Scaled out of some of the URTY shares I have as a legacy position from last autumn.  Bought TVIX (will continue to be a buyer of TVIX below $8) and bought a little TZA.

H/T to robertsinn.com for the referral to optionpain.com.  According to optionpain.com, the greatest number of current month IWM options (puts + calls) will expire worthless at the $79 IWM strike price.  This equates to a level of 790 on $RUT.  The market being the sadistic bitch she is means, I hope, we get near 790 on $RUT today.  That would be a 3.6% advance from yesterday’s close. 

Do I think we’ll get there?  No, not really.  I think that kind of a gain today is asking a bit much.  But if we do you can be certain that I will be selling a good chunk of my legacy URTY position and my TNA shares.  I’ll keep the TNA July calls that I bought in May.  They were cheap and I didn’t buy a whole lot of them.  So the way I look at them, they are a small ante that keeps me in the pot and allows me to see more of the cards turned up.  If I have to fold and lose the ante it’s not going to be a big loss.

On today’s dip below $8.  Will continue to be a buyer below $8.

In the daily $RUT chart above (courtesy of StockCharts.com), it appears we have a nice bull flag formation that has set up.  Measuring from the intra-day low of 729.75 on 6/4 to the intra-day high of 776.63 on 6/11 gives us a target of roughly 795 should the pattern turn out to be valid.  Note also the positive momentum divergence (MACD on a buy signal and moving in an upward channel while price is moving in a downward channel).

I sure could use a completion of this pattern so that I can exit the long TNA shares and calls I have and also get my legacy URTY position closer to break-even upon exit.  Capital which I, of course, plan to use to leg into more shares of TVIX and TZA in preparation for the upcoming crosses on $VIX and $RUT.

About 15 minutes before the close.  My position size is growing and my cost basis is now $7.71 on the shares I have accumulated.  I will continue to be a buyer below $8.

As I see it, the Bearded Clam faces two equally unappealing options at the next FOMC  meeting.  Option 1 is to announce some form of overt Fed action (QE3, Twist2).  Option 1 would risk the appearance that he is attempting to throw the election to 0 and would forever more brand him as the Chairman who politicized the Fed.  Option 2 is to do nothing overt other than attempting to talk risk assets higher until after the election.  Option 2 would risk that the bearshitters would continually call his bluff and hammer risk assets into near-oblivion between now and November.  Talk about a conundrum.

At this point, Option 2 is really the only option.  As damaging as it is likely to be to risk assets, The Clam will endure the short-term pain and emasculation inflicted by the bearshitters in order to avoid permanent damage to the independence of the Fed.  While the Clam can and will do nothing overt until we get President-elect Romney, there are covert options available to him (for example, pledging behind closed doors to accept Eurobonds as collateral for Fed funds).  However, bear in mind (pun intended) that every 1% drop in the S&P will result in a 10-fold increase in the blood lust in the heart of the Clam to obliterate the bearshitters after the first Tuesday in November.  Thus, the Clam will be like Fly in that he will be winning at all times and especially so when he appears to be losing.

Sharp morning up moves that get faded after the first half hour like we’re seeing today make this rally “feel” more corrective than impulsive, to borrow some terms from Elliott Wave Theory.  It is still my contention that this rally is the eye of the hurricane rather than blue skies for as far as the eye can see.  Thus, I was a buyer again of TVIX on Friday and will continue to accumulate shares below $8.  If the market manages to regain its footing today then before the close I will sell some of the URTY legacy position I have and buy not only more TVIX but also add to the very small position I have in TZA that was put in place a few weeks ago as a hedge when I began to doubt the wisdom of the AGQ, TNA and UCO shares and calls I had become long of the second and third week of May while waiting for this rally to commence. 

The main catalysts for my inclination to the short side are the impending golden cross on $VIX and the impending death cross on $RUT.  The key to profiting from each of these crosses is to anticipate them and then to not overstay your welcome after the cross.  If you wait until the cross occurs before taking a long vol or short small cap equity position and then wait until the next cross occurs before closing out, you will have missed the majority of the move and/or potentially even the ability to profit from the cross.

I will illustrate here by way of example from the last death/golden cross on $RUT/$VIX. 

$RUT experienced a death cross on 8/12/11.  $RUT had peaked 115 calendar days prior to the cross when it closed at 865.29 on 4/29/11.  $RUT reached a trough value just 52 calendar days after the death cross on 10/3/11 when it closed at 609.49.  From peak to trough, $RUT shed 29.6% of its value.  The golden cross on $RUT that followed the August 2011 death cross occurred on 2/8/12 when $RUT closed at 828.39, much higher than the October 2011 bottom.  Anybody who waited until the August 2011 death cross to initiate a short small cap equity position and then held too long undoubtedly lost money.

$VIX experienced a golden cross on 7/25/11.  $VIX had bottomed 59 calendar days prior to the cross when it closed at 15.45 on 5/27/11.  $VIX peaked just 11 calendar days after the golden cross on 8/5/11 when it topped out at 48.00.  From bottom to top, $VIX offered a net return of 211%.  As with the last $RUT death cross, anybody who waited until the July 2011 $VIX golden cross to initiate a long vol position and then held until the next $VIX death cross in January 2012 lost almost 10% instead of making money.

Note the proximity in time of the $RUT death cross and the $VIX golden cross.  I believe a similar situation is setting up right here, right now.  In order to make money off of this setup, I feel I must scale into a long vol and short small cap equity position during this so-called rally.  Trading like this is a lot like being an ambush hunter.  You stake out a position, hunker down and wait for the herd to come to you.

Long and looking to sell; URTY, AGQ, TNA and UCO

Long and looking to buy more; TVIX and TZA

Today’s NAAIM Survey certainly yielded a surprising result.  The reading went up from 28.65 to 49.32.  I had fully expected it to go down.  And not just go down, but go down to single digits.  A curious development, indeud (sic)!  Who could have known the professionals surveyed by the Association would be asshole dip buyers last week?!?

As I have stated in a previous post, I think this rally is but a brief respite before a continuation of the downtrend in $RUT.  The eye of the hurricane as it were.  I also said that I am a buyer of TVIX below $8.  This morning I started my campaign of scaling into TVIX.  Current portfolio construct is; 40% long URTY shares, 10% long TNA mix of shares and July calls, 5% long UCO mix of shares and July calls, 1% long AGQ shares and a very small starter position in TVIX.  URTY is a legacy position from last fall that is ~15% underwater.  The positions in TNA, UCO and AGQ were taken over the last 2 weeks and are intended to yield a profit that will offset some or all of the loss I will take scaling out of URTY.

I’ll have a more in-depth post up tomorrow.  Just wanted to put up a quick post this morning that the event I have been anticipating for the last 3+ weeks has finally happened.  This week’s AAII Bullish % has fallen below the key 35% level.  The last time it was below 35%?  For two consecutive weeks on October 5 and October 12 when it was 34.4% both weeks.  I would have liked to see Bearish % higher, but I’ll take what I can get.

Tomorrow we’ll get this week’s reading on the NAAIM Survey.  I’m hoping it shows a reading in the single digits.  As a contrarian indicator, that would be very bullish.

I stick to $RUT for my trading so I follow $RUT more closely than $SPX.  The higher volatility in $RUT relative to $SPX offers more opportunity.

$RUT has entered a downtrend by my definition; a series of lower pullback closing lows and lower rally closing highs with a pullback/rally being a move of at least 5% from a recent high/low.  There are also the matters of the impending golden cross on $VIX and the converging 50-day and 200-day moving averages on $RUT as it moves towards a death cross.  The average $RUT downtrend lasts about 7 months and sees $RUT decline about 25% from the most recent uptrend high.  Measuring the downtrend from the March 26 closing uptrend high, this $RUT downtrend is 2 months old and $RUT is down 13%. 

For a variety of reasons, I think this most recent $RUT pullback is almost over and the next $RUT rally is imminent.  My assessment of the probabilities is that we have more work to the downside in $RUT over the intermediate-term and this next rally will be short and sharp (the sharpest rallies tend to occur during downtrends).  Therefore, this next $RUT rally should be used to position for a continuation of the downtrend in $RUT.  This is the scenario I am playing for.  Over the last 2 weeks, I have taken long positions in AGQ, TNA and UCO as $Silver, $RUT and $WTIC each hit single digits in their stochastics.  After $Silver, $RUT and $WTIC have transitioned to rally mode, I will be unloading my AGQ, TNA and UCO and will use the higher levels in $RUT to scale into TZA calls and TZA shares. 

The only thing that I see out there that could blow up my plan is QE3.  We had a nice downtrend going in $RUT in summer 2010.  $VIX had a golden cross on May 26 of that year and $RUT had a death cross on July 28 of that year.  There were a host of other indicators signaling that a major top had occurred that summer.  Then in August (at Jackson Hole, if memory serves), the Ben Bernank announced QE2 and $RUT went on a relentless uptrend that lasted 40% to the upside and 178 calendar days without a 5% pullback in closing prices.  I was long RWM and VXX and recall that time with the same kind of feeling a prisoner at Gitmo recalls his time on the water board.  If QE3 gets announced then all bets are off on the scenario I have outlined in the previous paragraph.

The Great Gretzky always said that what made him a great hockey player was that he always skated to where the puck was going to be, not to where the puck was.  In assessing the probabilities of the next moves in $RUT based on decades of observation, I am attempting to emulate Gretzky’s philosophy and hope I don’t get blow’d (sic) by QE3.