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High Stakes Chicken

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Good morning and welcome back to the hair club for men (and women!). The ulcer quality price action we've witnessed seems to be looking for a resolution as angst levels in the trading ranks approach DEFCON 1. Indeed, there are a few scenarios that can potentially unfold-and in an attempt to assign a method to the madness, we'll walk through some of them together. First things first, we fire up our systems to find a mixed Europe clinging to the hopes of a potential rate cuts (rumored yesterday). Meanwhile, Japan continued to drip lower and shaved another 1% off that slippy Nikkei. Man, talk about death by a thousand paper cuts!

Yesterday's stateside bipolar action was the Minx at her best, as the disparity between the S's (S&P) and N's (NASDAQ) toyed with traders for the majority of the session. Clearly, there was an "accumulation" in four letter land all day---but when push came to shove (and Moody's downgraded JPM's debt), the old economy load proved too heavy to bear and dragged down the techs. The flashing red and constant flag was the internals, as the S&P logged its worst breadth since that fateful morning in September 2001 (when we returned to work with heavy hearts and heavy hands). Monitor this gauge today as we digest the action and find our way.

With everybody and their sister watching S&P 775 (July's intraday low), the index was bound to get there---and now that we're there, everybody seems to be holding their breath. I sense that one of three paths will be taken from this juncture, and while the only wisdom is knowing that we truly don't know, I wanted to think this through with hopes that it helps our process.

Scenario A) after some "back and forth," we hold these levels and begin to trade higher. Consistent with the reactive nature of this tape, buyers get pulled in (longs and shorts) and we get a nice little bear market rally. Looking back, traders will point to the fact that we held where we "had to" and VIX 50 was (again) clearly telling you that the fear factor warranted a long posture. Remember, in this environment, the buyers are higher and the sellers are lower. I suppose there's some weird sense of validation when the tape begins to move and, while I don't agree with that style of trading, I recognize its ability to exacerbate the price action.

Scenario B) we rally (see scenario A), the buyers jump in (again) and the fear of missing permeates the collective mindset. As the talk of a year end rally becomes the en vogue topic of conversation, new longs are sucked into the market and a relative complacency sets in (not necessarily today's business). This is when the potential for a real whoosh lower becomes dangerous, in my view, and conceivably more likely. The purist trader would prefer to see a hard, sharp purging of stocks to facilitate a sustainable bullish phase.

Scenario C) the purge begins (continues) today and, as we fail, selling begets selling. The VIX spikes to new highs, every sector base gets waxed and hope is wrung from the market. It's certainly the nastiest of the scenarios, but ironically, it's the most bullish. The market needs resolution from an emotional (and price) standpoint, and a V-bottom (if and when) on heavy volume would be perceived as such.

Yes, I'm aware that I've pretty much covered all the bases here but, as I've said, this is not an advice column-it's a forum to discuss, debate and share. How you approach today's action is unique to your personal and professional parameters. Last week, I offered my (humble) opinion that there would be a stiff rally before the end of the year but I didn't sense we were at an attractive starting point. As the negativity builds and the hope fades, I am clearly becoming more constructive on the market---for a trade. Does it start today? Let's take our journey one step at a time and maintain lucidity and discipline as we walk the path. If there's one thing we've learned, it's that discipline trumps conviction.

Good luck today.

R.P

Long QQQ calls


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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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