Put Options

My indicators remain at extremely low levels and the major indexes remain in down-trends.  There were only 13 new highs and 1,576 new lows in my universe of 4,000 stocks on Friday.  I see no evidence of any strength yet.  EBS and LPHI, two promising stocks at new highs that I have written about, showed large price swings last week.  This is typical of weak markets, when the few stocks that hit new highs cannot hold the gains.  It is folly to go long during the time when the general market averages are in down-trends.  I remain in cash and hold put options on a few stocks. 

The GMI and GMI-R remain at zero.  There were  3 new highs and 671 new lows in my universe of 4,000 stocks on Wednesday.  The indexes I follow remain in solid down-trends and I made a little money in my IRA as my put options increased in value…..

I have been going to trader meet-up groups the past three years and had noticed that attendance was sometimes a good contrary indicator at market tops and bottoms.  When few people attend the meeting it often signifies disgust with the market and a possible bottom.  Last night we had the largest attendance ever, an ominous sign to me.  When I mentioned this to the group they all laughed, which I interpreted to mean that they did not think the market was in for a further decline.  Many of the new attendees were noticing the volatility of the market and wanted to find ways to profit from it.  Could it be that as long as we have lots of people looking for opportunities, this market will not bottom?  Capitulation (and bottoms) usually occurs when people want no part of the market. Moreover, when I look at this monthly chart of the QQQQ, I see a market that may be closer to the beginning of a decline than to the end. 

Note that the shorter term moving average (dotted line) has just crossed below the longer moving average (red line).  In contrast, the 2000-2002 market spent two years with this short moving average declining below the longer average.  Maybe we should get ready for a long decline and stop trying to find a bottom.  What do you think?

The GMI ad GMI-R are both back to zero.  There were 3 new highs and 38 new lows in my universe of 4,000 stocks on Tuesday.  The Worden T2108 indicator remains at 3% and Tuesday was the 31st day of the current QQQQ short term down-trend…. 

Why place bets on the long side now when the odds are so against us?  The market indexes I follow (QQQQ, SPY, DIA)  are still in down-trends, and most stocks decline with the indexes.  For example, since I identified the current QQQQ short term down-trend on September 2, that index has declined 26%.  During the same period, 98% of the Nasdaq 100 stocks (measured by the QQQQ) declined; 40% have declined 30% or more.  At the same time all but one of the Dow 30 stocks have declined along with 97% of the S&P 500 stocks. My approach to trading is to always be consistent with the trend of the market indicators.  So, I have little choice but to be in cash on the sidelines, or short.  In my IRA, I can go short by buying deep in-the-money put options on stocks in solid down-trends.  I buy deep in-the-money puts because they have the smallest time premiums and will be profitable quickly with a minimal decline in the underlying stock. Shorting is very difficult and anxiety provoking.  One can get scared out by a sudden bounce like the one that occurred on Monday. It is preferable to not be too greedy and to set profit limits so as to lock in gains before they evaporate.  William O'Neil's small book on shorting has helped me to trade on the short side.