The Easy Money Has Been Made

 | Mar 08, 2012 | 3:03 PM EST
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In Tuesday's column, aptly titled, Time to Buy, I talked about how I was looking for spots to add to bullish positions as the Feb. 1 gap in the Russell 2000 (RUT) at the 792.82 level had just gotten filled. Furthermore, in the SPX there was the additional support at 1340 which I thought would hold if the market were to sell off some more.

The subsequent low in the S&P 500 (SPX) was 1340.03 and now look at it. The SPX and Russell 2000 have just filled their gaps from Tuesday's big shakeout. In other words, the entire loss from Tuesday's session has now been completely retraced at least in the SPX and RUT and Nasdaq, though, not quite in the Dow, which is still about 50 points shy.

I thought it was amusing and not unexpected, that when I talked about buying into that selloff, I got ridiculed by some knucklehead who thought I might be a bit early in the market collapse. He signed it LMFAO (which I had to look up on Google (GOOG)). I wonder if he's still laughing, especially now that the market has shot right back up to fill Tuesday's gap.

In the case of the RUT, the selloff finally took care of a gap I had been keeping an eye on for a while as a possible downside target. That gap from February 1 at 792.82 was overrun by several points, so I was early, buying at the gap. But now that it's back up to fill Tuesday's gap at the 803.65 level, it doesn't seem like it was such a bad move. I will likely take some profits in my most recently added positions in my Russell 2000 funds at today's close.


Russell 2000 -- Popping back up to fill Tuesday's gap
Source: optionsXpress


Speaking of the Russell 2000 and its gaps, note that, today, the morning selloff in the RUT carried all the way back to fill the opening gap at 795.95. That was a sign of a short-term intraday low as only the RUT filled its opening gap. The Dow, SPX and Nasdaq failed to pull back to that degree. Here is the short-term chart so you can better see what I mean.


Russell 2000 (five-day chart) -- Marking today's low at the gap
Source: optionsXpress


In the case of the S&P, no nearby downside gap marked Tuesday's lows, though the rally has now left a bunch of gaps on the downside. These will become targets during the next pullback (and yes, there will be one). The bottom on Tuesday was marked by some support at the 1340 level, which I had highlighted as support in that day's column. As noted above, the low was 1340.03 and now it's popped up to fill Tuesday's gap and then some. Now, a bit higher is Monday's gap at the 1369.63 level. That's the next upside target if the current highs at 1365.79 are exceeded. I am writing some out of the money April calls in the SPDR S&P 500 (SPY) as that gap from Tuesday is filled.


SPX -- Bouncing off the support at 1340
Source: optionsXpress


But as we so often find, the more accurate story, of gaps anyway, is told by the futures. In the chart of the Emini below, you will see that a bullish island reversal has now formed based on today's gap-up opening, and a portion of the gap from Tuesday that the futures jumped over this morning. The island is 1354.25. That was yesterday's high up to 1357.50, which was this morning's low. That is now an initial downside target for a pullback. And if history tells us anything, it suggests that this island will become aborted over the not-too-distant future. On the upside, there is still the gap from Monday at the 1368.75 level. That's the next overhead objective and I will likely sell some more SPY calls once that level is tagged.


Emini S&P -- Forming a bullish island reversal this morning
Source: RJ O'Brien Futures


Some of the indicators were screaming "buy!" at Tuesday's close. But if you had cotton in your ears, as some folks did, you couldn't hear them. Notably, the McClellan Oscillator settled at its most oversold reading since late November at a blisteringly oversold -266.50. Since then, it's come back to less extreme readings, settling yesterday at -155.47 -- still oversold but not at extremes. At today's close, it should be heading toward a more neutral reading.

The sentiment indicators also were supportive of a near-term low on Tuesday, as the Market Volatility Index (VIX) has spiked to a multi-week high. But now, as the market retraces those losses, the VIX has already pulled back to fill Tuesday's gap at the 18 level. That's a sign that the easy money has been made in the VIX as well. So I am not buying now as I am just using the rally to reduce bullish exposure, especially on the options side. Since I sold a bunch of puts in the iShares Russell 2000 (IWM) and SPY as the market sold off on Tuesday, now I am hedging those bets by buying some closer to the money puts and selling some distant calls.


VIX -- Also filling Tuesday's gap
Source: optionsXpress

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