MAILBAG QUESTION:

"i'm profiting from puts as i said but am wondering where this thing is going to end seems like theres no bottom!"

MY RESPONSE:

'Waterfall' declines are driven by fear, panic and are exacerbated by computerized trading but they DO come to an end. Measuring tools for where the Market is REALLY extended or at an 'extreme' (on the downside) can give some guidance.

I don't want to date myself too much but my first HUGE panic sell off I observed was as a young analyst (UBS) and trader in a group meeting in a conference room overlooking the CBOE trading floor. Guess what! That day showed the awesome effect of the advent of computerized trading sell strategies then called 'portfolio insurance'. And panic in Europe was a catalyst on that so-call Black Monday. Our group was going to meet with a market maker that day but there was no 'regular' business that was going to get done with this tsunami that day so we broke for the phones. Regular land line phones dude!

Here's a trip down memory lane in my first chart and you would think that I would better REMEMBER how nasty October can be!! But that's the power of market psychology as we get hooked into the prevailing trend and find it hard to get behind a radical shift! This is why call to put readings have NOT shown extreme bearishness; even today (10/15/14) after the biggest intraday decline yet and my call to put volume ratio (CPRATIO on the SPX chart) showed a little LESS bearishness!

Back to the question of finding it hard to see where there might be a Market bottom or end to this panic which the computer trading programs exacerbate at key junctures in the Market, especially when valuations are locked in for a certain earnings outlook that is suddenly called into question.

TREND RETRACEMENTS:

I wrote a Trader's Corner opinion piece just yesterday (10/14/14) on the use of retracements of the prior price swing to guage possible downside targets in this case. The so-called Fibonacci retracements of interest are 38% (a 'mild' correction), 50% (a relatively 'normal' correction) and 62% and 'deep' correction. To that list we can add retracements that WD Gann also thought of significance: 25% and 75%. A 100 percent retracement is a move back to the prior low, which sometimes will set up a double bottom.

The trading rule of thumb is that once a lower retracement level (e.g., 38%) is EXCEEDED, a next potential downside target is the next higher retracement level (e.g., 50%); exceed a 62-66% (I also use the 2/3rds 66% retracement level) retracement and that might carry to a 75% give back OR will result in a 100% 'round-turn' move back to the prior low (in the case of DOWNSIDE retracements).

When retracements get to 66%, that is somewhat 'extreme' and IF there are signs of price stability or an upside reversal pattern, that can be a tip off to at least cover your puts, if not probe the upside in bullish strategies.

ANOTHER WAY TO MEASURE 'EXTREMES': 21-DAY MOVING AVERAGE 'ENVELOPES'

Chart examples that follow will provide examples.

The up and down fluctuations of the S&P and the Dow tends to ragne from 3-5 percent ABOVE and BELOW a 21-day moving average. When the S&P falls to 5 percent below its 21-day moving average, that's an EXTREME case.

And that extreme is often an area where price stability will be found and, somewhat more often, where an upside reversal will occur, as was probably the case TODAY. See below charts.

The up and down fluctuations of the Nasdaq tends to range from 3-7 percent ABOVE and BELOW a 21-day moving average. When the Nasdaq indices fall to 7 percent below its 21-day moving average, that's an EXTREME case.

And that extreme is often an area where price stability will be found and, somewhat more often, where an upside reversal will occur, as was probably the case TODAY.

MORE CHART EXAMPLES RELATIVE TO MY ABOVE COMMENTARIES:


BACK TO THE NASDAQ 'PRIME' MOVER:



GOOD TRADING SUCCESS!