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[denleo]

Thursday was the opposite of Wednesday. Early morning rally was weak and then reversed to the downside. Spooz sold off 20 points from high to low and finished slightly lower. The weakest indexes were Energy (the latest safe haven) and Small caps (the latest underperformer). Go figure! Volume declined and VIX didn’t move, which means institutions are not doing much.

Here are some of the truly unique developments in the stock market:

1. VVIX (volatility of volatility) traded and closed at an all time low (VIX options have never been cheaper in history).
2. NYSE Composite made new intraday all time high, while Small Caps are trading below 200-Day Moving Average
3. McClellan Oscillators on every index are below zero. Even strong sectors like Energy and Consumer Staples are undergoing internal deterioration.
4. There are pronounced divergences on stocks trading above their 200-Day Moving averages.
5. New High / New Low indicator just looks terrible
6. Cumulative Tick is weak and divergent

I can go on and on. There is never a case when every indicator is pointing to the same direction, but the evidence is growing that the stock market is about to experience a 15% or bigger decline. If the market as measured by the S&P 500 index starts to decline now, the decline could be small (10% or so). If the market goes higher from here for a few days / weeks, we will be dealing with a situation where the opportunity to make life changing money on the downside will present itself. The Bull market of the 90s took more than a year to complete (from the beginning of internal weakness to the price top on S&P). The bull market of 2003 – 2007 took just a couple of months. It is impossible to know what this one will bring. That is why the best outcome to investors (not traders) is for the market to decline now and have a normal corrective process. Inability to do so now will bring something really ugly in a few months of 30% or more.

The paragraph above is a forecast. Forecasts are useless! Trades are what matters.

Did I mention that VIX options are the cheapest ever? I did. Buy them! Let me rephrase that – Load the biggest truck you have with those calls!

Buy VIX October 20 Calls (currently trading at 1.60). VIX at 30 and you will have a 10 bagger. Buy them and forget about them. Place them in a different account in order not to look at them.

Ok, enough talking about bearishness. Let’s go back to trading and adjust one of our positions:

IWM / SPY spread is down a little less than 2% from our entry. Let’s cancel the stop and instead buy IWM May 109 Put.

I will not be scalping or day trading tomorrow after the above mentioned plans are executed in the morning.

Have a Profitable Day!!!