Bottom? or Bounce?

On July 16 the VIX pierced the 30 level before backing off and closing the day with a long shadowed "doji" - indicating a fear spike during the day followed by some complacency and ultimately indecision by the time the closing bell sounded. Previous spikes above 30 have been the harbingers of significant downtrend reversals and are usually followed by an even more extreme "fear spike" that takes the VIX well into the 30s - thats exactly what happened on the 17th. The VIX move on the 16th and the big volume associated with it convinced me to clear my bearish positions. On the 17th the VIX and broad market price action validated my position change and started moving my hedges (bullish positions) in the proper direction as well.

About my hedges - as the broad market was dropping I made the (well founded) assumption that the market wouldn't fall forever (duh!) and that as we went to lower and lower price ranges my confidence was going to erode. So, as the down move was underway I hedged with some various trades (see My Current Positions). Now granted, I came to the party a bit early so my hedges are well under water at this point - but I have been sleeping like a baby for the past month! Yesterday's big move in the market has put much of my hedge close to break even and is showing potential for some profit in the near term (love the puts I bought on the SKF!!).

Now the big question - bounce or bottom? I think it is too early to call a bottom, but I am convinced that we have the making of a decent bounce underway. Today (the 17th) should confirm or deny my outlook - but since we have option expiration this week (and earnings!) I will try to stay nimble until we print some candles early next week. For now, you can see that I have a bullish bias in my positions - but since they were hedges against my extreme bearish sentiment over the past month I will be happy to bail out of them at break even or small losses. Any profits I pickup from the upside is just icing on an already very tasty cake.

111 on the DIAmonds...

...is the last level of meaningful support (38.2 fibo drawn from the 10/10/02 low to the 10/11/07 high) - after which we have some minor support at 107 and 105 before hitting the 50% retracement level of 102. I'm anticipating some froth at the 111 level but in the end I believe a dead cat bounce will provide just the energy needed to crack this support level.

Also the declining volume on the subsequent big down days tells me that we have not yet reached the bottom. I'm looking for a big volume event on a substantial distribution day to mark the end of the downtrend - capitulation - but we ain't there yet.

I sold my DIA puts for a tidy profit in anticipation of a short bear market rally (or in the event that the 111 support holds), and have lightened up on my other broad market index ETFs. One exception - GLD - I bought puts today as GLD was banging its head on 93. The range between 85 and 93 has been pretty solid and I continue to trade this range with options.