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Friday, November 21, 2008

Stock Market Bottom November 2008 Tomorrow Price Action

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Stock Market Bottom November 2008 Tomorrow Price Action

(READ ADDITIONS BELOW. Added in afternoon of Friday 21, 2008)

As we stated in the previous two posts during the trading session of November 20, 2008 (This post is being written in the night of November 20 to November 21, 2008), we should be at a stock market bottom today November 21 2008. A rally should appear from "nowhere" in the near future, most likely tomorrow Friday November 21, 2008.

The levels of the bottom areas are: SPX (SP500 index) 750, DJX (dow index) 7500, NDX (Nasdaq 100 index) 1050. The numbers are round numbers, and markets like round numbers for bottoms and tops as people usually place orders about round number areas.

We entered a retirement position in the banking sector in our retirement account (read previous post) at market close of November 20, 2008. Note that retirement accounts accept orders at close only. Therefore we cannot time market during the day. The financial sector ETF (XLF) closed at $9.32. If a rally takes place tomorrow (or later today as we are in early hours of November 21, 2008), we expect a big move in all market indices discussed in this post.

There is also the possiblilty of a market gap at opening.

ADDITIONS:

2:17PM (Friday November 21, 1008): THE SHORT COVERING IS ABOUT TO START. If this happens, hold until NDX touches at least 1060.

Conclusion:

The market behaved exactly as predicted! Notice the rally that started shortly after we called it during the trading day.

Profit Taking:

We stayed with the position until 10 minutes after the close (QQQQ EFT trades in after hours, and it was up an addition 0.5%). NDX closed at 1085. The after hours equivalent is then around 1095 NDX. We took profits for the extra position size we entered into towards the close of November 20, 2008, as well as for two of the quarters of the first positon size (the latter 2 quarters were done around 1075 NDX).

As a matter of fact, we were even more profitable than the above as we sold ITM puts that were expiring on November 20, 2008. Since volatility was very high, and our short strikes were 27 for QQQQ, the trades were much more profitable than we hoped. We did not do the calculations, but it was very good (as even trades we placed on November 19 with a higher NDX value were profitable because of options premimum).

We have rolled out to december expiration 2 QUARTER size positions that were established at NDX 1110, and NDX 1128 areas. With November premium, the cost basis of these are much lower (they were profitable at close). With december premium, the cost basis is down even further. The volatility premium for QQQQ $27 strike at close of Friday was about $1.90. This corresponds (top of head calculations) to 7% of the value of the QQQQs, which if translated to NDX would be about (top of head calculations) 75 NDX points.

A lesson from the above is that one should consider going long by selling puts (we prefer ITM puts for multiple reasons, and this post is getting too long to comment on this now).

To your profits!


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Happy trading,

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