The market action today seems to add yet more credence to our outlook for lower prices over the next couple of weeks.
The SPY 142 puts that were purchased yesterday gave us a clean double today, much sooner than I had imagined I must add. I remain in the puts with a stop loss in place that will capture a 75% return. The reason I did not take them off the table today was the fact that the market seems poised for yet more follow through tomorrow. The daily pattern calls for a continuation of lower prices into the 11:00 to 11:30am time frame tomorrow and at this time I will be selling the entire lot of put options.
For the truly aggressive who have been amply rewarded by these puts, there is yet another opportunity if we do in fact see a low put into place in the 11:00 to 11:30am time frame then it will be time to not only exit the put options, but enter into in the money call options. What we will be looking for is a counter trend rally back up to retrace 50% of this decline, but I will be giving targets if this pattern occurs.
On the intermediate term front we are closely monitoring the wedge pattern that I have drawn on the chart below. If we close below the lower line of the wedge pattern then the minimum downside target is 1280 on the S&P 500. The main question that we will try to answer in a timely manner is if in fact this possible next move lower is simply going to be a test of the lows or the start of a new leg lower.
As it stands, remain in the highly defensive 45% allocation and be prepared to hedge the remaining positions with options should the market call for this action.