CHICAGO, Sept. 19, 2011 /PRNewswire/ -- Zacks highlights commentary from People and Picks Trader "TickerBandit".
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My present thoughts
OK .... so now that we have had some earnest kick back ... it should be clear that a signficant bottom is forming. Will there be weakness ahead? I think this outcome is likely. I would give the probability of a new low roughly the same probability of new highs ... roughly 70%. So near term a new low ... or a test for a new low .... is likely ... but no means necessary ... AND intermediate term new highs are also likely ... by my estimation.
Near term weakness could be played a couple of ways with likelyhood of success. One is abstenance, (less than full exposure than one's tolerance for bull market exposure ... a trade of opportunity), the other is a hedge. I do not recommend puts primarily because I consider them a speculation tool rather than purely a hedge. The difference between buying options and selling options is that the some of the risk of the seller is conveyed to the buyer of the option in the form of the option's time value. After repeated hedges, the seller of the covered call VASTLY outperforms the buyer of puts. The seller of the covered call doesn't buy his protection ... he sells it ... and his only risk is one of opportunity and the risk of holding the underlying security (which is reduced by selling the call). Aligning oneself to higher probability outcomes is the "road to success"
Lets cover that last sentence in a little more detail. How about aligning oneself to gain from a free-fall crash? Is that a good decision? I would argue that it is not and PARTICULARLY with puts. First, it is a very low probability proposition. That is clearly obvious from the historical record, they happen infrequently. But what does happen frequently is the "anticipation of" a free-fall crash. So last Friday, it just seemed inevitable ... but "historically" the statistics support a rally instead ... if only because ... a free fall crash was widely anticipated.
So how low can we go? Only the market will tell us. The fact is, I can't rule out Mighty Myth's ultimate scenario. Probability exists for any conceivable outcome. But what I can say is that historically, his proposition has little support. The market conditions which normally pre-empt bear markets were not present during the recent top. Ultimately I think intraday 10300 to 10400 (DJIA) will prove to be the bottom of this correction. And I think we will come to know this period by a name, just like we named the "Asian Contagion". And just like the "Asian Contagion", I think this period will be followed by a very strong BULL MARKET rally. Were I to position for the alternate outcome, I would be taking a position not statistically supported as likely ... much like Mighty Myth did by loading up on top of a losing position in puts.
Ultimately we find our own way in the world and such it must be with each of us. Beware falling into the mass psychology trap. Strong bull markets arise from extreme pessimism and presently sentiment about the prospects of the economy and our nation are near levels of March 2009. Right now is the time, IMHO, to be planning one's future exposure to an upcoming bull market rally, and that is but one of the ways I am making my way through the world.
Happy Trading, TB
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