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The Watchful Tower



No reason to get excited, the thief he kindly spoke
There are many here among us, who feel that life is but a joke
But you and I we've been through that, and this is not our fate
So let us not talk falsely now, the hour is getting late

(Bob Dylan)

The green seas continue to swell into the early afternoon, but before we talk tape, I wanted to respond to a question from the readership. At the end of each column, you will see a disclosure of any positions I have in securities discussed in that particular post. If I write "No positions in stocks mentioned," that simply means I didn't mention any of the names I'm involved in---it doesn't mean I have no positions. Further, please don't interpret those disclosures as advice---our portfolio is made up of many names at any given time. Thanks!

Back in manicland, the averages are quickly approaching our next resistance levels of NDX 900 and S&P 850. I'm certain that next week's expiry is factoring into today's price action and, with each passing "strike," the mojo seems to be picking up. While all is well in the World, it's worth noting that this "volatility exacerbation" is a two-headed monster. In other words, as traders buy underlying stocks and "chase deltas," they effectively flatten their exposure. IF these names (indices) reverse lower, they'll find themselves getting increasingly longer as the market trades lower...and will turn and sell. I know many of you don't understand the particulars of the derivative market, but suffice to say that moves both ways will be shaper than normal.

Yesterday we spoke about the various situations that "could" play out as we approached S&P 775 (on the downside) and, in the interest of perspective, I felt it would be helpful for us to revisit one of the potential options. "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."

Remember, when we first walked through this theory, the notion of a rally was a foreign concept. Now, 24 hours and 700 points later, the fear of losing has almost completely morphed back into the fear of missing. This is certainly self-fulfilling for a spell, but it's also a dangerous element in an uncertain environment---particularly with the busiest earnings week of the quarter approaching. I know this has been a difficult year for many of you, but keep your emotions in check as we wade towards the closing bell. Over compensating when trading is a cardinal sin and one that often leads to problems.

Choose wisely, my friends, and good luck.


No positions in stocks mentioned

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

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