10/10/2008 10:05:28 PM
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On to the markets, the system remains in Sell mode, however we seem to be getting close to a buy point.
On September 22 we sold an SPX Oct 1070(SPQVN)/1060(SPQVL) Put Option Spread for a net credit of $0.80
The premium received is $80 per $1,000 of margin required per spread (before commissions).
SPX Chart - Bigger Picture
In the bigger picture, the chart above is something that's not seen very often, the key support point I spoke of last week at 1090 smashed easily and we've now even gone beyond the low point of September 2001 at around 980! In fact, from data I've seen, we've just witnessed an October 1929 style crash, over the last few of weeks, we've dropped from 1255 on September 22 to a low today of 840 (33% in 3 weeks). Around mid October in 1929, the S&P was around 350 and fell to low of 210 by around October 25 (a 40% drop), it rebounded to 280 within a couple days (over 30%) and then made a new low at 195 by mid November (a 30% drop), before making a rally that lasted several months.
I'm not saying that we'll get the same outcome as that which happened in the 1930's, I don't know that. What is evident is that the market is spooked at this point and all logic has gone out the window and these types of events usually set up great buying opportunities.
In relation to the technicals, the divergences I had spoken about in the past reports are now no longer valid and we are simply in an extreme oversold situation that can result in a snap back rally to around the 1100 level.
SPX Chart - Smaller Picture
In the shorter term, the market has dropped off a cliff and the chart speaks for itself. Again, we are way oversold and logically a bounce it due, and while the markets are always driven be emotion, it's never more so than in times like these.
When this sort of thing happens, both technical and fundamental analyses are of no guidance and we simply need to surrender to it until the hysteria subsides.
The bearish sentiment in the market went into overdrive this week and the Volatility Index, (The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear) is at one of the highest points since inception.
A figure of 30 is usually quite high and we're now at 70!
For next week support on the SPX is around 850 and resistance is 1000 - 1090.
In relation to our open Put Spread, with a week to expiry, we are deeply in the money and the dramatic movements in prices this week has meant that taking defensive action would still have caused a massive loss. I understand that some of you chose to sit this month out and that turned out to be a wise move in hindsight. For the rest of us, I'll monitor the market early next week and see if we can salvage something, but unfortunately, we're starring down the barrel of the worst care scenario of a complete loss at this point.
The quote this week is from Voltaire, "Each player must accept the cards life deals him or her: but once they are in hand, he or she alone must decide how to play the cards in order to win the game."
Have a great weekend and feel free to email me at email@example.com with any questions or comments.