Wheee, that was fun!
We’re already back in our range after all that hand-wringing last week. I like to do these perspective charts once in a while even though I’m not much of a chart guy. It’s funny how people lose their minds over what was clearly a minor dip so far – never even coming close to threatening our 5% rule, which is the only way we’re likely to give up hope.
Our next big challenge is getting over the 1,088 Fibonacci line but after that we should have a clear shot to retaking 1,100. Nobody expects good jobs numbers today but more than 460,000 lay-offs in this morning’s report will probably keep us on hold through tomorrow’s NFP report at least. Notice how yesterday’s fat-body candle was as big as any of our recent big drops – that means the bears are as freaked out about yesterday’s action as the bulls were about the flash-crash and there’s a lot of bears out there – crossing that 1,100 line this week could lead to a pretty good short-squeeze into the weekend.
As I had mentioned way back on May 5th, our expected downtrend along the 5% rule was 1,155, 1,114, 1,100, 1,073 and 1,045. Now we just have to work our way back up that ladder! Since earnings were not as exciting as we had hoped, our expected mid-point on the S&P has since dropped from 1,100 to 1,070, which alters (lowers) our expectations slightly but not too much from a long-term standpoint and there hasn’t been a need to adjust our long-term positions as we hit our buy point on the nose at 1,045 and, of course, we have our hedges.
Speaking of hedges, on August 25th, with the S&P down at 1,045, we looked at Disaster Hedges that could make 500% if the market falls. The idea is to take 2% of your portfolio value in a play that makes 10% if the market falls 5% or more as insurance. We do this so we DON’T have to panic out of positions at an inflection point.
Some people take them right off if we hold our levels and some people use our 1,070 and 10,200 lines (both passed yesterday, of course) as a signal to take them off and some don’t mind the carrying cost of insurance but let’s look at the damages if we had done nothing while the Dow jumped over 250 points yesterday: The DXD Jan $27/32 bull call spread was $1.60 and the…