HERE WE GO...

We started the move down on Friday, but it was impossible to know the future. We knew that we were near the top. If you listened to my advice last week, you are sitting on a large cash position and ready to make some money on a downward move. If you didn't...well...if you gamble long enough, you will lose...and possibly lose big. Friday we closed within the trading range between 992 and 1007. We sold off early, but managed to rally up a bit at the end of the day. On Thursday I was in a class where I made an argument that we could go up, down, or sideways over the next few weeks. When you can make an almost equal argument for each of those three alternatives, you know it is time to go to cash. As trend traders, we will always lose some money when the trend changes. I'm not faulting anyone for having some Calls going into today's move. The lesson is that we should have lightened up on our trades and built a large cash position...just in case we got a move like today. The large gap down didn't give you much of a chance. This is why it is important to lighten up on the trading when it starts to feel like the trend is ending. You really can't stop trading the trend completely (because it could still keep going up), but you've got to lighten up. The first warning sign was last Tuesday (August 11) when we broke below the 10 day moving average for the first time since the trend began. When that happened, you had to ask yourself "how much more gain could I get in this trend compared to the risk of a sharp reversal". There should be more follow through to today's move. We could possibly get a bounce early in the day tomorrow, but any rally should be looked at as an opportunity to buy puts. If we gap down in the morning, be patient and wait for a slight rally before buying puts. Don't chase a gap down. You will most likely get a second chance. The easiest trade is to just trade the markets (SPY or DIA). Do not use August out-of-the-money options. If you want to use August options, go in-the-money and get a delta of at least .70. It would be safer to use September options. Avoid buying puts on stocks like AAPL, GS, or any other "hot" stock during this last trend. They might continue to move down, but there are probably a lot of traders waiting to buy in on a pull back like today. They might not fall as far as other stocks. In fact, we will be itchin to get back into these when we feel the correction is over. The next support level to look at is around 950 on the S&P 500 (which is also the 50% retracement of this last trend and the 50 day moving average). Expect bearish to sideways movements for possibly the next few weeks. This first move down could just be a wave A. This would likely be followed by a choppy rise (wave B) that could be followed by capitulation selling (wave C). If the 950 area holds, we could be back to talking about a bull market. If it fails, we could dip below 800. Whatever happens, we'll make money. That's the great thing about trading trends.