General Thoughts and Strategy

As you might have noticed, I haven't been that active in posting charts (aside from SPY and DX) this past week. In part it's because I have been really busy with other endeavors but also it's because frankly I determined over a week ago that the low of the correction is not in and that it is too hard to time a short entry. Since I expect the market to drop, I won't bother trading to the long side. Meanwhile trading to the short side has been risky because with high a VIX you get hurt twice when the stock market rallies (vega and delta), so I deem it best to sit out. Still I did try holding puts all week this week but the VIX dropped so much it didn't result in much of a gain for me.

I expected the stock market low to occur this week but the market makers decided to shake some bears off the bus instead. The SPY close at 110.7 put in a doji for the day yesterday and while one could anticipate a reversal, it would be highly risky to do so given that SPY was in the middle of filling the gap to 111.7 and that supposedly good unemployment numbers were due out this morning.

My point is: I know the stock market will hit a low and I have said before that this will happen when the volume in SPY peaks over 600M. I expect that low to come soon because drops happen fast. I remain over 80% in cash because I believe it will be a great buying opportunity. Everyone will be panicking about the european debt crisis, TLT will be near breaking 100, and the BP oil spill will still be out of control. It will look like doomsday and people are going to dump. It's not worth shorting at this point trying to pick up 3-4 SPY points when there is potential for SPY to base around 102-106, return to 122, which would net you ~20 SPY points. So when the low happens I'd rather sit back, relax and pick up good long positions rather than worry about closing short positions.

However there is always a possibility that I am wrong, and I do have long positions in BAC (shares), USO (call spread), and short VXX (shares). These are my insurance policies in case I am wrong. I regard them as low risk. It may not be the best strategy but I can hold my BAC shares safely for 20 years if I wanted to. VXX has spiked and I have held my position and doubled down because in the long run, I will win shorting VXX guaranteed. The VIX always eventually drops. So I don't mind tolerating pain on a short VXX position. My long positions constitute less than 20% of my portfolio value so I'm not losing sleep over them either.

If I have more time next week then I'll try to be more active in day trading, but my overall plan is to wait for the volume spike to signal the low and then to take larger and more aggressive long positions.

Don't think the stock market can rally in the middle of all the bad news? Just watch it happen.

Finally SPY 101.9 and SPY 103 are the lows made during October and November 2009. One of those levels should hold.