drove stock prices to the floor in the final hour of trading erasing today's gains for most of the indices. We have a had a series of higher highs and higher lows since March 6th. That will change this week as Monday's low loses ground (likely tomorrow) and the selling continues on Friday. With the market already overbought on all kinds of timeframes, a major trend change signal like this will create a selling panic for the bulls. I hope you are on the bear train as it is leaving the station.

I added to my IWM 40 puts at today's high giving me an effective .41 avg. cost. I also added to my ES shorts. Due to trade management (profit taking, etc.), my current avg. cost on the ES is 854.


  1. Rich, good call again. One thing I always remember as a pure technical guy (not knowing how to chart EW) is that break of trends almost always go back to test the break point. So while I was pretty well loaded with shorts, I bought more on the break from the double top today. Got more of the IWM options as well, and it looks like a chance for a 20% drop for the IWM. Good charting and good options picking on your part.
    Please keep posting a trade for each trend. I'd be happy to post mine but I wonder if anybody would care.
    do you think AAPL pos earnings will help the NDX much tomorrow? I have QID and and QID May 50 calls.
    Thank you again for your excellent chart work.

  2. Rich, what is the psychology here? The A wave has run out of gas, after testing the resistance in the 870s. Bulls look for a pullback here, to add longs? Any chance we go down past 666?

  3. Pressman, good to hear you stuck to it. Yes, broken trendlines are often retested, but sometimes it is a question of when. I'll continue to post my swing trades. As for aapl, I think it was already baked in. I think aapl will sell off hard tomorrow with the rest of the stocks.

    saleen, bulls who add on the initial pullback will get run over. The scenario I would like to see is a retest of the broken trendline (somewhere in the low to mid 700s). Although a possibility, I don't think we see a break to new market lows until the end of the year. One of the hard things about playing the bear rally is that you really never know when the rally will end, so you have to tread lightly and play it conservatively. I think we will find that after the 'B' wave is over it will be a lot of up and down over a very long period of time. The going straight up or straight down days are over until primary wave 3 kicks in (likely in 3-7 months), which will make it very hard for everyone to make money.