Fireworks should start in next 2 weeks

I'm still expecting to see a bearish capitulation before any significant downside occurs. I expect to either see bears throw in the towel as markets climb even higher or quickly cover shorts on the first dip. Either of those occurances should mark the end of the rally...or a least a signficant pause.

I'm noticing some bearish divergences in momentum indictors such as the McLennan Oscillator and further cracks in the wall of worry are showing as per the 44% bulls, 36% bears in the AAII sentiment survey. Readings of 50%+ bulls have coincided with previous IT tops. However, let's be clear about something. If this is the first leg of a new bull market sentiment could get a lot more bullish before signaling danger and extreme overbought readings could stay extreme overbought for quite some time as like what happened in the initial March 2003 bull market launch which by the way lasted 3 months. Top picking traders got steam rolled during this period because they were gaming the extreme overbought readings and bullish sentiment which in the prior occurrences always signaled an immanent top. Their mistake was that they were playing by bear market rules. Bull market rules allow for a much higher tolerance of overbought conditions and bullish sentiment especially in the initial trust.

Now, I did mentioned before that I don't believe this is a new bull market similar to the 2003-2007 variety and if it is some sort of retest is likely at some point. However, I am cognizant of the fact that the Sept-Oct decline was the worst ever drop in history in such a short time frame and so payback is a bitch and this may be what we are seeing here. I am open to the possiblity of a 3-6 month mini bull market.

I mentioned before that I believe the VIX should hit 30 on this move. The VIX is clearly making a significant breakdown and yet there is not much talk about it. At prior IT tops such as May 2008 and January 2009 you can see the VIX just about touched the lower band of the RSI indicator. It certainly looks like it will happen again this time at the least and therefore a move to about 30 would be in store at the very least.



I intend to take advantage of this by puchasing June VIX 35 puts. At 2.50 this gives you the chance to make a quick double should the VIX hit 30. These types of option plays are "all or none" for me....its either 100% return or bust.

Let's keep in mind that prior to the once in a lifetime September-October debacle a VIX of 35 was considered extreme. Therefore, if the economy does in fact stabalize at least for a few months, calling for a VIX of sub 30 by June 19th would not be outlansish.

Should be an interesting couple of weeks....