DOW HOLDS 10,000

After a back and forth day in the market, the main focus near the close was to see if the Dow could close above 10,000. It did...barely. Tomorrow is September. We should start to see some volume enter into the marketplace, but it might not start to increase until next week. I'm still expecting a big move down soon, but I'm a bit concerned about the increase in a bearish outlook by many on Wall Street. The increasing percentage of bears could raise the probability for a rally. The current Elliott Wave count does allow for a possible rally, although the probability is low that we will get it. I'm still using the 1068 area on the S&P 500 as a stop loss point. Instead of getting out of all my put options trades on a move above 1068, I might use a "protective" call. For those that have taken my Advanced Option Strategies course, it would be similar to a protective put used for a bullish trade. With the likelihood that volatility will increase in September, I entered into a call option trade today on the VXX. This allows you to trade changes in the Volatility Index (VIX). I think it is very likely that we will get a spike up in the VIX in the near future. This trade will allow me to profit from that potential spike up. The S&P futures are up about 8 points at the time of this posting. If this hold up overnight, the market should gap up at the open. It is does gap up, it could immediately start selling off. A gap up would complete a possible small bearish ABC pattern...seen easier on a 15 minute chart. In other words, don't overreact to a gap up at the open and start buying a bunch of calls. Wait for about an hour before making any decisions...unless the market goes up enough to trigger your predetermined stop losses. A lot can happen between now and the market open. Last night the S&P 500 futures were down big when I went to bed. When the market finally opened, they were only down a little. The market then gapped down a bit at the open and almost immediately rallied up. I think the opposite might happen tomorrow morning. Be prepared.

THE SELLERS ARE BACK

The market had a big rally on Friday, but a closer look at the price action showed that it just completed a bearish ABC pattern. Look at the 60 minute chart of the SPY. The market started the day down (which completed the wave B), then it rallied up in a wave C. This rally up on Friday didn't quite fill in the gap on the S&P 500 (the gap created by the August 24th move down), but it did get filled on the SPY and the S&P 500 futures chart. The question I had at the open today was whether or not the "C" wave was complete. That question really didn't get answered until the last two hours of today's trading. We are now likely to move down below 1040 and possibly be on our way to 1010. The only thing that worries me is the light volume. Today was one of the lightest trading days of the year. This is expected in August, but it also tells me that the selling wasn't "heavy" today. We did get a rise in the VIX, but we are still below the 27.40 resistance area. The market could be waiting for August to end. I told you earlier that the major market crashes often occur in October and September (in that order)...not August. Although August is often a bearish month, it usually isn't associated with crashes. If you set your stops above that 1067 to 1068 area on the S&P 500, you shouldn't have been stopped out on Friday. I was traveling on Friday, so I was glad I didn't witness the wild swing that took place. I was only stopped out on part of my FAZ position. There are a lot of charts that look bearish. AAPL looks like it is going to make another move down...maybe to around $230. Oil looks like it is going lower which will likely push energy stocks down. Oil also looks like it has completed a bearish ABC pattern on its 60 minute chart. The initial short term downside target for oil should be around $70.70. Ultimately, I think it will get down to around $64. I can't believe that I am suggesting this, but AXP looks like it should continue to drop to at least that $37 support area. I've actually had a Bear Put Spread on that stock for the last few weeks. I gave up on the directional put option trade after being stopped out twice, but the spread is working great and I will probably hit my exit target tomorrow if the market is down again. If we do get a big move down over the next week or so...or if we get to 1010 on the S&P 500, make sure you take some profits off the table. We could get a short term bounce like we got at 1040. You might be able to lock in your put option profits and get into some short term calls. I'll alert you if I see any short term bullish trades...but only if there is a decent probability for success. I normally don't like to trade the counter trend moves within a trend. Keep this in mind...we really aren't that far below the 50 day MA (especially with Friday's rally) which means that we could possibly fall a lot further before we are in an "oversold" condition. As the selling gets more extreme, expect to see days like Friday where the market stages what appears to be a strong rally. These rallies should be used as entry points for put option trades. During the financial collapse in the fall of 2008, we had 700 point drops in the Dow that were followed by 300 point rallies. I used these massive rallies and entry points for my bearish trades. These massive one day rallies were almost always followed by even bigger moves down. This is why it is important to take profits on big moves down. You might not get out at the bottom, but you will allow yourself to be able to get back in after the rally and make more money as the stock "stair steps" its way down.

NO CHANGE

We didn't break below Wednesday's low and we didn't rally up to the 1067-1068 area so nothing has really changed from yesterday's post. We could drop tomorrow when the GDP report comes out, or we could rally up a bit and fill in that gap created last Tuesday. The downside target is still 1010...and possibly lower, but expect some buyers to continue to come in around 1040. Until those buyers get shaken out, the market could continue to chop sideways a bit right there. I really believe that we haven't seen the big move down yet. Although the market has dropped several points from that August 9th high, we still haven't seen a significant spike up in the VIX. This tells me that there still isn't significant fear in the market that things could go lower. Now some of you might interpret that as being bullish, but technically the market hasn't shown any bullish signs over the last week. All the market has done is drop below key support levels. To me everything points to an explosive move down. If we end up getting an explosive move up instead (a 250 or 300 point rally in the Dow), I would have to stop out and immediately trade bullish...for the short term at least. Either way, the market is telling me that it is about to make an explosive move. I hope you are positioned to profit from it.

READY FOR THE NEXT MOVE DOWN?

We rallied today off of the 1040 area on the S&P 500. If you have been following the blog for the last few months, you know that this is a key support area. This was the initial downside target for this latest move down. The rally off of this 1040 area later in the day represented a rally within the downtrend. This was expected. We should move back down very soon...possibly tomorrow. I see a possibility where we could go a bit higher and fill in Tuesday's gap (around 1067 to 1068 on the S&P 500). The put trade is to enter tomorrow and place a stop above 1067 or 1068. If we move above that area, we would need to stop out and re-evaluate the rally. If we move below today's low within the next few days, it would significantly increase the probability that we are going lower. For those that are trading more cautious, you would want to wait for that confirmation before getting in. The next downside target is 1010 which is the 7/1/10 low. There are a few more key economic reports coming out tomorrow and Friday which could continue to drive the market down. For an economic report calendar, you can use the following web address: http://www.bloomberg.com/markets/economic-calendar/

EASY MONEY?

If you have been trading over the last month, you have experienced the opposite of easy money. Sometimes the market gives you the money easily and sometimes it makes you work for every dime. This is why I am often critical of people that come into the market expecting to make tons of money in a short period of time. It's not that you can't do it, but rather it is the expectation that it should happen. Worse yet, it is the criticism that I receive when I can't always deliver the easy money. Somehow in these sideways trading ranges, I mysteriously lose my ability to read trends and forecast market moves. These sideways trends always test a trader's patience. If you learned anything over the last month, you should have learned how important a good money management plan is to your market survival. I have been predicting a big move down for the last five months. We had a big move down in April, May, and June and we are starting perhaps the biggest move down here at the end of August. If you didn't get into your puts today during the rally at the market open, you need to look to get in tomorrow. It's not too late, but the entry here isn't as great. I'll be forced to try to re-enter a few put option trades tomorrow. I had to set up some fairly tight stops due to my flight this morning (Monday morning). I ended up getting out of about half of my positions during the early market rally. We will likely gap down at the open tomorrow. The price action at the end of the day was very bearish. China and Japan both traded lower. There is a lot of economic news coming out this week and none of it is expected to be positive. Any significant bad news could really sent the market down. I will watch the VIX closely at the open tomorrow. I haven't seen the spike yet that would reveal panic in the market. That might come tomorrow. This could be another "easy money" trading period. If it is, you will want to take advantage of it. I won't recommend individual stocks, I'll just recommend puts on the SPY, DIA, and QQQQ. Why all three? Because they often move by different percentages...and it's difficult to know which one will make the bigger move. Look at today's results. The Dow was down .38%, the S&P 500 a bit more at .40%, but the QQQQ was down almost 1% (.92% to be exact). Your QQQQ trade made a lot more than the others. This could change tomorrow. Maybe the S&P 500 has the bigger move, or maybe the Dow. This is why I like to trade all three. Also, it is easier to trade the whole market when you are expecting a big move down. Anyway...look to get more aggressive and make a lot of money on this next move down...then send me the success stories so that I can brag about you. Look at 1040 as a shorter term target. I don't expect to get there in one day, but it is possible.

OUT OF TOWN THIS WEEK

I will be out of town for most of this week. I will try to post something if I see anything big, but otherwise it will probably remain the same bearish outlook. We could see a big move down this week. If we rally up at all on Monday, you might want to look at setting up some put option trades. The easy trades would be the SPY, DIA, or QQQQ.

SUCCESS STORY

Dear Jerry,

Your lessons on money and trade management have paid off in spades just this month alone (August, 2010)!

Despite the severe choppiness in the overall markets, my winning percentage is off the charts. Most importantly, I'm making more money than I'm losing now. I used to be okay at timing my entry into trades, but I was terrible at knowing when to get out. All that has changed in just a couple weeks of studying with you.

I am very grateful,

Terence C.

Reseda, CA

SUCCESS STORY

Dear Jerry,

The tools I've learned about reading charts in your class saved me from a terrible trading decision.

I noticed that oil services stocks seemed to be performing well. So, I thought about going long Halliburton (HAL).

I did my due diligence as you taught us, and immediately noticed that the chart was screaming 'sell me!'

I bought puts and came out with a small profit instead of the huge loss I would have suffered prior to taking your class.

Thank you,

Davida M.

Reseda, CA

ARE WE ON OUR WAY?

That is the big question for tomorrow. I've been waiting to see some follow through to this selling...and to see more fear and volume behind it. What to watch for on Friday?... I believe that if the S&P 500 drops below the 8/16/10 low, we will start to see the spike of the VIX. Any spike in the VIX that moves above about 28 will be considered significant. We could have a rally tomorrow, but if it moves back up above the 50 day MA, you might consider stopping out. If you've had some recent success stories...and I wouldn't blame you if you haven't, please e-mail them to me so that I can post them on the blog. We have a lot of new traders just starting their course and they need to see how well you guys and gals are doing.

1040...HERE WE COME

With the rally now out of the way, it looks like the next stop is 1040 on the S&P 500. I expect the market to drop tomorrow (Wednesday...I posted this very late Tuesday night/Wednesday morning)...although I will check the futures again before the market opens. Thursday could be interesting. There will be another Treasury note auction that day. The past auctions have resulted in a short term rally of the markets. This means that we could be down tomorrow, up Thursday, then down again on Friday. For those that can watch and trade the market throughout the day, there could be an opportunity to ride the market down tomorrow (assuming we do drop tomorrow)...sell out at the end of the day...possibly buy calls in the expectation of a short term rally on Thursday...then reload on the puts near the end of the day on Thursday...and finally ride the market back down on Friday. Now I don't know the future, so this type of a trade would be total speculation. The safer trade would be to trade a possible move down tomorrow, cash out at the end of the day, wait for a rally on Thursday, then set up put option trades for Friday and beyond. If you can't watch the markets throughout the day, just set up your put positions and hold them through a possible Thursday rally. Any trades should be planned out with stop losses and proper money management. I still like stops to be just above the August 11th high. I'll repeat again that I don't know the future. It just looks like a possible scenario based on the charts and the recent Treasury auctions. It looks like the market is completing a small bearish ABC pattern. This pattern can be seen more clearly on the 60 minute chart (intraday chart). It looks like we completed the pattern around 1:30pm Eastern Time and started to sell off going into the close. Regardless of what happens in the short term, the probability is that we are on our way lower. We could possibly rally up a bit more tomorrow, but that would still be considered a rally within the downtrend. For confirmation on new put positions, wait for the S&P 500 to get back below its 50 day MA. This would create a safer entry into your put positions. I am mindful that many of you are cautious right now. A close back below the 50 day MA would significantly increase the probability for a move back down to at least 1010 on the S&P 500. Buy plenty of time for you put options...October expiration would be a good start. Although we could move down very quickly, we must plan for it to take some time. I recommended the TLT as a bullish trade on Sunday night. We got the big gap up on Monday, but many of you were unable to participate since you probably weren't already in the trade. I didn't like the bearish move today in the TLT. If you didn't get into that trade, stay out for now. If you did get into a call option trade on the TLT, set a stop loss below today's (Tuesday's) low. If we move lower tomorrow, get out and we'll re-evaluate the trade later on. Monday's gap up is starting to look like an exhaustion gap. Did anyone end up trading POT? I mentioned it in a post a couple of weeks ago. I was waiting for it to pull back a bit more and I missed the big move up. That can be the danger of waiting for a bigger pull back. It might have more room to rise if they get a bid from another company that is higher than BHP. The trade I like is calls on POT and puts on BHP. BHP looks like it has completed a larger bearish ABC pattern and could move lower despite the run at POT. I also think that since other potential buyers now have a starting price, there could be some higher offers for the company. POT has already said that the current offer is too low. I would actually prefer to play this with a Bull Put Spread or a Bull Call Spread since the options are likely going to be inflated by all the speculation. An August 140/135 Bull Put Spread looks pretty good right now.

BEWARE OF THE BULLS

There is still a lot of indecision in the market. We are also still in August which usually means anemic volume. Today was one of the lowest volume days of the year. There could be a short term rally in the next day or so which might shake some of you out of the market. I don't expect any rally to break above the 8/11/10 high. If it does, you would want to get stopped out. Although I still expect another decline in the market, I also think we could chop sideways for a period of time due to all the conflicting signals in the market. Make sure you buy enough time for your options. I'm still watching the VIX very closely to see if there is any fear behind the selling.

MONDAY'S OUTLOOK

Mondays have tended to be bullish days for most of 2010. It is possible that we might get a short term rally. At the time of this posting, things still look pretty negative around the world which could lead to more selling on Monday. What I'm trying to say is that we are still expecting the market to move lower, but we might get a short term rally along the way. These rallies are great opportunities to buy puts. I will look at any rally as a put option buying opportunity unless the rally brings us above last Wednesday's high (around 1116 on the S&P 500). I still like the bearish patterns I listed on the blog last week. Of the three index ETF's (SPY, DIA, and QQQQ), I like the QQQQ the most. It has shown the stronger weakness early on in this sell off. Buy plenty of time. October expiration would be a nice target. On the index ETF's, you can also try using the Quarterly expiration options. The Q3 options on the DIA, SPY, or QQQQ expire at the end of September. This gives you an expiration date between the September expiration (9/17/10) and the October expiration (10/15/10). Don't use September options unless you plan on being in the trade for less than a week. For some bullish trades, I like calls on the TLT (although it could pull back a bit before going higher). Either wait for the breakout above about $102.50, or wait for a small pullback. You can also try calls on the TZA. The TZA is a leveraged inverse ETF for small cap stocks. These leveraged ETF's should only be used for shorter term trades (less that 2 months). Last week looks like an "Outside Week". You can read an explanation of this pattern on the June 28th posting. If last week did complete an Outside Week, we should get some heavy selling sometime this week. The last time it did this was on 6/25/10. That next Monday (6/28/10) was down a fraction, but the next day (Tuesday) we were down 268 points on the Dow. We'll see what happens this time around.

HERE WE GO

It looks like we got some of the confirmation that we were looking for. The market closed on its lows today, and we got a decent spike out of the VIX. We also started to break below some key support levels. The Dow closed below its 100 and 200 day MA. The Nasdaq closed below its 50 and 200 day MA. The S&P 500 closed right at its 50 day MA, but it will likely drop below it tomorrow. The S&P 500 futures broke their 50 day MA after the market closed, so I'm assuming the index will follow tomorrow. If the S&P 500 drops below 1088 (July 30th low), my next target would be that magical 1040 area again (although we could get a bump around 1060). With the negative news from Cisco and the current selling in Asia at the time of this posting, the market could gap down again tomorrow at the open. If it does, you might want to wait a bit before buying your puts. If we gap down, I think we would likely rally back up a bit...perhaps up to today's closing price. That would give you a better entry. If we open at today's closing price or if the market gaps up at the open, I think you can buy your puts right away. A nice tight stop would be above today's opening price. If we move up tomorrow and wipe out today's move down, you will want to be stopped out of the trade. Let me repeat that...If we move up tomorrow and wipe out today's move down, you will want to be stopped out of the trade. That goes for about every individual stock that had a big move down today. I don't recommend getting overly aggressive here. There are still plenty of traders out there that are looking at this as a buying opportunity. We could get a small bounce or even move sideways for a few days. Buy in-the-money options with a delta close to .70. Although I expect a possible big move down, the ITM options are still the safest way to play the expected move. Make sure you have a plan to take profits off of the table. Even though I give you target expectations for these moves, it doesn't mean that you don't take profits along the way. I like put option trades on SPY, DIA, and especially QQQQ. I still have puts on IBM and AAPL. I've got calls on FAZ (which is actually a bearish trade on the financials). I like puts on AMZN (although it is a riskier trade since it is still above its 50 day MA). I hate to say this, but I like puts on AXP...I won't trade it because I got stopped out twice before, but it could get down to at least $37 if we have another big move down in the market. I like puts on NEM. I like puts on CSCO, but it might end up gapping down to around $22 after their earnings announcement today. If it does, don't chase it. Wait to see if you get a bounce. From the Dow Industrial Average, I like puts on AA, BA, DIS, HD, IBM, JPM, MMM, and XOM. There are many other bearish looking patterns out there, but there are also some bullish ones. I haven't listed any bullish patterns because I think that the market could continue to sell off tomorrow or Friday. If it goes up instead, I'll list some of those bullish patterns. Let me be clear, I don't expect you to trade all of these patterns. Look over them yourself and see which ones you like. I expect you to apply the trade management techniques that I taught you in the course and to use proper money management. The money is not made in the stock pick. It is made on how well you manage the trade and how well you manage your risk. For those that have not yet learned about trade management, you can protect your trades using a simple 50% stop loss. Once you lose half of the amount you spent on the trade, you get out. You can use some of the previous lows as possible profit targets. If you have any questions, please e-mail me or ask me in class. Don't get overly aggressive here. If the market is on a new trend lower, we could have several opportunities over the next few months.

THIS COULD BE IT

We got a big gap down in the market this morning with a 3 point rise in the VIX. This could be the start of a major sell off. Don't get overly aggressive here. The bulls have been strong for the last several weeks. For those that are bearish, we want to see a close today near the lows of the day and the VIX to continue to move up. A like the puts on IBM. I sold my AAPL calls and held on to my AAPL puts (part of a Strangle trade). I bought calls on the FAZ which is a leveraged inverse ETF for financials. This is a bearish trade on financials...which I don't recommend to those that don't understand leveraged inverse ETF's. We'll see how things close today.

STILL SIDEWAYS

The market is still waiting. The FED meets tomorrow for its policy-setting meeting. This might be the trigger for the next move. We can move sideways like this for quite a while. If you look back to November 16, 2009 to December 21st, 2009, we moved sideways for 35 days. Let's hope that doesn't happen here...but realize that it could. One interesting thing to note from today was the move in the VIX. Usually there is an inverse relationship between the market and the movement of the VIX. Today the market was up 45 points, but the VIX was also up. Not by much, but it was still up on an up day in the market. This can sometimes be seen as a divergence. Why would institutional investors be running out to buy protective puts if they believed that the stock (or the market) was going to go up? Now this isn't a major divergence. The protective puts could be just an insurance policy because the market has been moving sideways for so many days...but it still illustrates the uncertainty that still exists in the market. Based on probabilities, when the market illustrates uncertainty with choppy and sideways behavior, it will often break in the direction of the previous trend. In the short term, the previous trend has been considered up...so the short term expectation is for the market to break upward. On the other hand, the longer term move up since July 6th also looks a bit choppy. This could mean that the longer term trend will soon break in the same direction of the previous longer term trend which is down. This is why we are still mostly on the sidelines. It is hard to tell the direction of the next significant move. I do have a few more patterns I like if the market continues higher. I still like NFLX. Today's pullback could provide another entry. You could place the stop below the 50 day MA. I think $123 and $128 are two targets that you can use. I do like the Virtual Investing Club pick on MED. This pattern is based on an Elliott Wave pattern that is similar to the one used for ADS. Elliott Wave patterns don't always work out (just like everything else in trading), but this is stock has a pretty good probability of getting to around $36...unless the whole market sells off and pulls it down. This is why you should use a stop loss on the trade...perhaps below the 50 day MA. AKAM is starting to look a bit like NFLX did a few days ago, but it would still be a riskier trade due to the stock being below its 50 day MA. PG still seems to be working well. IBM rallied back up today, but it is still below the resistance area around $102.50. AAPL looks like it is close to an explosive move. The question is, in what direction? I haven't seen AAPL move back and forth in this tight of a range for quite a while. For those that have been through Course 2, you could try a Straddle or Strangle on AAPL. I'd use the September expiration for added safety. In closing, I will reiterate that the safest place to be right now is in cash. These are just some ideas for you traders that want to be more aggressive. If these trades don't work out, remember that you decided to take the additional risk and not sit on the sidelines. The higher probability trades are coming...when the market decides to start moving again.

SUCCESS STORY

Jerry,

I bought the ADS Sept 60 call and had a profit of 82%. Absolutely shocking! I bought at $2.25 and put a trailing stop on the position last night to exit if the last price paid dropped by .15 cents. It stopped me out leaving me with great returns; the 82% is my return after commissions both ways and the price of the investment. Again, pretty amazing!

I see the price of the option went higher after I was stopped out. Not to worry though I took my profits just like you taught us and I am thankful. YIPPEE!

Kind regards,

Jeniffer

NOT YET

The market started to sell off on Friday after the release of the not-so-great unemployment report. However, the sell off only caused a minor spike in the VIX which led me to question the strength of the sell off. The buying that came in at the end of the day looked to be caused by a bunch of short covering. This means that the sellers are still lacking the strength and conviction to push the market down. This also means that there is a good chance that the S&P 500 might break above 1131 in the next day or so. This could change the direction that I have been playing the market. You have already seen me point out a couple of possible bullish trades to keep an eye on. There could be more if we break above 1131. These current market conditions require a lot of patience. You should be significantly cutting back on the amount of trades you are making. Many impatient traders will over trade during these conditions, then complain about why they aren't making any money. The market isn't paying out a lot of money to directional traders right now. The spread traders are making some money, but they are even taking in smaller amounts due to the reduction in volatility. Don't be afraid to sit back and wait. When we start to get more confirmation on the next market move, the money will again seem easy to obtain. You can't force the market to pay you when you want to get paid. This is why you should always trade with money you can afford to lose. It is almost impossible to succeed when you trade with money you can't afford to lose. You have an additional emotional attachment to that type of money. You will rarely follow your trading plan because you can't afford to lose any of it. You will also end up over trading in markets that you should be sitting out because you need to make "X" amount of dollars by next Friday. Don't ignore these economic reports...especially the ones related to unemployment and housing. These are key indicators for a recovery. The CEO's of these major corporations are experts at squeezing good earnings out of these companies...even if the economic recovery is slow. However, they can't do it forever. If the employment and housing numbers don't start to show improvement, you will start to see an effect on these company's ability to make money. A "double dip" recession is still a strong possibility...and we are getting close to October. Many of the worst crashes have occurred in October (the crash of 2008 almost made it to October...it missed it by two days). Even though I may turn more bullish if we move above 1131, I will still be cautious. IBM and PG have both looked like good trades so far. I only need one of them to work out, but so far it looks like they both might.

SUCCESS STORY

Hi Jerry

Last week I decided to start trading after lesson 4 last Thursday. What I have learnt from you has started paying off. I made a 29% return on my trades within 1 week. I placed calls on JNJ 57.5 and ADS at 60 strikes and sold them before the market closed today.

I read your blog carefully and trade with caution.

Have a good weekend.

--
Rob T.

ALL EYES ON FRIDAY'S UNEMPLOYMENT REPORT

With not much else out there to move the market, it looks like all eyes are on tomorrow's unemployment report. Whatever the outcome of the report, we should start to see a move one way or the other. If we do end up breaking above 1131 tomorrow, don't run out and start buying calls on everything. One more decent move up would put the market a good distance away from its 50 day MA, making it vulnerable to a pull back. Start looking for some bullish trading opportunities. I'm watching INTC. It has a nice possible bullish ABC pattern with about a 50% retracement (56.4% to be exact). It is just below a convergence of its 10, 50, and 200 day MA's. If we break above 1131 on a big move up, this stock could move above all three of those moving averages. This would be a pretty good bullish signal. I will emphasize that you must wait for it to get above those MA's. If we start a major sell off, this stock could end up going much lower. I got into two range bound plays today near the market close. I bought puts on IBM and placed my stop above 133. This stock has moved in a range for the last 8 months between about 132 on the upside and around 122 on the downside. It is currently around 132. If it fails to move down this time around, it will be a small loss. If it does move back down to 122, the trade would have about a 5:1 reward to risk. On the opposite end, I bought calls on PG. This stock has been in a range for about the last year between 59 on the downside and about 64 on the upside. The stock is near 60 and my stop is below 59. Again, the reward to risk is fantastic. Not quite a 5:1 like IBM, but it is around a 3:1 reward to risk. If we move up or down from here, one of those positions will make some nice money...enough to offset any loss in the other. If they both work out (which is very possible), it would be fantastic. NFLX is also on my list of possible bullish trades, but I'd like it to get back above its 50 day MA. For those that want to play the wheat news, try ADM. I don't know that I would chase it immediately after today's move, but I am looking into using a Bull Call Spread or maybe a Bull Put Spread. You can also look to play the fertilizer stocks like MOS, POT, AGU, CF, IPI, and SQM. They all need to pull back a bit, but start watching them. I got out of my trade on GLD a few days ago when we moved up above the resistance at 116. If we move back down below 116, I might get back in. A move below 116 should signal a continued move back down to around 102. I think that the big signal for another move down would be a gold close below 1156. I've mentioned a few ideas to open the blog tonight, but I'll still recommend that students sit on the sidelines for at least another day or so. Don't be afraid to sit out for a while until a clear trend emerges. Many of the trades I am doing right now are hedged positions. I highly recommend using ATM or ITM options right now and give your trades plenty of time. October expiration might be better for some of you (if that month is available...use September if it isn't). I'm prepared for a possible move above 1131. The sideways price action of the market over the last three days points to at least another move up. That is just a probability, it doesn't mean the market has to do that. If we have a decent sized sell off, check the VIX for a big spike up. If there is a lot of fear behind a move down, it will be more likely that there will be more selling to come.

STILL WAITING...

Today's move really didn't tell us anything. It also doesn't look like a topping pattern so far. Topping patterns are strong reversals that take place after a high is reached. If we gapped up tomorrow morning, then immediately started to sell off, that would be a strong topping pattern. If the pull back is controlled and in small choppy moves, it makes it more likely that the market will move higher. This sell off would really need to take place starting tomorrow. If we have another day like today, my bet would be that we will break above the 1131 area.

PULL BACK COMING SOON?

The rally today took the Dow above its June 21st high. It did not go above that high on the S&P 500 or the Nasdaq. The volume, however, was on the lighter side. This tells me that the latest run up could be losing some steam. We are probably due for a pull back in the market. I'm still not quite sure how to interpret today's move. Either the generals (Dow average) are leading the way and the troops (S&P 500) will follow, or the troops are about to move in the opposite direction. If we do pull back tomorrow, I will watch carefully how we pull back. If we sell off on higher volume and a spike in the VIX, I'll expect the market to start a big move down. If the pull back is choppy and the volume is average (and no big spike on the VIX), I might start recommending some bullish trades with the expectation that we will move higher. If we end up moving higher tomorrow, I'll watch the 1131 area on the S&P 500 and I'll still expect a pull back soon. For most of you, I'd still recommend sitting on the sidelines. Wait until you get stronger confirmation from the market as to which direction it is heading. I took on an aggressive put option play on the SPY. I bought puts expecting at least a short term pull back. I will stop out if the SPY moves above that June 21st high.

EARNINGS SEASON WINDING DOWN

Sorry for the lack of posts last week. Not much new was happening in the markets and I needed to take a break from the blog. This week could be a critical week. Earnings season is winding down and there are a lot of economic reports coming out in the next few weeks. With no big earnings announcements to counter the economic news, the markets could start to retreat. This week I think we will either get a move above the 1131 area, or a strong sell off which could trigger the bearish scenario that I've presented over the last few months. When you follow the blog, please make sure you are aware of my longer term outlook verses the shorter term expectation. For the last few months, I've said that I think the market will continue to trend down through the end of the year. This doesn't mean that it will go straight down for 5-6 months. The market always "stair steps" up and down. Right now I am looking at this latest move up as a rally within the larger downtrend. As we moved above the 1040 area on July 7th, it became apparent that we were in for a market rally. I expected a shorter rally, but it now looks like a very deep retracement of the downtrend. Although I'm expecting the downtrend to continue, I'm also preparing myself for a possible market move above 1131. If this happens, I will be forced to rethink my bearish outlook. I try to analyze the markets based on what the charts tell me. I don't really care if the markets go up or down as long as they move. I can make money in a choppy market, but the money comes a lot slower. Some have felt that I have ignored some of the positive signals in the market over the last month and have "dug in" on my bearish outlook...perhaps because I have taken such a strong stance in predicting a big move down. This is simply not true. I always consider the news...good or bad, but I analyze it based on the chart patterns. I'm not saying that I operate without a market bias, but I am saying that a market bias won't prevent me from trying to make money in the market. This is why I'm prepared to turn bullish if the charts tell me to turn bullish. What I am looking for this week is either a move above that 1131 area, or a big sell off in the market which could trigger the next big move down. Keep an eye on the VIX. If we sell off more than 150 points on the Dow and there is a significant spike up in the VIX, we could be in for a very large sell off that could finally bring the S&P 500 down to that 950 area I've been talking about. For anyone that trades these possible moves, use in-the-money options with a delta of around .70. The traders that are in trouble with their previous trades are the ones that bought out-of-the-money options and failed to follow my advice to stop out when the market moved above 1040 early in July. For those that used in-the-money options, they could get bailed out if the market starts to move down in the next week or so. They also had an opportunity to roll out their options to September or October when the market moved down on July 16th and 21st. In-the-money options are just a safer play in these uncertain markets. Stop losses are also important. You don't always have to use actual stop losses (I don't always use them), but you still need to know where you will cut your losses when a trade goes against you. Those that want to be more aggressive can enter bearish here and place a stop above 1131 on the S&P 500. If you have bearish trades on individual stocks, look to stop out if the market goes above 1131. I recommend that most traders wait until we get some sort of confirmation...up or down...before getting in. I know many of you are anxious to overcome some drawdowns, but be a bit more patient and it should pay off for you. Watch how the market closes tomorrow. The buyers have been coming in at the end of the day for the last 4 trading days. If we have a down day that can close at the lows of the day, look out.