Speculation

I must note here, we all know the speculative activity was rampant until this week. So, this week something very strange happened. We had a surge in put buying ahead of declines and then immediately massive call buying that largely offset the puts from the morning. There may be exceptions by a few hours etc, but the same pattern happened this morning too. We had a surge of put buying into the market bounce and now as the market tanks, the call buying surges. It is much less than earlier in the week this time, but indeed it was able to defensive positioning already a bit. So, there is definitely some attitude adjustment and risk recognition, but I am just very surprised by these two categories of investors that showed up this week, the ones who knew the decline was coming and then the other ones who has been blindly buying calls into the declines. The ones who anticipated the decline day after day has been increasing though, perhaps we will also have the blind selling into the rallies next... I do not think it will last beyond a 20-25 points bounce at the moment, I think the speculation has ways to go before fully reconditioned. It doesn't mean we cannot bounce more than 20-25 points, it only says it will become difficult. It should take several weeks in my measures to reconvert the majority to bears and keep them there, but right now we have a set up for a very good bounce for next week. Perhaps one more low after Apple announcement on Monday or FOMC. In the mean time, the cycles projected and confirmed a sell off below 1100 already for the next 2-3 weeks, only we may put a short term low for the end of the month before we dive underneath. From the o/s perspective, it is worth the shot, nothing goes in a straight line, but then one of these times it will... and seriously, if I had to pick a time, I could not find a better one. We had rampant speculation into a rally with divergent breadth momentum AND summation index that turned very abruptly right under resistance, the liquidity environment is rapidly changing, the regulatory environment is said to become very stringy, the earnings are generally being sold, there is overvaluation of some sort depending on how you look at it. I will trade long for a bounce, but I will strictly respect my stops and risk/reward potential here, risk is 1070-1080 and reward is 1120-1130 in my measures, this is 50:50, not a very great trade other than o/s breadth and prices... Best of luck.

Thanks Arb...tricky spot here for sure:

#1

I will trade long for a bounce, but I will strictly respect my stops and risk/reward potential here... this is 50:50, not a very great trade other than o/s breadth and prices...

Hey Arbie,

Well said... And, that's what we're doing.

Sorry for the grammar mistakes there, I typed too quickly. I just think that if we shoot lower one more time, it will be an 80% odds long trade, or a dive to or under 1100 and then a rally. I think we are seeing some bearish surge right now, but much more may be needed to offset the excesses of the previous 2 weeks OR we may simply go lower a bit and then never try to penetrate over the 1120-1130 resistance area, simply turn down from there after a 20-25 points bounce from 1090-1100. I am much more interested in that trade than going long right here, this will be an hedging trade to the intermediate term short positions for February and early March anyway...

Edited by arbman, 22 January 2010 - 02:30 PM.