This article summarizes the Europe situation pretty well imo: "Kashyap: Euro Areaâs Rescue Options Shrinking Fast" http://www.bloomberg.com/news/2011-...hrinking-fast-commentary-by-anil-kashyap.html But in fact, this is no longer just about Europe, and is equally about Asia slowdown. Governments are trying like mad to try to hold markets up artificially by infusing liquidity and acting as lenders of last resort, but I don't think that is what ails the world economies anymore. Of course, the markets still don't believe it because it doesn't show in the earnings, and rationalizes that this or that hedge fund redemption is the problem with other fundamental indicators. That is the lag, and it may be a genuine inefficiency in the way markets operate if you could tell which it is.
The last two days are incredibly ominous for SPX, and even more so for NDX. This is a layup short, but there is one tremendous short term risk (there are no longer term risk this is going lower come hell or high water) the FED will likely intervene on hard down markets with QE3. Markets will rally on that, but it will be short lived.
Would you recommend putting on a max size (short) position here or wait for a confirmation like a break of 1100?
I cannot in good faith recommend a trade. As you have witnessed the stress that I go through on these trades, it is nothing I wish on anyone else. The problem is that VIX is so high, otherwise it would be easy for me to say, buy a put, and hold it until you reach some reasonable profit objective, and then all you can lose is your premium and can sleep at night. But buying 40 VIX requires even bigger balls than just going short outright, imo. For me, I was never too worried that I would get run over on the long side since I trust my model. But look at the number of times 50, 100 handles has exploded in my face. I mitigated that by getting myself small wins here and there on my third unit. You have no such cushion. I have learned the value of Campaign Trading, and it is a jewel on high VIX. One thing you can do is sell calls and buy puts so that you are net short, the way that Forex players do it, (20 or 30 delta). That is probably the least risky play, since it only has skew risk and not outright vola risk.
Out 1 of 3 units at 1143 SPX, + 42. Still short from 1186 and 1220. Will add short on any rallies. 1172 - 1192 are sweet spots to sell. I now have a huge cushion (on the closed PnL side, if you include the open profit it is gargantuan), and almost nothing can shake me out of the trade except FV.
BTW, I would note that support is still being respected, but resistance is beginning to break down. For example, 1142 ish held, but the market cut right through 1172. I don't know what that means. Market Profile guys probably have a more fine tuned version than my crude S/R levels, but it does appear that resistance is becoming blurred. One way in which it affects me is that it is harder to pinpoint where to enter short, because timing on the actual trades in FV are done through S/R levels. On the other hand, it could be an illusion. Depending on where we open, and using VIX to calculate implied moves, of course one direction will seem more blurred than the other simply because the market movement is fascilitated by proximity. If we were closer to the lower end of the range, the opposite may be true.
Calibrated FV, 858.26. FV, 1064.24. Mid, 961.25. Calibrated FV continues to implode, affecting Mid which is some sort of compromise.
Nothing to do but hold all shorts. Next week looks terribly ominous for markets. EOQ when pension funds and mutual funds come out and spend your and my 401K money, and re-balancing is done. Would not be surprised to see a kick higher on Mutual Fund Monday, but 1120 looks extremely fragile, and 1100 is in sight of the guns on deck. With VIX at 40, 25 SPX moves are a dime a dozen, so don't get discouraged if you have to take a loss of -10 handles. That is made in minutes in this market. The bulls will come out and defend 1120, and 1100 with all their might (how can they not? stocks are "cheap"). Remember, it is a Campaign.