REASON FOR SELL SIGNAL @ 10:00AM in DIA

DIA entry 106.21 at 10:00AM

Here's what I am looking at this morning:
The Put/Call ratio is HIGH this morning, which indicates that volumes are in put contracts. Most people interpret that to be bullish, but you have to look at what that volume is doing to prices of options. When you add that into the equation, it reveals that the volumes from put contracts are driving DOWN the level of options prices because the VIX indicator is down 2.4 to 42.86 (current reading as I type).

Granted, the VIX level of 42+ indicates extreme fear and uncertainty and is typical of major stock market bottoms historically. HOWEVER, the VIX has hit 40, then continued to 50, 60, 80, and even 160 in the 1987 stock market crash. Yes, 160 is correct. The illiquidity of options and the fact that stocks were closed on the NYSE pushed options prices to the moon.

The point is that you can't just blindly BUY the market when VIX hits 40. If VIX is rising then you have to be careful, you have to know that uncertainty is rising and that people act irrationally when fear is rising and do things that in hindsight seem foolish but at the time seem rational and get justified very easily and logically with facts and figures.

Apologies to drift along here while this sell signal is in place. I'm sure you would like to read what the reasons are for the trade.

The put/call is 1.94 now (at 10:44AM) and the VIX is 42.64 -2.62. This setup occurs when put-sellers are in the market and when you SELL PUTS, you drive down the price. When the put-seller exits a position, the offsetting market-maker has to buy back his short in the underlying security. Hence, the underlying security rises in price from the "short covering". Short covering rallies tend to be short-lived and the 3 hour rule will hold true here too. If the rally lasts longer than 3 hours, then we can presume that the put-sellers are the "smart money" or the "bigger money" and that they have control of the market.

HERE'S THE HUGE TRADE SETUP: If BULLS are SELLING PUTS to establish new LONG POSITIONS then we could be setting up for a big fall once the 3 hour move is over.

I'll work on a deeper explanation to present later.

Put-selling is the most important variable to track, in my opinion and it is put selling that sets up the biggest, most violent moves in the market that I have seen in my 23 years in the markets. 1986-2008.

Feel free to post replies:

10:55AM
106.93 bid last for DIA. Close to stopping out based on parameters listed at 10:00AM, whereby I said to lower stop to break-even (entry) after an hour. At 11:00AM we will therefore be stopped out.