UPDATE

I apologize for the lack of posts this week. It has been a busy week for me. There really wasn't much more to add from my post last Friday. The market has been very strong and still looks like it will go higher. We could get some shorter term pull backs, but the pull backs should be viewed as buying opportunities until they start breaking back below support levels. I don't have any good trades to list tonight. I haven't been able to look through many charts this week and the S&P 500 is getting close to the 1344 resistance. FCX looks like a nice bullish pattern...however, the trend is still considered down. I really liked the bullish move on March 15th...along with the surge in volume that day. Keep a tight stop below the 50 day MA. The Dow could find some resistance here around 12,400. The Dow Transportation Index reached a new intra day 52 week high. As I've mentioned several times before, the Dow Transportation Index can often be a leading indicator for the market. If that's true here, the market should go higher. This is not a great area for new trades. If you are already in trades, you should stick to your trading plan. If you are on the sidelines, you should probably wait for the market to either pull back a bit or breakout to a new high.

FRIDAY OUTLOOK

The bulls were able to close the S&P 500 index back above its 50 day MA. This should shift the strength back to the buyers. The only thing that concerns me a bit is that there is relatively low volume on this rally...meaning that the buying has been a bit tepid. Even though the short term bias has turned more bullish, this doesn't mean that the market will go straight up from here. We could get a lot of volatility back and forth. CAT, EOG, MEE, and MCP have been fantastic trades. I hope you were able to profit from them. Some other bullish trades that I like are HD, TRV, JPM, and PCLN. On the bearish side, gold and silver had very bearish price action today. The SLV gapped up at the open and traded at a 30 year high for part of the day. It then sold of and managed to close below yesterday's closing price. This is generally very bearish and could mean that gold and silver could pull back a bit. I'm not telling you to short these precious metals...especially silver. I think silver could reach $40 within the next few weeks. I would, however, be careful not to chase it on days when the price action is weak. If it reverses today's bearish move tomorrow, you might want to buy calls on the SLV or add to existing positions. If it continues to sell off tomorrow, you might want to be a bit patient and see if you can buy in somewhere on the pull back. The gold miners still look very weak. AEM and NEM are set up nicely for put option trades. If gold drops a bit and these stocks continue their downtrend, this could be a great entry for puts. The reward to risk on these trades is fantastic...especially if you put the stop just above the 50 day MA. I also really like INTC for a put option trade. It is bumping up against some very strong resistance and the price action today was very bearish. The reward to risk is fantastic if you put your stop above about $20.65. The next support area is down around $19. That's about a 3:1 or 4:1 reward to risk. If you do get stopped out on a move above $20.65, you could immediately buy calls with a stop below about $20.25. The upside target would be around $22. That is about a 3:1 reward to risk to the upside.

SUCCESS STORY

Here are some success stories. I bought SLV 26.00 strike price April 16 call options at $2.58 on 1/31/11 and sold on 2/22/11 for $6.50. I also bought USO 37.00 strike price April 16 call options at $3.40 on 2/25/11 and sold on 3/3/11 for $4.67.

Landon F.

UPDATE

The market is having trouble breaking above the 1300 area on the S&P 500. If the market turns back down right here, we could be in for an even bigger move down. If it can break above 1300, I would anticipate that the market would move more sideways. Usually the market doesn't recover from big moves down within a few days. In fact, snap back rallies after big moves down are often a signal that more selling is coming. Some of the biggest up days in market history have come as rallies within larger downtrends. The 2008 financial collapse saw big 1-2 day rallies that were followed by bigger moves down. Same with last April. The reward to risk for bearish trades is very nice right here. You can place a tight stop above the resistance. The resistance on the S&P 500 looks to be around 1300 to 1302. If this holds, the initial downside reward target would be about 1227. If the market closes above 1302, the expectation would be a trading range between 1302 and 1344 for the next few weeks. The CAT, MEE, and EOG trade recommendations have worked out very well. VLO has stalled a bit, but it is still above its 50 day MA. I also like DD, CLF, and NOV as a bullish trades if the market can move above 1302. I would also look at the financials like JPM and BAC. With the news out on rare earth materials today, you could look at MCP, REE, and AVL to make a run. They've had a nice consolidation and could be breaking out again.

ST. PATRICK'S DAY COULD BE GREEN...AS IN BULLISH

The market staged another intraday rally before selling off a bit at the close. There have been market retracements during this downtrend, but most of them are happening intraday. I bought puts near the market close expecting this trend to continue. If the Japan nuclear disaster fears ease overnight, the market may stage a rally. There are short sellers that will cover their positions at the first sign of good news. That would cause the market to rally, but not necessarily reverse the downtrend. The rallies are being sold right now, so a rally tomorrow could provide another opportunity to buy puts. I won't start to turn bullish unless the S&P 500 can move above its February 24th low (about 1295). We'll see if the market can stay in the green tomorrow. If the market looks like it will stage a rally, look at stocks in the energy sector as possible short term bullish trades. VLO and MEE come to mind. CAT could also be a short term bullish candidate...and EOG. These would probably need to be short term trades. I still think the market is heading lower over the next week. Have a great St. Patrick's Day!

UGLY TUESDAY?

At the time of this posting, the S&P futures are currently down 30 points. This means that the Dow could gap down around 300 points at the open. We'll see how the futures look in the morning, but I doubt they will come all the way back by market open. The price action near the end of the market was actually somewhat bullish....going from down 147 points on the Dow to down just 51 at the close. That should change at the open tomorrow barring a major reversal. This move down should eliminate the mixed signals we've been seeing in the market over the last week. At the close today, the three major averages all looked like they might be completing bullish ABC patterns. Assuming the market opens way down tomorrow, it would likely eliminate that pattern. Commodity prices also look like they will sell off. Oil, gold, and silver futures are all down at the time of this posting. The trade is puts on the SPY, DIA, and QQQQ. I wouldn't take on a big position at the open since I wouldn't want to chase it. There will often be snap back rallies within a downtrend so you will get other opportunities to get into the trend.

MARKET UPDATE

The S&P 500 moved down below 1302 earlier this morning, but it has since come back above it. The Dow is down 147 points right now after having been down over 200. Although the move today looks very bearish, I'd like to see it close below 1302 (or even its 50 day MA) before I start to get too aggressive to the downside. The market is giving out a lot of mixed signals which means it could still have some wild swings back and forth over the next few days. Commodity prices are down big today with oil leading the way. This is a divergence from how oil and the markets have been trading lately. The sharp move down in oil, gold, and silver should have some follow through to the downside over the next few days. However, this doesn't necessarily mean they are collapsing. When the oil trade gets hot...especially when it is tied to the Middle East, it usually lasts for several months. It wouldn't surprise me to get another run in these commodities, but for now it would be smart to wait and see if they pull back a bit more. The dollar is very strong today which is also contributing to the weakness in the commodity sector. If the dollar stages a rally over the next few weeks, it could continue to put pressure on commodity prices. Lower oil should be bullish for the markets, but if the recent high oil prices have damaged the bull market, we could see a market drop along with a drop in oil...until investors think the value has returned. You can now see some of the conflicting signals that we are getting in this market. You can also begin to understand why the market is making these wild swings back and forth...and why I am not putting too much money in trades right now. If you are looking at a trade, look at the TLT (calls on the TLT). As money comes out of stocks and commodities, money managers and institutional investors need a place to go. They will often go to Treasury bonds until they can figure out what they will do next. This could lead to a short term pop on the TLT.

Gold and Silver Update

This post is from Chaz...a commodities trader that writes a monthly newsletter on the precious metals market. He has given me permission to post it on my blog. As a disclaimer...I (and Option Magic) are not responsible for the content or recommendations in this newsletter. Also...a lot of this information relates to trading the actual commodities. There may be some terms or strategies that you don't recognize. This update is meant to be an information guide for those of you that are trading gold and silver...or just the gold and silver ETF's like the GLD or the SLV. This commentary is opinion and analysis. You must still use good money management and trade management principles. You must also read the charts. No one...I'll repeat...no one knows the exact future of any event on Wall Street. You must still do your due diligence. Thank you Chaz.

Good evening traders. Just a quick note here. Triple witch is coming up fast and as expected, the metals are getting hit on. They may get slammed. The shorts certainly do not want the silver contracts expiring at these levels. We did not get the fireworks we thought might happen last week and after the hits of the last two days, it appears the shorts are going to come on strong and beat silver down. Our 50% retracement rule would suggest that silver may go as low as $31.57 or thereabouts. When triple witch comes around, sometimes its just a good idea to clear your positions and wait for it to pass before resuming trading. And that is exactly what I did today. I sold the May 35 calls, the May 40 calls, and bought 5 May 50 calls as insurance in case we do get fireworks. You never really know exactly what is going to happen so its a good idea to play both sides. All we can really do is carefully examine market technicals and fundamentals and make our best educated guess on what is most likely to happen based on the information we have at hand. My best guess is that this market is going to correct this week and next, possibly as low as the $31.50 range. However, once triple witch is over, I think silver is going for a foot stomping rally to $39.00 or more. And it may happen VERY quickly. I will be buying back into the May 31,33,35, and 40 calls next Wednesday and Thursday which is when silver should be bottoming out. My original intention was to end this commentary at spring break but I have a lot of new readers who want to learn more so I'm going to keep this up for a while to try to give them a chance to learn more and to maybe take that brave step forward. Besides, with what is going on in silver, this is getting to be fun. ....A quick word on gold. I really don't see it dropping much below $1400.00. This market seems to be dominated largely by happenings in the Middle East. Silver is being dominated by a massive shortage that can't be hidden any longer. Silver is what we need to be concentrating on. It is going to be one of the greatest trades of this century. ....I don't think that's an exaggeration. Time will tell. Soon......Happy trades...Chaz....Tuesday, March 8, 2011....10:40 pm.

NO CONFIRMATION TODAY

The market moved close to that 1302 S&P 500 support area before rallying back up a bit. That late session rally does not help to make things any clearer. In fact, with oil pulling back a bit today, we might even end up with a rally tomorrow if no bad news comes out overnight. I hedged some of my previous bullish trades with calls on the VIX. The VIX spiked up nicely today and made up for some of the stops on those other bullish trades. I exited most of my SLV and GLD trades today. Gold and silver look like they might have a short term pull back (especially if the market rallies a bit tomorrow) and the SLV trade has been very successful. If the market is up tomorrow, I will want to see at least another day of buying before I'll want to get back into bullish trades. If the market (S&P 500) breaks below 1302 tomorrow, I'll look to get into some bearish trades or add to existing ones.

SUCCESS STORY

Best trade ever for me:

2/1/2011 bought: SLV Apr 11 27 call, 5 contracts @ $2.11 + commission = $1070

3/4/2011 sold same: @ $7.51 - commission = $3739.92

Profit for approximately 1 month: $2669.92

Thank you Jerry for what you have taught me and for your continuing advice.

See you in a couple of hours for Course 2, Lesson 4.

Dave L.

WILD WEEK

Friday capped a very wild week in which we saw some extreme volatility enter into the market. I want everyone to realize that when the market makes swings that big, not many people are making money....bulls, bears, or even spread traders. It can get frustrating. You can also find yourself chasing trades. This is why I have been recommending hedged trades lately...buying calls on the VIX to hedge your bullish trades or buying calls on oil and silver to hedge your bearish trades. These wild swings tell us that neither side (bulls or bears) have a strong conviction on which way the market will go next. The safest trade is to sit on the sidelines until we get some clearer confirmation...like maybe a move above 1344 or below 1302 on the S&P 500. I would hold on to gold (GLD), silver (SLV), and oil (USO) trades until they stop going up. I don't know that I would get into new positions on those stocks since they have already moved up quite a bit. TLT would be a good trade if the market keeps dropping. The TLT is an ETF for the Treasury Bonds. When uncertainty increases on Wall Street, money often flees stocks and goes to gold, silver, and Treasury Bonds. With oil at $106 a barrel at the time of this posting, there will be increased pressure on this quarter's earnings. These spikes in oil are usually not short term events. They often last several months. Any big pull back in oil should be looked at as a golden opportunity to buy...at least in the longer run.

WHAT WILL HAPPEN NEXT?

This was the main theme of most of my emails today. One thing that we have to accept as traders is that no one knows exactly what the market will do. We look at patterns and we gather clues, but no one can perfectly predict the future direction of the market. I tell my students this from lesson 1 of Course 1. Since we can't perfectly predict the market, we need to be good at managing probabilities. To effectively manage probabilities you need to be good at money management and calculating reward to risk. Based on the recent price action, the probability was that the market would continue lower. With today's sudden rally, it reduces that probability...but it hasn't yet completely eliminated it. The bearish argument would be that we haven't yet moved above the February 18th high. Until it does, we can still assume that the market will head lower. The additional argument would be that oil is still moving higher (it didn't drop much today) and that will continue to put pressure on stocks and future earnings. Also, the trouble in the Middle East has still not gone away. The bullish argument would be that we are again rallying off the 50 day MA. That this is a great buying opportunity after a shallow pull back. That oil will pull back as soon as the Middle East issues move to the back pages of the newspaper and earnings will continue to grow. We will need more confirmation to know which argument will win out. The strength of the bulls today scared me enough to exit my put positions on DIA, SPY, and QQQQ. I held on to my GLD and SLV trades. If the markets are going to roar back, it will start with the quality stocks that had great earnings this last quarter. I added a few bullish trades today and hedged them with calls on the VIX. By the way, there was a bit of a divergence in the VIX today. Although the market moved above its March 1st high, the VIX didn't come close to its March 1st low. I'm not saying that it is a strong bearish argument, but something to keep an eye on. Just like the Tuesday high was a key level for the bulls, today's low becomes a key level for the bears. If we reverse this rally within the next few days and close below today's low, you would need to consider buying puts again. For those that have taken a beating over the last few days, you could wait on the sidelines for either a move above the February 18th high to buy calls or a move below today's low to buy puts. For those looking for at least short term bullish trades, consider the following stocks (and these would be just a few...if you have favorites that have similar patterns, jump in on those): DE, OPEN, MU, CAT, CLF, AAPL, ISRG, WLT, PCLN, IBM, JPM, XOM, UTX, DD, BAC, BA, WPI, MYL, MEE, and VLO. These all have a classic bullish set up for the methodology I teach in the course. Place stops below their recent lows. I might also look to buy calls on the USO if oil does pull back a bit. I think that in the longer run higher oil prices will lead to inflation which will start to affect earnings...but for now I'll respect how strong the bulls have been these last 6 months and I'll try to follow the current price action. Remember what I always say..."the price is always right".

Flip Flop

The bulls might be back. The market indexes are back above the 10 day MA and many are moving above the Tuesday high. These are all bullish signals from the market that we can't ignore. If you set stops on your trades, just follow that plan. If you didn't have stops on your put positions, you might want to get out of them or at least lighten up on your positions. I would hang on to GLD and SLV. Although those are down a bit right now, they haven't technically broken down yet...and the fundamental story is still in place for these stocks to go higher. You could also look at some solid companies to buy calls. Companies like CAT, CLF, CMG, AAPL, and WLT. The market could flip flop back and forth here. If you want to trade this market, you have to be prepared to switch directions when the price action tells you to do so. If a peace agreement is made in Libya, the Bulls could come roaring back. If it falls through, the Bears could take control again.

SUCCESS STORY

Jerry,

Success Story:

On Feb. 11^th I purchased 4 contracts of the VIX April Call, with a $16 strike price at $3.90. I stopped out on Feb. 25^th at $5.60. I had been moving my stop loss up as the VIX increased. That was a 43.5% gain.

On Jan. 26^th I purchased 10 contracts of GLD March Call with a $129.00 Strike Price at 3.70. I sold on March 1 at $10.00. I had again been moving my stop loss up as the GLD went up. That was a 168% gain.

I have another GLD trade still working and I am over 200% on that trade. I will let you know where that trade ends up.

Thanks,

Dan

RALLY FAILS

I told you on Monday that the market was in a good position for new put option trades. I hope that some of you cashed in with the move down today. One thing to watch for is the volume on the rally days. When the sellers are strong, the market will rally up on average to lighter volume. There will also be larger than normal volume on the down days. If you look at the volume on the SPY over the last few days, you will see what I mean. The volume dropped down to average on Friday and Monday when the SPY was rallying, but it spiked back up today as the market sold off. You can also see the same pattern on the DIA and QQQQ. It wouldn't surprise be if the market rallied up a bit to retrace today's move, but it could also just continue selling off tomorrow. If you don't have any put option positions in the market, wait until the next big confirmation area to get in. That area would be a close below the 50 day MA on the S&P 500. If this happens, we could see a lot more selling. Buy puts on either a rally or a break below a support level. These would be the best entries. I still think that gold (GLD) and silver (SLV) still have more upside, but you might want to wait for either a pull back or a break above a resistance area. The GLD looks like it is breaking out to a new high and could easily make another move higher. The SLV has already broken out to a new high. Look for pull backs to its 10 day MA as buying opportunities. I don't like chasing it here, but it could easily move higher as long as the Middle East uncertainly continues. The USO (oil) also looks strong and should be bought on the dips until it starts breaking below support levels.