This morning (premarket) we sent a note to subscribers laying out some hedging strategies, should they be needed in the event of a continued rally. Happily, not only was that note totally unnecessary, but today’s fantastic drop has us ideally positioned going into next week.

As several members mentioned today in correspondence, the advantages of market-neutral trading strategies aren’t limited to markets that blandly drift sideways; being neutral is also a great way to avoid the day-to-day whiplash of the sort we’re seeing now.

The Dow Jones Industrials settled at 12209, down 394 points today, which is a crying shame; we held a little party into the close making friendly bets on whether we’d close down 400 (Dow futures were down about 418 at 4:00). All the major indexes were off by about 3% today; the financials (XLF) were down 5%. The most interesting sector of the day was energy (XLE), which gapped up hard at the open to 89.72, and then basically sold off for the rest of the day, closing down 2% (annotated chart at right).

Reversal Readings

To review, these are just the 2-period RSI readings on some of the ETFs that we follow. We consider any reading under 10 to signal an oversold condition and anything over 90 to be overbought. We consider readings below 5 and above 95 to be worth examining for very short-term reversal trades.

You’d think that with a down day as heavy as this one, there would be plenty of oversold readings to be had, but given that today was coming off of a similarly uproarious day yesterday, readings here aren’t so dramatic.

DIA – 14.94
SPY – 16.87
QQQQ – 17.91
IWM – 23.27
XLF – Financials – 10.73
XLI – Industrials – 5.84
GLD – Gold (now, with listed options!) – 95.06
DBA – Agriculture – 97.67
DBC – Commodities – 93.72
We usually just select a few interesting names, but today, that’s actually the whole list. Seems like the trend next week is anyone’s guess.

Last 5 posts by Condor Options

• Midweek Sméagol Reading - August 20th, 2008
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