Wednesday, October 21, 2009

An outside reversal day, tomorrow should confirm it

Hmmm where to start. The overnight market brought the indices to new lows before the market opened, but at the open the bulls took over and pushed the market to new rally highs. After a few hours of distribution, the bulls gave up the ghost and the market cratered.

We are at a VERY important junction. Why? Well, besides having a completed EW count and perfect market sentiment for a primary wave 2 top, we also are about to lose the channel that has defined this bear market rally since March at the same time as not being able to confirm a breakout of the 9/23 top. If primary wave 3 has indeed started, we should see an impulsive move on the daily chart that takes us to the 875 area before any significant counter trend rallies form.

For the bulls? Well, they need to immediately push the market up and close it above today's high. That would signal significantly more strength ahead.

As for a high reward option play, it would be to wait for continued weakness into 1050, and then buy Dec/Jan puts into the countertrend rally with a stop above the highs. Key areas to buy puts would be starting with the 38.2% retracement all the way up to the 78.6% retracement of the move down.


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