Market Sells Off After the Announcement

Pre-market futures are down considerably ahead of the bailout announcement this morning. There are really two main reasons: one is the current upswing is simply at a probability point for a consolidation, and the second is the "Bailout Bulls" are coming to their senses and realizing that the government is not the fundamental catalyst for economic growth. It is possible that the bailout announcement at 11:00 pm ET will put some fear in the Shorts, which could cause some covering and a bump, but it's likely that the market is having one of those "reality check" days where it realizes that no matter how much it desperately wants a big, robust secular bull market that it can't just manufacture one out of thin air (or hot air if you count politicians).

Here is a chart of the SPX:
(click on image to enlarge)

The SPX is set to test 860 fairly soon after the open, which is the tipping point on the morning. A move below that area and it's unlikely that the market makes it back to new highs above 878. The SPX would need to move above 878 for the Bulls to signal a probable continuation of the current upswing. So a move below 860 and I'm in consolidation mode and looking at the current upswing as pausing at best and rolling over at worst. I would be interested in puts only if the intra-day formations were good signals, but a move below 860 does open the door for a drop back down to 852, which would be an Evening Star Reversal, which in turn would open the door for a drop back down to 830.

The Naz has been leading the current market rally, and you can see the upswing is ripe for consolidation.

Here is a chart of the Naz:
(click on image to enlarge)

It's always possible that the Bulls get hyper, and the Shorts get wild and crazy, and when the market dips to 860 and then Bottle Rockets past 878, so I always like to keep an open mind. If we get that kind of intensity intra-day, then I will take it as a very strong signal and look to play calls the next day or two. Otherwise, I'm looking for consolidation today, and a possible rollover in to a potential Triangle type of consolidation on the SPX.

7:33 am MT: Early-day Update: After seeing the open, the highest probability scenario to me right now is a drop to 852 on the SPX. It doesn't mean it has to happen, but it's likely to happen. A 15m candle close below 862 would be a confirmation - and probably leg the market down to 857 - before an intra-day pause and a decision by traders to see if they sell it down to 852. It's always possible that the Bulls get excited and take things back above 878, but I'm still looking for that consolidation day as the probability outcome.

9:15 am MT: Intra-day Update: The SPX did drop to 857 (856.22) as I speculated and then paused. The next leg down intra-day took the market beyond 852 and down to 846, where the next pause is happening as I type. The Evening Star Reversal is forming on the daily charts as I speculated. The market may not close and confirm all of this, but the likelihood of an intra-day recovery is pretty low.

I "paper" traded some nice SPY puts early out of the gate and during the ensuing wiggle, and scaled them out into the parabolic drop on the 5m charts. It was a nice 12.5% gain in just 75 minutes. I will look for more potential opportunities if price action shapes up nicely after this next pause.

Oh yeah, and then there was that "bailout" announcent thing.....a real life-changing experience.....

11:25 am MT: Intra-day Update: The SPX hit 830 right on the nose, so we'll see if this is the next pause point intra-day. I traded two more sets of puts after the first wave for another 20% gain intra-day. At this point I'm looking for a longer consolidation, so I'm out and watching for the next set of price action. The SPX could still hit 825 today, but a pause off of 830 is what I'm looking for right now.

11:40 am MT: Intra-day Update: There's the bounce off 830. Price action is slowing to the downside, so this fits right in with what I was speculating and that is a bit of a longer consolidation in this area intra-day. It may be more than an hour before we see any new lows on the day if we get new lows (down to 825). For now, this has been a great day for puts, and it's probably mostly done in this area.