China Lights A Match

The Shanghai index was down over 5% last night, which unleashed a tidal wave of selling across overheated commodity markets as well as the S&P futures. It is being said that it's in response to China possibly raising interest rates, but it could just as well be from Obama being a little too frank at the G20. I was stunned to hear his comments that we face deflation and that countries (meaning China) should not rely on exports to the US. He's basically telling the truth, in my opinion, and knows we're on our way down. I'll post more on this later when I can find his quotes.

This is why I've been only using call options for upside exposure. I'm a structural bear, but a pragmatic one. It is also a hedge against VXX, my volatility bet, and UUP, my synthetic short. I can be wrong and not get blown out. I did hedge the calls with an intraday short position using SDS, but only brought down my total risk on dips after which I'd scale out to flat. I still think this has been a sloppy decline so far and that we will see higher highs eventually, but it could be sloppy all the way to 1175. Conversely, my gut tells me it's still too early to put together an outright short position, one that I would ride for several months.

In the ES, overnight action bounced strongly off trend line and price resistance at 1193. We will probably open "in the middle" yet again. I will wait to trade an extreme, either higher or lower.