Wednesday Weakness – Selling Pressure Continues

Down and down we go

I said last week that we'd more likely to see 2,800 on the S&P before we see 3,000 but I didn't think things would fall apart so hard and fast.  Still, a correction is a correction and this one is long overdue and it's still very mild as 2,850 is only down 5% from the 3,000 line and that means we expect 30-point bounces to 2,880 (weak) and 2,910 (strong) from there so we know exactly what range to watch and, conveniently, 2,855 is now the 200-day moving average – so it's a perfect level to test to see how real this rally is.

As you can see from this S&P chart, we're moving right within the 5% Rule™ around 2,850 as we predict 30-point incriments to drive the index in either direction.  If we can stay in the top of the range and hold the 2,850 line and get back over the strong bounce line – then we're be consolidating for a move over 3,000 but anything below 2,850 and we'll have to consider another 5% drop (2,700) before this correction is over. 

We're happy either way as we've considerably lightened up our portfolios as of last month, taking 1/3 of our gains off the table in the Long-Term Portfolio and bulking up our hedges – just in case.  Having more cash on the sidelines allows us to take advantage of new trade opportunities, like yesterday's UGA spread and, in our Live Member Chat Room, we decided to buy the long July $29 calls for $2.75 as they weren't getting lower while the $32 puts were an easy sale at $2+ and we're waiting for a bounce to sell the July $32 calls for $1.70 now (to make up for the extra quarter we spent on the calls).  

The July $32 calls are now $1.15 after bottoming at $1.10 and, since we expect $1.70, that's a 0.55 (48%) gain from here so actually it's good for a long play at this point too!  We're nothing if not flexible in our outlook because we're Fundamental Investors which means we know the value of an option and, since we fell the July $32s are worth $1.70, but not more – just…
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