Wednesday, January 27, 2010

Wave 2 has started

Well, today's volatility nearly got me to my 1080 target, so it was a bit frustrating when some of my cover targets missed by near ticks on the ES, but that is how it goes sometimes. Nevertheless, we have a near perfect 5 wave pattern on the hourly chart, so now it is just a matter of building up a short position at the right spots.

So, here are high probability turning points for a wave 2 end:
- 1114/1116 (near the 50% fib retracement and key resistance)
- 1128/1131 (test of the breakdown area)

Certainly once we have a wave A and B, it will be a little easier to project the wave C termination point.

Someone asked me about my options strategy. Here is how I'll be positioning myself for what should be at least 2 weeks of solid selling once wave 3 picks up. As the finance sector should be one of the more vulnerable sectors, I'll overweight my strategy on Finance (FAZ); however Energy (ERY) and Technology (TYP) should also provide plenty of bang for the buck. 3x ETFs can be dangerous, but they should work well for 2 weeks in a wave 3 situation. I'll be putting half my position in Feb calls and the other half in March calls. I will buy 1/2 my position at 1114 unless we have already put in a wave A before then. I will buy the other half all the way up to 1128. Risk is 100% of the option price. Initial profit target is 300% of my cost basis.

Best to your trading!
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