Trading During Extreme Volatility

One good option in such an environment is to not trade. Today I sold a number of put positions, in case we make a break higher, leaving myself mostly in cash. Looking at the 60 day chart of SPY, we can see that price is approaching a moment to truth: do we definitively break the downtrend line, and move higher, or else make a clean break below the 84.00 level, to test the November lows?



In any case, it is a very difficult market to trade, regardless of time frame. At this point, I am waiting for a more clear direction, and also more volume.

The dollar has risen during the past few sessions, and is still trading in a range.



Oil closed at a new low on increasing volume.



Commodities are still headed lower.



Yet, the bulls were strong today. When I look at a chart like IYR, I am deeply puzzled. I have puts, and I am not liking the volume patterns. I can shake my fist and yell "fools!" at my computer monitor, but nonetheless, someone wants to buy REITs here. We'll see how long that lasts.



- JEC looks good for the long side.



- DFS: I still have puts on this one.



Read this related article by Meredith Whitney:

First, I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn (€2,365bn, £1,955bn) of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year.

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy.

...I expect more broad-based credit contractions but, specifically, more than $2,000bn in credit lines to be cut in reaction to risk aversion, constrained capital and regulatory change.

- FXI: If we get another 10% pop here, we will have higher lows and higher highs.



For now I am focused on protecting capital, and waiting for a clearer direction.