Possible Short-Inverse Set-Up Early This Week

Today stocks are off to a stronger start, but in the context of many things that I am looking at, this could be the last little rally before a strong sell-off resumes.

On a purely objective, back testing basis, a 2% + rally today on lower volume would really fit the bill of a high probability inverse/short set-up.  I have probably posted about these days before, but since most of the market time is not in high volatility down trends, this scenario does not come up often.

Now I won't have all the data until we see what happens today, but if today closes up 2-3% on lower volume, my suggestion is to BE OUT or GET OUT of this market if you are holding positions.

For those of you that are unaware, we currently are in the midst of a never-before-seen level of option speculation on further upside in the market.  In my experience, this speculation will always be unwound or punished.  It is just a matter of when.

Without getting into chart or numbers, I believe that a large amount of the stimulus $ created and distributed this spring and summer has found its way into speculative markets.

• There has been massive call option speculation 

•  This has created a probable "forced" stock buying in mass quantities by market makers who sold the options

•  As the options expire, there will likely be mass quantities of stock to be sold for market makers to get back to neutral positioning

• A huge volume of these options will expire this week, and so it would seem like there will be an underlying down pressure on equities as this week begins to wind down and move to next week. 

 Since this speculative option bubble is greater than anything seen before, the reaction and fallout from it, will likely be larger than what most historical corrections would be.

The call option orgy really got crazy from June through August.  

While it seems crazy, I think that it is very reasonable, and I would actually put greater than 50% odds that the stock indexes in general will fall back below the March lows before the speculative unwinding is complete.

Cycle analysis that I follow shows mid this week as a short and intermediate term cycle high, with a very strong downward phase projecting into mid or late October.

Pete