SANTA CLAUS IS COMING TO TOWN!

For those that were waiting for a Santa Claus rally, you got a Santa Claus rally. Today was a painful day for those of us that were short the market. It happens...but you have to put things in perspective. Today's 490 point rally likely ranks in the top 15 Dow rallies of all time (I'm assuming this...I haven't verified if that's true). This means that it is a rare event. You can't change your entire trading system after a rare event. I don't believe that today's rally is kick starting a new bull market...but that doesn't mean that we won't move up a bit more. The key resistance levels to watch are 12,284 on the Dow (the October high) and about 1280 on the S&P 500. There is another resistance area around 12,500 on the Dow and about 1295 on the S&P 500. We closed today at the highs of the day and the volume was higher than normal. This usually means that we will go up a bit higher. Keep in mind that the first resistance area on the Dow is only about 240 points away. If we rally higher, keep an eye out for any divergences that could signal that the rally is losing strength.

I'm going to keep a neutral stance for now. I'm still bearish in the longer term, but I realize that we could move up a bit higher in the short term. I exited most of my FAZ and TZA options today. Options don't always recover very well when they've lost most of their value...leveraged options are even worse. We could get a 500 point drop tomorrow and they would still show a loss. I'm mostly in cash right now...except for a few spreads. I like it when I'm mostly out of the market because it allows me to look at things more objectively. The market looked like it completed a corrective rally on October 27th. The "pre Thanksgiving" drop looked like the start of a bigger move down. The rally on Monday and Tuesday looked like a correction within that bigger move down. That expectation turned out to be inaccurate. Like many of you, I had stops in place in case that outlook was incorrect. Like many of you, today's move blew through many of those stops causing a larger loss than was anticipated. Luckily my money management prevented that rally from destroying my account.

I know it's hard, but you can't focus on the past. Today's move is now behind us and the market could care less what happened to us today...good or bad. We now need to look at what new patterns are showing up. It now looks like the October high was the end of a wave A (of a bearish ABC pattern). Wave B looks like it ended last Friday (November 25th). This move up looks like a possible wave C that should complete that bearish ABC pattern and lead to that bigger move down. This is why we will watch those resistance areas as possible ending points. I haven't dismissed the possibility that there could be a prolonged rally off of today's move. History shows that governments (and central banks) can sometimes prop things up a bit longer before the ultimate collapse takes place. QE1 and QE2 managed to prop up our markets for an additional year. This is why I will be watching carefully for divergences or clues that could signal the end of the rally. I'll let you know if I see them...or if I feel the need to turn more bullish. Be careful not to make dumb decisions if you are dealing with a draw down. There is a natural tendency to want to get the money back right away. This often leads to impulsive trades or attempts to "bet everything" on a particular move. If this next move down is a big as I think it could be, it could bail just about anyone out of their draw down. The trick is to not go bust before you get that opportunity. For those who haven't suffered any major draw down, you could look at some short term trades on the DIA or SPY...call options. If you are down in your account, don't do anything right now. You will be in really bad shape if you load up on calls and we drop 500 points.

SNAP BACK RALLY

Today's rally was exactly what I was talking about in the last few postings. It is common to get sharp counter trend rallies within downtrends. It is possible that we could rally up a bit more, but we are likely setting up for another move down. This doesn't mean that a downward move is guaranteed. In trading we deal in probabilities, not absolutes. Since we broke through those support levels last week, it increased the probability of a down trending move. When the trend turns down, the rallies become opportunities to buy puts. Buying puts on the rallies often give the trades higher reward to risk capabilities. If the market starts to break back above the 1218-1220 resistance area, we might need to re-evaluate the outlook. Until then, I'm recommending puts on the SPY, DIA, and QQQ...or calls on the FAZ or TZA. If you get into any of these trades, be aware that we could go up a bit further before dropping. You might need to be patient...as well as use good money and trade management. Many of the Elliott Wave counts are pointing to some further selling once this rally is complete. We'll see if those counts are correct.

SUCCESS STORY

Hey Jerry,

Here is my success story. It was nice first before of the good new teachings of the Elliot Wave count and second because it paid off pretty good. Shorted Bidu at 132.06 and covered it back at 121.10. I got on the good impulsive Wave 3 of Y, and now will hope for a good impulsive wave 5 so lets see what happens. It was very nice because it went just like a drew it. I hope I am right again. Thanks Jerry, great class so far. It is helping a lot and giving new perspective on things. It will take a while to master it but it is a great start.

Thank you again for being a great teacher !!!

Brgds

Roman

HAPPY THANKSGIVING!

I hope you had a happy and safe Thanksgiving. Just a reminder that the markets will only be open for a half day tomorrow. I normally don't trade on the Friday after Thanksgiving since everyone is usually on vacation...but I will possibly make a few trades if the market manages to rally tomorrow. With the markets breaking support last week, I think that any rally presents an opportunity to buy puts. This market looks like it wants to go lower. If we get a "Santa Clause" rally this year, it might just be a short one...a rally within the downtrend. Make sure that you buy some time with any put option trade you make...at least January expiration. This doesn't mean that you need to go out to April, but you need to give yourself some time in case the market does rally up a bit. Usually this time of year is fairly bullish, so it is possible that we rally up a bit or move sideways for a few days or even weeks. If the market does manage to tread water through the holiday season, it would likely start to collapse early in January....thus the reason for the January expiration. Buying the extra time does not mean that we ignore money and trade management decisions. We aren't going to bet everything on a world economic collapse. However, the conditions have turned considerably bearish. If you have been patient over the last few weeks, your patience will likely be rewarded. The market is very oversold after last week's drop. We'd love to see a snap back rally here. If we get it, look to buy puts on SPY, DIA, and QQQ...or calls on FAZ or TZA. If we drop more on Friday or Monday, you could buy some puts...but only buy a small position. We'd like to get more aggressive on the rallies, not the drops. Gold and silver also look like they could continue to drop. You could look to buy puts on the GLD or SLV.

SUPPORT BROKEN

The S&P 500 and Nasdaq have broken below their 50 day MA's. This is a sign that the sellers have taken control of the market. The Dow and Dow Transportation Index are lagging a bit, but they should break below their 50 day MA's soon. Look to start buying puts on the DIA, SPY, QQQ....especially on the market rallies. You can also look to buy calls on the FAZ and TZA. The market won't likely drop straight down so be patient with your trades. This doesn't mean that you don't set up stops, it just means that you might not get the move down as soon as you get into the trade. Make sure to buy enough time on your options. Don't use the "weekly" options. They are too risky.

A RALLY IN THE FUTURE?

The sideways movement in the market over the last few weeks has created a near perfect symmetrical triangle pattern on the S&P 500 and the Dow. Today's move down hit the lower rising support line of the triangle. If this support line holds, the market should start to rally and break out of the upper resistance of the triangle. If we rally up, the Dow could reach 12,400 before any significant drop takes place. If we break the support line of the triangle, we will likely start a larger move down. As a natural contrarian, I wonder if the triangle pattern will break out to the upside. So many people are seeing this near perfect bullish triangle pattern. Usually when most of the market is expecting a certain move, the opposite move ends up taking place. The week before Thanksgiving is usually a bearish week with the traditional "Santa Clause" rally usually taking place after Thanksgiving. In my 14 years of trading, I've never seen a significant market drop from Thanksgiving through New Years. Even in the financial collapse of 2008, we had a "Santa Clause" rally. A contrarian would view this as the perfect year for an end of the year stock market drop since so many people are expecting the market to rise. In terms of probabilities, I'd have to say that the odds are greater for another "Santa Clause" rally. If the market starts to rally tomorrow, I'll look to buy calls on the SPY, DIA, and QQQ. COST would still look good as a bullish trade and IBM would be a great bullish trade if it can break out above $190. PCLN might also break out within the next few weeks. If it breaks that support line, you might see me get bearish again very fast.

RANGE BOUND

The selling didn't continue after last Wednesday's drop and we didn't drop below those key levels. The market has been moving within a tight range over the last few weeks. I mentioned this possibility last month. The bulls aren't confident enough to push the market higher and the bears aren't confident enough to push it lower. So we will continue this sideways trend until one of these groups wins out. The volume has been low on both the up days and down days, so there really hasn't been any strong clues as to which side is winning. You can lose a lot of money when you get too aggressive in uncertain markets, so I will continue to recommend that we sit tight and wait. I can see a scenario where we have one more move up and I can see a scenario were we start a big move down. I'm not ready to flip a coin for my trades. The only trades I have on right now are Iron Condors, Credit and Debit Spreads, and Calendar Spreads. These trades are designed to work well in choppy or sideways markets. I cover these strategies in Course 2.

BIGGER MOVE DOWN COULD BE UNDERWAY

Today's move increased the probability that we are starting another move down. I'd still like to see the Dow break below about 11650 and the S&P 500 to move below 1220 before I really turn bearish. This doesn't mean that you can't start to enter some call option positions in TZA or FAZ...or put options on DIA, SPY, or QQQ. If this selling continues, there are many stocks that could really drop including AAPL, AMZN, BIDU, CRM, LVS, WYNN, and just about any bank stock. We had a huge spike in the VIX today. This usually leads to more selling...especially since we haven't seen any "panic" selling yet. The volume today was modest, but not huge. I'd like to see those levels broken on the Dow and S&P 500 and the volume surge to some higher levels. Keep in mind that today's move could have just been a "C" wave of a bullish ABC pattern that might have started at the end of October. If this is the case, we could end up rallying up above the October 27th high. If we have a strong move up tomorrow on higher volume, I'd look to buy calls on the SPY, DIA, and QQQ. If we are flat or down tomorrow, we are likely headed lower. We'll see what happens.

UPDATE

There hasn't been much to add in the last few days. We have rallied up on light volume. I don't see any major weakness, but I still don't trust the rally due to the light volume. If the market can break above the 10/27/11 highs on higher volume, I might start to turn more bullish. I've been mostly neutral for the last week and I'll probably remain neutral until I see some stronger signals...bullish or bearish.

SUCCESS STORY

Hi Jerry

It feels good to write a success story after a month of waiting , but no complains the stock market on October was very tricky and i was patient enough, but last Wednesday i bought some bearish trades and lost 50% of there value on Thursday them i added some more on Thursday and sold everything today Tuesday I approximately broke even in all trades but the shinning trade of 100 calls faz that i paid $2 for them and sold for $ 6.70 was great, made me $47,000

thanks,

Naseem

BEARS BE READY

I apologize for the lack of posts this week. I have been a bit sick. As you may know by now, I have a very weak immune system and I seem to catch every virus that goes around. The drastic change in weather didn't help either. We had a high of about 65 degrees on Monday, but it dropped down into the 40's since then. I'm not ready for winter. The market staged a rally today, but it was on lighter volume. The move down on Monday and Tuesday looks very impulsive. This could mean that today's move up was just a correction of the new downtrend. With the Dow and S&P 500 still above their 50 day MA's, I'm hesitant to call for a new downtrend. However...I think that if we close below Tuesday's lows, it will significantly increase the probability that we will move lower...much lower. With the debt agreement in Greece falling apart (I told you so...at least those students in my recent classes), this next move down could resume as early as tomorrow. There is a possibility that the market will try to move a bit higher, but that would have to happen very soon. A close below Tuesday's lows would likely decrease the probability for another move up. You could start to look at buying FAZ and TZA calls, but be careful. Look at the December options rather than November. If we do try to rally up a bit further, you could get stung pretty bad with November options. Also, try to limit your purchase. I'd look to buy a small amount and be willing to risk that entire amount in the trade...in other words, don't set a stop. The way this market is swinging back and forth, you would likely get stopped out on any stop that was set. This means that you better be willing to lose the money you are putting into the trade. You could also look at puts on the DIA, SPY, or QQQ. This is still not an area to get too aggressive...but we could be getting close. I'm still looking for a bit more confirmation. I'd really like to see the Dow Transports and Russell 2000 have a bigger percentage move down than the Dow and S&P 500. I'm still bearish on gold and silver and bullish on the dollar. I like calls on the TLT. If the market does end up rallying much higher, I like COST as a bullish trade. I'd like to see it break above about $86.50 first...as confirmation.