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.

Talk to me VIX

Having survived the dogfight of expiration Friday somewhat intact, I find myself leaving the scene in a kind of bleary-eyed, preoccupied stupor - heading away at Mach 1, yet knowing in the back of my mind that I should re-engage. I reach deep into my soul and call out desperately for my long lost flying partner for help..."Talk to me VIX". In an instant I'm pulled back into the fray - re-energized, refreshed, and ready for battle. My old flying partner has revealed some much needed insight. I have managed to keep enough powder dry to finish what was started - victory will be mine. Now if I can just find that darn aircraft carrier...

The VIX is speaking volumes about the current market conditions - coupled with the DOW and SPX banging their heads on some very formidable overhead resistance, it seems like the end of the bear rally might be upon us. The VIX is showing the same level of complacency we saw back in October just as the market hit its highs and rolled over big time. The SPX has shown some strength in climbing back from the lows of 1275 but it has not been an easy climb. When it broke through 1385, the talking heads were quick to proclaim the bottom had been put in and we were turning to the upside, but follow through has been weak on mediocre volume. The cash is still on the sidelines. The DOW is no different - also banging up against the 200 MA and showing even greater weakness than the SPX. The DOW just can't seem to break through 13,000.

So...what am I doing? I'm mostly in cash but have some speculative PUTs on DIA and am long SDS. Up until today I was holding onto GLD for a hedge but decided to take my profits due to the weakening of the metal commodities. Also long some DUG - a small speculative position that is looking for a decline in Oil prices. I'm excited about the market opportunities that are in front of me. I'm looking for the VIX to start to move up and confirm a rollover in the broad market. Just gotta keep a clear head and listen to my gut.

"Requesting permission to buzz the tower".