BULLS SHOWED UP TODAY

I've been sick over the last few days so this posting will be brief. After the gap down this morning, the buyers came in and managed to cut those losses significantly. The price action was definitely bullish. The volume was above average so we can't ignore or brush off the move. There is a good possibility that the market will be up tomorrow. Having said that...there is still a lot of uncertainty as to the future economic outlook. Like I've said before...if we do move higher, I don't expect it to be too much higher. The reward to risk still favors the bears. I wouldn't be surprised if we got a complete reversal of today...a gap up followed by a big sell off. Either way, I'm not too worried since I only took on a small position as we broke below 110 on the SPY. I'm still looking to take on the larger position when we break below 108. This is one of the benefits of waiting for confirmation. Those that have already entered trades need to make sure they follow their trading plans. I had a few e-mails asking me if they should stop themselves out early because of today's move. I'm not a big believer in changing the trading plan after you are in the trade. The decisions you make after you commit capital to a trade are usually bad decisions. If you fully accepted the risk before you entered the trade, you should be willing to remain in the trade until either of the parameters are met (getting stopped out or hitting your profit target). The whole reason why you set up a plan for your trade is so that you won't act emotionally to every gyration of the stock (or market). Although the move today was somewhat bullish, a move like that still need another day to confirm it. The market hasn't yet broken above any key resistance levels so there's no reason to panic if you are bearish on the market. Remember...we don't care where the market decides to go. We can't predict it (at least not perfectly), we can't wish it or hope it, and we definitely can't control it. If we lose money on this expected move, we will make it up somewhere else. Don't make the mistake of believing that this expected move down will be the only chance to make money. The market is always presenting opportunities to make money. However, we need to be patient and make sure we are following sound money management principles. Money management is the most important part of trading...I know I've heard that somewhere before. Unless something big happens, this will probably be my last posting of this week. I'm miserably sick and I barely have a voice so I'm taking the weekend off to recuperate. Have a great weekend and send me your success stories if you have some...although I'm aware that I will probably get flooded with them as soon as the market drops 300 points.

IS THIS THE START OF THE DOWNWARD MOVE?

It could be, but there wasn't much volume behind the sell off today. The VIX did start to spike up a bit, but it backed off near the close. There isn't too much fear yet in the selling. I did get triggered today on my 110 contingent order. I'll look to add more if this move brings us below 108, although I might add to the position earlier (perhaps 109) if the VIX spikes up or there is bad news that comes out before the market opens tomorrow. Some other nice bearish patterns include many of the financial stocks. You have high probability bearish trades in AXP, GS, MS, JPM, and COF. If you are brave enough, you can really turbo charge your returns by buying puts on the FAS or calls on the FAZ. The FAS moves three times the financial index. If the financial index goes down a dollar, the FAS goes down three dollars. The FAZ is an inverse ETF. It will go up three dollars for every dollar that the financial index goes down. The call options on the FAZ are much cheaper than the put options on the FAS. These leveraged ETF's are not meant to be long term trades. You can lose a lot of money if you try to use leveraged ETF's for long term trades. For short term trades, they can significantly increase your returns if you are right about the trend direction. Read this article to learn about the risk of leveraged ETF's: http://news.morningstar.com/articlenet/article.aspx?id=271892&pgid=etfarticle
I think AAPL could continue to move down to around $190 (that's a possible $7 move down). HOG is in another great put option position. Please send me some success stories if you have had some over the last few weeks.

WE'RE AT THE 50 DAY MA ON THE SPY, WHAT'S NEXT?

That's what I'm asking you...anyone know what will happen next? I was expecting a small rally today, but it ended up being more than I anticipated. This has got to be it for the bearish scenario. If we move above the 50 day MA, I will turn very neutral on the market. The good news for the bears was the Fed's raising of the discount rate today. We've already seen the downward pressure on the Asian markets and we'll probably see early on how this news will affect the U.S. markets. This could be the catalyst or trigger that I mentioned in last night's blog posting. If you are already in a put option trade, you might see a profit very soon. If you are still waiting for confirmation (like me), you might get your entry sometime tomorrow. I'll probably set up an initial trade contingent order tomorrow...possibly just below the 110 area on the SPY. If the futures are down in the morning, the SPY will probably gap down at the open. This tightening by the Fed should result in the dollar continuing it's uptrend (watch the UUP). This should also put pressure on commodity stocks like gold and oil. These sectors will most likely make moves down tomorrow. One more thing to consider...it is option expiration Friday tomorrow (February options). One thing that I have learned over the years is that expiration Fridays are the most irrational days of the year. The market will move up or down (or both) regardless of the trend...or wave count...or pattern. This makes these days very unpredictable. What causes this irrational trading behavior is the fact that there are decisions made on those days (expiration Fridays) that have nothing to do with expected future movements on the stock or market. These buy or sell decisions could be based on the sole fact that it is an expiration Friday and the future means nothing to the decision being made. This means that we shouldn't react too strongly to breaks of support or resistance if that break took place on an expiration Friday. I'm not using that as an excuse to ignore a possible break above the 50 day MA on the SPY, but rather a reason to possibly wait until Monday to see if that break was justified...assuming the market goes up tomorrow.

GET YOUR PUT OPTION TRADES READY

Just when you thought it was safe to buy calls...I'm now going to ruin your day. This is a perfect area to start looking at put options on the SPY. The reward to risk won't get much better. We had a sell off on the SPY in January that broke below the 50 day MA. We have recently rallied up to that 50 day MA in what looks to be a bearish ABC pattern. We are about $1 away from the 50 day MA and the 50 day MA is flat-to-slightly-downward. This is a FANTASTIC REWARD TO RISK...IT DOESN'T GET MUCH BETTER THAN THAT!!! If you don't understand what I mean, let me try to explain. If you buy your put options near this area and the SPY moves above the 50 day MA (I might even put it above the November/December resistance around $111.75), you would incur a small loss if you were stopped out. However...If the SPY drops to just the previous low on this next expected move down (around $104.75), you would have a potential $5.50 gain for the $1.50 risk. That is over a 3:1 reward to risk! How do I know the market is going down soon? I don't! I could repeat all the signals I've been following over the past week, but you can review previous blog postings for that. If this is a new trend up (instead of a correction setting up another move down), we should break above the 50 day MA soon. If we were stopped out of the put options, we could turn around and buy call options and make up the small loss within a week. As for any longer term bullish outlook...even if we do go higher, the charts say that we are still due for a larger correction (I base that on several Elliott Wave counts). If that larger correction doesn't take place now, it will probably take place soon after the market reaches a new high. In other words, the reward to risk for bullish trades is terrible right here. I understand your bullish arguments (I've received my share of e-mails this last week containing bullish arguments). I pride myself as a trader who tries to look at both arguments before making a decision. As you can tell from some of the last few postings, I've been a bit cautions to make a strong bearish recommendation. I'm going to make a strong recommendation now. I can see the possibility of a slight upward move on the SPY tomorrow (You could also use the DIA or possibly the QQQQ if you like)...maybe at the open or possibly late in the day. Maybe enough to get it right up to that 50 day MA (which is currently sitting at $110.98). If we do get this rally, look to load up on put options and place a stop above the 50 day MA. For those that may want to be a bit more conservative, use a contingent order somewhere below 108. What I plan on doing is setting up a contingent order below 109.75 if the SPY goes above Wednesday's high (around $110.40). This would trigger an initial trade. I would then add to the position if the SPY dropped below 108 (which would trigger my other contingent order). Let me be clear...I'm not setting up a contingent order below $109.75 unless the SPY goes above Wednesday's high of $110.40. This order would be a smaller initial entry into the trade which would be followed by the larger trade if the SPY drops below $108. If we sell off right at the market open, I would probably just wait for that 108 contingent order to get triggered and forget about the 109.75 contingent order. The safer trade would be to wait for some confirmation. With these contingent orders, I'm protected if the market decides to just go up 300 points tomorrow (although I will look a bit stupid with my bold recommendation). If we do rally 300 points tomorrow, I won't be in any trades so I won't care that we rallied 300 points...although if that happens, I might not have a blog entry for a week while I recover from my embarrassment (that wouldn't be the first time...and it wouldn't be the last). This could be a great opportunity for you guys to make some money and pay for your education...or possibly allow you to take additional courses...like my Elliott Wave course! By the way....look at the nice bullish ABC pattern forming on the VIX. The VIX is also sitting on its 50 day MA. If the VIX decides to spike up again, well...you know what that means for the market! For those that keep asking me about Gold...be patient. There might be an opportunity in the near future, but I still don't want to touch it right now (bullish or bearish). Keep an ear out for any negative news...especially if it involves Greece, Dubai, or even Italy. Usually a big move down needs a trigger...kind of like an avalanche. We could use a avalanche right now.

SECTOR ANALYSIS RECORDED CLASS

Here is the link to the Sector Analysis (lesson 4) recorded class: http://www.virtualinvestingclub.com/training/Sector%20Analysis/Sector%20Analysis.html

MIXED SIGNALS

The market produced some mixed signals today. These signals make the next few days in the market very critical. Some of you might view the recent rally as a start of a new uptrend. Others might view it as a rally setting up another move down. For the bulls, I give you a break above the 1085 S&P 500 resistance today and the possibility that a bullish ABC pattern completed on 2/5/10. You could also look to the oversold conditions in the market and a MACD that is turning upward. For the bears, I give you a recent spike in the VIX and the completion of a possible bearish ABC pattern with a 50% retracement. You could also look to the downward trending 50 day MA and a world debt situation that is possibly going to snowball. The bottom line is that no one knows exactly what is going to happen next. You might think you do...but you don't. The point is not to be able to predict the future, but rather to have a system that you are following consistently. I'm still bearish because we are still below the 50 day MA and the 50 day MA is still trending downward (although it is starting to flatten out). Each time it breaks above a resistance level, the market is exhibiting a characteristic of an uptrend. I haven't missed those clues. But this doesn't mean that its time to go out and buy calls...just that it's not wise to buy puts. The next two key resistance levels are the 50 day MA (currently around 1108) and the 1117 area on the S&P 500. If we break above 1105 (February 2nd high), I will really turn neutral and start looking for bullish trading opportunities. For now, I will raise my contingent order on the SPY to 108 and wait to see what happens tomorrow. The volume was very light on today's big move which would be considered a bit bearish, but the dollar seems to be in a position where it could pull back a bit more which could be viewed as bullish. I could probably go on and on with both arguments. Be patient and don't gamble. If the trend moves back above the 50 day MA, there will be plenty of opportunities to make money on that trend. If the market breaks lower right here, you'll be glad you didn't load up on call options. If my contingent order gets triggered, I should have a very nice bearish trade. I'm going to sit here and wait for my pitch.

I'M STILL WAITING...

At the open on Friday, it looked like we were in for a big down day. The SPY came close to triggering my contingent order, but the rally at the end of the day kept it from triggering. Thus I am still waiting. With the slight pullback on Friday, we are still in a situation where we could rally up to that 1085 area...or we could drop big time from the open on Tuesday. Mondays have been rally days for the last several weeks. With the market closed today due to the president's day holiday, we could be in for a rally Tuesday. I don't care what happens tomorrow. My contingent order is still set and I'll just patiently wait until it gets triggered.

STILL WAITING...

I didn't get filled on my contingent order today. The SPY never dropped below 106. I told you that there was a chance that we could rally up a bit more which is why I set the contingent order. There is still a possibility that we will move up a bit more before coming down. My target area for the next resistance is that old familiar 1085 area. I don't know if we will move up that far, but if we do...it will set up for a very strong probability for a big move down. I'm keeping my contingent order at 106 for now. I told you that I might consider moving it up, but the low today was at 106.25 which is not that far from where I have it now. I'll stay at 106. If we move up tomorrow, I might move it up a bit at the close. If I do, I will tell you where I put it. My birthday is tomorrow so I probably won't be posting anything. Have a great weekend!

CONSOLIDATION

The market has been consolidating for the last few days. It is still difficult to determine when the next move down will be. I see possibilities of a rally over the next few days, but I also see a possibility for another 300 point drop. If you look at an intra day chart (15 minute chart) of all three major averages, you see a possible bearish ABC pattern forming. What I did today...and what I will probably do tomorrow...is to use a contingent order for a put option trade on the SPY. I'm looking to place my contingent order around the $106 area of the SPY. If the market move below this point, it should trigger my put option trade...with the expectation that we will be on our way down in the near term. If the market continues to rally tomorrow, I will look to raise this contingent order until the market decides to drop again. I do not see many buyers on these rallies which gives me greater and greater confidence that we are moving lower. Having said that, the major averages still look like they could rally up a bit. We are getting further and further away from the 50 day MA. When this happens, you expect the market to come back to it...even if it is just a little bit. The safest place to be right now would probably be in cash. The market is currently (as of today) in a kind of "no man's land". This is not a good area for new bullish trades and it is not a great area for new bearish trades. If you already have trades set up, keep managing them. If you are looking for new trading opportunities, be patient. Since I don't see many great position trades out there (trades designed to work over two weeks to two months), I moved into the intra day charts to look for any swing trade opportunities (trades designed to work over 1 to 5 days). This potential trade in the SPY is a swing trade. I'm expecting about a 30 point drop in the SPY (down to that 1040 area) if that confirmation point is hit on my contingent order. This move would be expected over the next 5 days if that confirmation point is hit. This doesn't mean I know what is going to happen next...I don't...but I have a plan and I like the reward to risk. There was some Elliott Wave analysis that went into some of this trading decision. I went over a lot of the details in my Elliott Wave class tonight. Elliott Wave analysis can provide a great context to the market. It can sometimes make you feel like you can predict the future...even though you still can't. There are some Elliott Wave patterns that can set up some very high probability trades. We'll see how well I do over the next few days. If you are interested in that course...the Elliott Wave course (Course 3)...please let me know by e-mailing me at jerry@myoptionmagic.com.

OVERSOLD?

The market sold off in a big way during the last hour, but we did not break below the Friday low (around 1044). The market is due for a bounce. If we break below the 1044 level tomorrow, you could look to buy more puts. If we move above 1065, we could be in for a short term rally. The trend is definitely down, but we are also getting pretty far away from the 50 day MA. I would still consider any bullish trades risky in these conditions. The easy money will probably come from setting up put option positions on the rallies or buying puts on the break of support areas. I still don't see any confident buyers out there. I sold most of my contracts into the strength of today's close. I will either buy more puts on a break of that 1044 short term support area (about 42 on the QQQQ and 9835 on the DOW), or I will wait for a rally to set up new positions. Like I said in earlier blog postings, I will often trade just the SPY, DIA, or QQQQ during sell offs in the market. If I do come across bearish patterns on individual stocks, I will post them on the blog. I don't expect too many great individual bearish stock patterns until we get a decent short term rally in the market...which could possibly come as early as tomorrow. The UUP (dollar index) looks like it could be in a position for a pull back. This could lead to a bounce (rally) in commodity stocks if the dollar does indeed pull back a bit. That doesn't mean that I am recommending bullish trades in commodity stocks. The trend is down which means the path of least resistance is still to the downside. If you do have bearish trades in commodity stocks, you might want to consider taking some profits off the table.

SUCCESS STORY

Hello Jerry,

Just want to send you some of my recent gains. On Jan 13, I bought hog Feb 26 put @ $1.35. I added the Mar 25 put on Jan 20 @ $1.85. I sold both positions on Feb 5, the Feb contracts @ $4.05 for a 115% gain and the Mar contracts @ $3.35 for a 145% gain. These were both based on your recommendation on Jan 11 and Jan 19.

I just want to thank you for what you're doing with the blog. These trades here aren't the first ones that I've made money on from your recommendations. Much appreciated.

Mike

SUCCESS STORY

Jerry, Thanks for the seminar. Things really started to come together with the last couple of sessions. I am seeing more possible trades all the time. My virtual trading is improving and the risk/reward calculation was the clincher! The clarity of instruction with many examples of current charts gives the practical examples that can be implemented in my own review. It was amazing how many things I missed when viewing the videos that you clarified in class. I will be re-viewing many of them to reinforce the techniques you teach.

I look forward to continuing with courses 2 and 3.

Again, Thanks.

Jim S.

ARE WE GETTING A RALLY ON MONDAY?

The price action on Friday was fairly bullish as the market rallied off the intraday lows and closed in positive territory. Combine that with the fact that several of the Mondays over the last few months have been up days and you have a chance at a rally. If we do rally, I would look at it as an opportunity to set up another bearish position...however, I will watch the price action closely to see if the bulls are gaining strength. Although we didn't hit the next support area at 1040, we did come awfully close...possibly close enough. If we don't rally tomorrow and we break below the 1040 support level, it could possibly set the tone for a very bearish week. I hope you took some profits from the last move down on Thursday. If not, you need to work on that area of your trading.

FINALLY!

As soon as the market wiped out Tuesday's gains, I knew we were going lower. I probably would have built a bigger position near Tuesday's high had I not been spooked by the strong rally on Monday and Tuesday. The question now on everybody's mind is what do we expect next...well that is the question on my mind too, but here are some ideas. The next support area is around 1040 on the S&P 500. We might get there tomorrow if the unemployment number isn't good and the fear level amongst the professionals continues to rise. There could also be a snap back rally. If you have bearish positions, you should have taken some profits off the table after today's move. If you didn't take any money off the table, you are exhibiting the behavior of an amateur. If you didn't take profits today, look to take some at the market open tomorrow. I'm not talking about selling your entire position, just part of it. You can't get too greedy after a 270 point drop. As long as we don't gap down at the open, you could look at some possible put option trades on the DIA, SPY, or QQQQ. If we do rally for a few days, those trades would likely still work out. I would take a smaller position size and not use a stop. If we do gap down tomorrow, I wouldn't chase it. Be patient and wait for a rally. If you want a bullish trade recommendation, keep an eye on RIMM. I don't know if I would get into any bullish trades right now...but if the market does start to rally up a bit, this would be a stock to consider. BBY is getting pretty far away from its 50 day MA. If you haven't taken any profits on that bearish trade recommendation, you need to do so soon! Have a good weekend.

SECOND STRONG RALLY

The market rallied strong for a second straight day...closing very near the highs of the day. The volume on the SPY was still on the lighter side, but it was a bit higher than yesterday's volume. The DOW and Nasdaq had lighter volume. I usually don't like to see a "straight up" rally when I am expecting another move down. If we get another strong move tomorrow, I will move my outlook to "neutral" in case the buyers are ready to try to push the market higher. If we don't get the drop I'm expecting, I will take a bit of a loss on the recent position I set up...however, the percentage loss won't be much different than if I had used a stop (Remember that I didn't use stops for the most recent option trades I entered. I just cut the position size in half and kept the risk percentage the same). The benefit of this approach is that it allows me to have a chance at breakeven (or even a gain) if I get the expected drop a bit later. Even with the strong rally these last two days, there are still reasons to doubt the rally. The technology sector has led the way for most of the last year, but this group has remained very weak over the last two days. Even if the tech stocks decide to participate tomorrow, I think it would be too little too late. Don't chase this rally from the long side (bullish side). It's too risky. This rally still has signs of a "suckers rally". If the market can give back today's gains tomorrow, look to get into some put options. If we rally another 100 points in the DOW or if we barely move up or down, be patient and wait another day for some sort of confirmation.

DON'T FORGET THE STAIR STEP GOING DOWN

Today's rally should not have surprised anyone in my classes. I've been telling you to watch for it over the past week. We get so used to trading the pull backs within the uptrend that we forget to trade the rallies within a downtrend. This is the basic stair step process that we talk about in our trend analysis class. I received a few e-mails that showed concern for the rally today. Although I do not know the future, I still have a lot of confidence that the market will make another move down. The main characteristics of this latest downtrend have not really changed. The rally today was on much lighter volume than the previous few days. We did close back above 1085 which is a break above resistance. There is a chance the market could rally back up to the 1115 area on this latest move. The 50 day MA is in that vicinity...so is the upper range of the November/December channel. That area would also be near the 50% retracement (actually 56.4%) of the latest move down. Bottom line...if you have put options, follow your trading plan. If you get stopped out, you will probably get another chance to get back in. I didn't use stops on my latest trades, but I limited the risk by taking on smaller positions. I've already added to my original position. I will probably add more if we rally up to that 1115 area. If we drop from here, I will just keep the original position...I don't like to buy puts on heavy selling (the options become too expensive due to the increase in implied volatility). Also keep in mind that "earnings season" will be winding down after this week. If the market didn't rally on some of the nice reports we received earlier, it's hard for me to believe it will rally after everyone is done reporting.