Picture Perfect - but relax!

Needless to say, I am pleased that price action followed my illustration perfectly. Again, that is unusual but sometimes I get it right. Here is the hourly chart for comparison to yesterday's drawing:



Enough bragging. The more important issue at hand is where are we headed. All too often we bears get excited about a break in our favor, and this was significant for a number of reasons, however it is way too early to celebrate. Rather, we have to be very smart, nimble and prepared to take profits whenever opportunity presents itself. Two days ago, a number of bears that I know wanted to through in the towel. The rally was never going to end and they could no longer endure. DO NOT FORGET THAT FEELING - as it may be right around the corner. Nothing feels worse than hesitating only to see the market swallow your paper gains in a heart beat.

The good news is that I think we have more downside ahead of us. On the hourly, I highlighted what I believe to be a 5 wave EWT that is either near completion or mid-way through its cycle. Wave i was formed with yesterdays firm push down to support at 1130ish. As expected, support was found because there are so many folks out there convinced that all you need to do is buy the dips to win. Big money relies on that psychology to distribute - which they did heavily once wave ii completed in around 1143ish. Note that this was the resistance box that I illustrated yesterday. It marked the 50% retracement and location of the 50p MA. As soon as that happened, note how the price action forcefully moved right through support at 1131 and paused somewhat at the 1120 area. Now, this could very well be the mid point of wave iii. If so, wave iii completed at 1115, as prescribed. I am encouraged by how long we flagged along the 1115 support level - reaching back up to the mid point of potential wave iii, before breaking down again to close near the lows. This "flag" is either wave iv or the middle of wave iii.

Why is this important? Simple. We are at 1115 - which is the top of a prior trading range. If we break support here, we re-enter the 1080-1115 range. That is a 35point range and could be very profitable for all of us. Let's do the math. If we dropped from 1150 to 1115 to get here - that is 35 points. If we are at the mid-point of this EWT that means we have another 35 to go - which puts us remarkably at 1080.

You can see this more clearly on the daily chart.



Other features worth noting on the daily chart are the intersection between the bottom of the old range and the trend line for this 10 month rally. This seems to confirm that within the coming sessions we should see 1080. Also note that the 20d MA sits below that trend line, which means a major break could occur down to the 200p MA which should be around 1020 by then. Things happen fast, so let's see how it goes.

Today I sold some front month OTM puts on my SPY, DIA, and QQQQ. I chose strikes of 104 for SPY, 101 for DIA, and 42 for QQQQ. This timing was perfect for these sales as the options have a significant amount of time premium which will rapidly fade over the next 20 sessions. If by February we reach these strikes or lower - fine, take my shorts. As you may recall, I have an equal number long March puts to replace those positions at much higher strikes - including average strikes of 108 for SPY, 105 for DIA, and 45 for QQQQ.

The options are all about timing though and I have to carefully monitor the swings to time my exits.