This is not good:
It's been a long time since we've needed the Multi-Chart as the Multi-Chart is most useful when you are trying to put into context how far your market has fallend compared to other G8s. As you can see, the Vomiting Cobra pattern is consistent across the World and has not ended well in China, where we've fully reversed 6 months' worth of gains already.
The Dow is back where it was 6 months ago, just off the lows of Sept and Oct but our other major indexs have substantial room left to fall to catch up to Asia and our own senior index. The UK is in the same nasty shape as the Dow and we just got bad news on German PMI, French PMI AND EU Retail Sales.
Now we need to see the Dow get back over that 200 dma (15,475) and, if that begins to look like overhead resistance, we need to grab some more shorts. That's another reason we like our Multi-Chart – it shows us who the lagging index is on the way down and they, then, become our favorite to short!
We already use TZA (Russell Ultra-Short) as a hedge for our Member Portfolios and now it's the Nasdaq that has plenty of room to tumble if things really hit the fan. Since we are going to be upping our AAPL longs anyway, we have a doubly good reason to short the Nas, which went from 3,000 to 4,250 last year (41.6%) so we'll call 4,200 a proper 40% move and that, according to our 5% Rule™, means they owe us a 20% retracement (of the run-up), which would be 240 points to 3,960, which is another 70 points below yesterday's close.
As you can see from Dave Fry's NDX chart, the MACD is still stretched, to say the least and the RSI already spells DOOM!!! and it's quite a long way down to the next proper support, 50 points lower at 3,420. NDX at 3,470 is 86% of the Composite's 4,031 and .84 x 70 just so happens to be 59, so close enough that both indexes are showing us similar support and, with the 5% Rule™, there are no coincidences – so that's going to be our bet!
Since we're not betting on the Nasdaq to STAY down, we need a bet that pays well on a short-term move and that means a directional bet, like QQQ, which is at 84.91, so if we think the 4,031 Nasdaq will drop 70 points, then we should expect a roughly 1.5-point drop in QQQ to 83.50ish. The Feb $86 puts are $2 and they'd be $2.50 in the money on that drop and make at least 25% on a drop to our goal. Since it's only a 1.7% drop in the Nasdaq, we're getting 14x leverage to the downside, which means we only need a small hedge to protect ourselves.
Let's say we have a $100,000 Portfolio and we expect to lose about $2,000 if the Nasdaq drops 2%, we can mitigate that potential damage by 50% by buying $4,000 worth of QQQ Feb $86 puts and, since we don't lose all $4,000 unless QQQ goes up 2% (which, then assumes we make 2% on our bullish Portfolio) we're only risking $2,000 to cover $1,000 of downside.
Under what circumstances do we lose on our Hedge? Only if the Nasdaq goes up. That means we can hedge our hedge with a bet that wins if the Nasdaq doesn't go lower. Selling something that we would REALLY want to own if the Nasdaq does take a dive, like FB 2016 $35 puts at $2.50. We collect $2,500 for 10 those (FB is at $62.75) and use $3,700 in margin and now we've covered any futurther drop in the Nasdaq by simply agreeing to buy FB if it drops 44% from its current price.
You can also hedge large positions in specific stocks using a collar strategy but, as our Members know, I generally prefer CASH!!! in a weak market – as it keeps us nice and flexible and ready to take advantage of any market situation.
We made a quick $500 per contract using our CASH!!! to short oil this morning at $98.25 and now oil is back from $97.50 to test our Conviction Short Line at $97.95 ahead of inventories (10:30) – so we'll SHORT IT AGAIN!!! I know it's kind of tedious but, hey, $500 per contract!
Be careful out there!
