The Good News:
I’m hoping the market tanks a little further to please the hard-core technicians, but we probably have enough to herald a strong market snap-back. I’m excited, friends.

UPDATE AFTER MARKET CLOSE: The Dow closed at 10,609, down over 25% from the October high; VIX closed at 36.14.

CORRECTION: the post stated originally that the INDU’s all-time high was 14,198 (what my QCharts platform shows), when it was actually 14,279. My apologies! I have corrected the post.

As I write, the Dow Industrials (INDU) have hit an intraday low of 10,660 in trading today, the lowest since January 2006. And we could see a lower low before the day/week is over. As the chart below indicates, this is a selloff over the preceding 12 months of 25.34% (3,619 points) from the October high of 14,279.

While amateurs and your dear Aunt Mabel are in panicky liquidation mode, savvy traders and investors know that the point to get in is here - or very near. First of all, the market selloff has been huge. There could be more to come, sure, as the lying scalawags of Wall Street are forced to disclose how bad things really are.

The Better News:
But an imminent market surge is on the way, as measured by the CBOE’s Market Volatility Index (VIX.X or $VIX), a premier sentiment indicator affectionately known as the VIX. It tends to move inversely with the stock market. Thus a significant market low will result in a spike in the VIX, as happened today.

In fact, the VIX hit an intraday high of 35.76, its highest reading since January of this year. The VIX strongly confirms a stock market move off this low level, which probably will be (at least) a market bottom. The market reverse on the last VIX spike, which barely broke 30. A reading over 35 is a horse of a different color. Look at January and March 2008 for an idea of what to expect.

I expect a strong snap-back in the next couple of months back up to test the upper range line (top chart), which also happens to be the 200-week moving average.

If the market breaks above the upper range line, you’ll hear a lot of idiot pundit talk in coming weeks about the new “bull market” - as if a bull market could spring forth from current economic conditions and falling corporate earnings. No, a bull market is not beginning, but we should have a couple of months of a rising market, which is a peerless time to write covered calls.

Consider legging in to the calls, meaning to buy the stock and write the calls only after the stock has risen (which really supercharges returns). If you’re really short-term bullish, consider buying ITM calls on great companies that have sold off with the market in past weeks.

What Could Go Wrong?
Of course, more catastrophic bad news on bellwether companies like AIG and Merrill might knock such an advance in the head, which would likely mean another stall-out in the market, sending it sideways, as happened after the July 15th “bottom”.

This entry was posted on Wednesday, September 17th, 2008 at 2:32 pm and is filed under Covered Calls, Markets/Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.