2008-10-08

Looking for bottom in an abyss

S&P500 (ESZ8) and other world equity indices

Buy up to 960 stop below 940 target 1080 - 1180

I might regret writing this blog (and more so taking this trade) but I feel that we are reaching a bottom in S&P. I will analyse other markets for exact entry and exit levels but the analysis is likely to be similar. I am still not falling in love with upside but I do not see harm with a small fling for sometime. My target for this bear market (2007 - 2009) is 800 or lower and I still expect that to reach in 2009. However I feel that we now need a pause in this relentless selling we have witnessed for whole of last week. Can anyone imagine S&P was at 1250 just 2 weeks ago? So what factors ask me to see an upside here:

a) We seem to be in capitulation mode where people lose all sense of "reason" and trade with "just get me out of here mode".
b) VIX is hitting all time high. It cannot last or else option markets will go out of line with reality.
c) October Expiry is next week and I feel environment of fear is created (so that puts can be sold at inflated prices before they are allowed to expire worth less)
d) Central Banks world over have come together and even though I do not agree with lot of things they have resorted to doing, but at least there is no point picking up a head to head fight with fed. Ultimately markets will go where they are supposed to be going (which so far is 800 as my bear market target) but that does not mean they have to go there in a straight line.

I also feel some of recent selling was exagrated by some very powerful "fire sale". It was known that ice landic banks were selling assets to raise cash this week and I am sure there might be some more hidden skeletons somewhere in the world (which should start coming out soon). But I feel it should get over now.

This should give us a powerful relief rally, enough to suck a lots of recent undecided bears who will turn bull or get tagged while markets move up through their stops. Also election month in US should keep regulators on their toes to ensure markets do not become "sense less". However the next set of shoe to drop will be earning disappointments and further credit write downs (auto loans/credit card loans/commercial loans). That should give us the final leg of the bear market some time in Q1/Q2 2009.

So while I remain a bear, I would try to ride this move up. As always I will start by taking smaller positions as "probes" and once the trend is confirmed, I will be more aggressive and start buying on dips as well as moving stops up to limit risk.

The risk to this trade remain that it is quite "possible" that we may not stop at this point and sell all the way to 800 level. Afterall we did drop over 250 points in 2 weeks, so it is not surprising to drop further 200 points in next 2 weeks. So I will have one eye open for that eventuality. One "small risk" way is to buy butterflies for 1080/1160/1240 calls in S&P for December. That way the risk would be limited and rewards would be substantial.

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-VS