One Hell of a Market Cross-Roads

So here's the scoop.  A nice brief article.  No mention of gold (except to mention that I'm not mentioning it right here), or the USD.  I'll stay away from individual stocks and commodities today.

No, dear reader, my concern lies with something I brought to your (and my) attention back on September 14th.

Remember when I said that the most likely place the S&P500 would rally to was 1,132, according to a fibonacci retracement calculation that was further strengthened by that nice downward trend line dating right back to the all-time market top in October of 2007?

I present for you, the updated version:

As you can see here (by clicking the chart), the major downshift in sentiment has a nice trend-line dating all of the way back to the all-time market top.

This is the point where anyone still invested long in stocks should really consider pulling out the majority (if not all) of these holdings and sitting in cash to ride out the next leg of this long-term bear market.

Going short isn't such a bad idea either (and probably 3 or 4 times more profitable than cash), if you are the type - just make sure that your brokerage or trading firm isn't one of the weaker ones as many will be blown away by the sheer volume that is going to come into this decline.  Not to mention some might have a hard time, you know, existing with those awesome capital rations of theirs!

As always, stay safe out there.  The next leg down should break far below that lower trendline in the downward channel and we probably won't see a total low for the market for up to 12 months.  The lower part of the channel should act as overhead resistance for the trendline.

My suspicions, however, (and coincided with studying the market moves of the Great Depression and other market bubbles) is that we won't see that lower trendline for some time once we break through it.

Of course, the unthinkable could happen and we could have a mad dash to new heights first.  However, I'm just not seeing it as the DSI is hovering around 90% or more on practically every market that has be making new highs for weeks!  And the DSI is 93% bearish on the dollar for a MONTH.  Yikes.  Feels like sentiment is way too stretched.

Happy Investing.  Remember Mark Twain's sage advice for these times:

"I am more concerned with the return of my capital than the return on  my capital."  

Truly coined for the depression era.  Sock away every penny folks, save as much cash as you can and be ready for those once-a-century buying opportunities not-too-far down the road. 

Derek.

To turn $1000 into $4000 in less than two months....

All right, so just a quick few notes. I am still working on part 3 of the ultimate buy. In the mean time I'll just post a few positions I recently took.

I haven't really covered stock options to this point for any of my readers out there, but I will do a segment on them in the next month or two as I am planning on trading them pretty heavily on a <90 day contract basis, due to the high volatility out there I'm looking to leverage my gains without having to extend as much capital as taking the same size position as in ordinary stock.

Anyway... I digress. Here's a few positions I have taken over the last sis weeks. These are all still open positions and I will let you know when I close them off. Some are down some are up, some are for fundamental, long-term reasons and other are for trading purposes.

Linear Metals Corporation, Traded on TSE: Symbol LRM
Purchased December 22, 2009 at .045/share - 40,000 shares

Silverstone Resources, Traded on TSE: Symbol SST
Purchased Jan 05, 2009 at .70 / share - 2,000 shares

Couer D'Alene, Trades on NYSE: Symbol CDE
Purchased 05 @ $.55 / share - 2000 shares

Baffinland Iron Mines, Trades on TSX: Symbol BIM
Purchased December 15, $.0165 / share - 10,000 shares

JPM (JPMorgan) March 2009 Puts, $15.00 strike price,
Purchased 20 contracts at $.42 / contract

That's it for now. Others to come.

The one I want to focus most on is JPM - the reason I took out puts at $15.00 for the third friday of March expiration is because I think there is a decent chance the stock will make it down that far.

Looking at the Put side of the table here, current puts at or around the real stock price trade at a premium of about $3.00 per share for the march contracts. This is after a few days of upward movement, as well, which generally will mute the premium for the opposite trend on the short term.

But I think JPMorgan has a fine chance of reaching new lows within 6 weeks. Here's why:

No matter how you look at it they are still in the iron grip of a heavy bear trend, complete with huge false rallies and crushing reversals to follow. The 50 day Moving Average (the average price of the last 50 trading days, for those who don't know what a MA is) has acted as an inpenatrible ceiling for the last few months and I don't think this particular rally is going to be any different.

In fact as we have seen on most Bailout announcements the tendency is to buy the rumor and sell the news.

But the big thing for me? March is when the Fed starts buying up treasuries of its own (kind of like writing a cheque to yourself from an account that says zero and cashing it) which will cause huge debasement of the USD. This will crush JPM's balance sheet as they are very very heavy treasuries and their value will collapse as soon as this plays out. This will inevitably hurt the stock. Not to mention they just raised guidance for defaults on loans by ONE HUNDRED PERCENT. It will get worse as well.

So if I can get down to even $16.00 or so on a huge selloff over a week or two, my 20 contracts which cost me around $900 USD after commissions could very well turn into a tidy $3000 - $4000. However if the trade continually runs against me I have set a stop at a 50% loss on the options and I will sell them off on the market early. Risk a little for a decent sized reward.

So here's the chart for JPM - let me know if you think I've got a chance :)