8/12/2007 7:11:25 AM

The washing machine effect.

I recall bodysurfing one time in my late teens with a friend, we decided to go far out into deep water where the surfers caught waves. It was a day where the waves were quite large (7-8 feet) and we had the false confidence that comes with inexperience and ego. We got out there and caught the next huge wall of water. As I went up with the wave, the crest started to turn and break, I got dumped big time. The force of the wave and the turbulence of the water kept me under water for longer than felt comfortable and being without a board had me feel as though I was in a washing machine and I couldn't get my head above the water. In that moment, I felt panic and in that panic I thought I couldn't hold my breath any longer and as I was about to give up and take water in, the wave passed and the air in my lungs naturally had me rise to the surface and I took the biggest breath. I then gently made my way back to shore and rested.

That day I learned a great lesson, I realised that I can go into battle with the wave and come out second best or I can see the waves as simply a movement of water from one place to another, if I get dumped and don't resist the wave, I'll have plenty of air in my lungs to rise to the surface when it inevitably passes. So too it is with the markets, this week started with a wave of buying that added almost 5% in 3 days and ended with a wave of selling that dropped over 3% in 2 days. Those who resisted these waves would have felt as though their head was being held under water and they may have even taken in water. Those that didn't resist would have felt the discomfort of the waves but would have risen to the surface and can now calmly re-assess their situations.

Our system moved into Buy mode during the week and remains there. The large drop on Thursday meant that our suggested trade got filled with a better premium than anticipated, we got $0.80 rather than the $0.60 we requested.

Position Recap:

On August 9th we sold an SPX Sep 1310(SXYUB)/1300(SXYUT) Put Option Spread for a net credit of $0.80. (i.e. $80 per $1,000 of margin)

SPX Chart

Looking at the charts above, 1460 is resistance and 1430 is support. Friday's price movement in candlestick analysis terms is a large spinning top, which indicates uncertainty. The market seems to be at a cross road now, where a close below 1430 will likely be bearish and a close above 1460 gives the bulls another chance.

I have included a shorter time frame chart to show that there are some positive divergences developing on both the MACD and RSI indicators and when we combine this with the underlying buy mode that our system has produced, I'm inclined to go with a bullish bias in the near term.

Feel free to email me directly at angelo@stockbarometer.com if you have any feedback or questions.