WHERE ARE THE BUYERS?

The markets were up for most of the day, but the volume was a little lighter than it had been last week. The last hour erased those gains. When the volume is light on a rally (after it has been high on a sell off), it shows that the buyer are not very aggressive. The light buying is from amateurs who think the market will just go back up, or by professionals that are taking profits on some of their short positions. In a short position, you sell first (or sell to open the position). You borrow the shares from your broker and sell them...first. You then buy back the shares when the stock goes down thus creating your profit (and obviously give those shares back to your broker). In other words, you sell high and buy low...or sell and bring in $5,000, then buy the shares back at $4,000 and realize a $1,000 profit.

There is definitely uncertainty creeping into this market. The sentiment is turning bearish very quickly. This is how quick the trend can change from an uptrend into a downtrend. Hopefully you are learning firsthand how important a sound money management plan is to your long term success. Those that had all their money in call option trades (with no stop losses) are probably looking at February 19th as the day they will officially blow out of their account. This is why I have been preaching for months about the need to keep a larger portion of the account in cash. If you have time, I encourage you to review the blog postings over the last few months in order to see some of the signs that led up to this latest sell off. There is no way to know exactly when a trend reversal will take place, but there are clues that usually allow you to protect your account from disaster. There are many reasons to believe that there is more selling to come. The earnings season has been filled with very impressive numbers, but most of the stocks have sold off on that good news. There are political and economic events that are causing uncertainty on Wall Street. I was expecting a severe drop to start in the second quarter of this year (spring), but it looks like it is starting earlier. The market pause of the last two days could continue for several more days. It is often difficult to know how long a correction will take...as far as time. The sell off at the end of today could spill over to tomorrow and we could be in for another big move down. The 60 minute chart (short term) of the VIX shows an almost textbook bullish ABC pattern. Remember....that would be bearish for the market if the VIX spikes up again. If this is an early stage of a downtrend, almost everything will go down at first. There will be very few good bullish trading opportunities...at first. It is a very dangerous market to trade. If you are new to trading, your best bet is to sit it out and stay in cash. For those that want to take some risk, do it with a small amount of your overall account. I set up initial put option trades on the SPY and QQQQ near the intra day high today (Tuesday). The positions were small in comparison to my normal position size. The idea is that if we move lower tomorrow, I will be able to capture that move. If we rally a bit higher, I can look to buy up to my normal position size and hopefully get the move down a bit later. If we rally higher and it looks like real buyers are back (and the uncertainty disappears), I can look to either stop out of that original starting position or just let it expire worthless. Either way, the reward to risk should be in my favor. I've had some questions about my opinion on gold. I do not recommend that you buy gold right here. There is often an impulsive reaction to buy gold when there is uncertainty in the market. I think that gold has another move down before it might be considered again for a bullish trade. There is also a possibility that gold could have a massive sell off, but I think that move is a year or two away. By massive, I mean that gold could come back down to $700 an ounce. For those that don't think this is possible, you need to take my Elliott Wave course (Course 3) to learn about market cycles and crowd behavior. Using this analysis, I was able to predict the 2008 market crash. Although I was a bit early in my prediction (as you know by now, I'm usually a bit early), I was able to instantly recognize it and trade it when it hit in the fall of 2008. Am I bullish on anything? Yes. I'm bullish on the dollar. You can trade the dollar using the UUP. There are also options available on the UUP. $23.20 is a key resistance area. If we break above $23.20, the UUP could be in for another run.

UPTREND BROKEN

The 50 day MA was broken on the S&P 500 last Friday. This shows a significant break of the uptrend that started almost a year ago. The huge spike in the VIX on Friday shows the increase in the level of fear that the professionals are feeling right now. You need to pay attention to these signals and signs. The drop below the 50 day MA increases the possibility or probability that the trend is reversing. That break of support is a characteristic of a downtrend. The next key area of support is around the 1085 area on the S&P 500. If this gets broken, it could drop to about 1035 before it finds another support area. With the huge selling at the end of last week and the huge spike in the VIX, I expect a bounce on Monday...or at least early in the week. The next support area is 1085. We could get a rally off that area. It could be a huge rally. Look back on some of the trading days during the crash in the fall of 2008. There were 700 point drops that were followed by 400 point rallies. There was a 900 point rally on October 28th, 2008. All of those rallies set up bigger moves down as the crash continued. I'm not calling this latest move a crash. I am pointing out that there could be a fierce rally that just sets up for another move down. The spike in the VIX not only shows a spike in fear, it also shows a likely increase in volatility. We will likely get some huge swings in the upcoming days. For day traders, it will be a late Christmas present. For the inexperienced, it will provide an opportunity to get wiped out of the market...if you aren't careful. Take on a bearish bias these next few days (and possibly weeks). Look for rallies to buy puts. I will try to help with some of the blog postings. This does not mean that I won't still post bullish patterns. This latest sell off has caused many great uptrending patterns to pull back to great reward to risk positions. I will continue to trade great reward to risk trades. I was finally stopped out of SMH, but what a nice move down on HOG. These are both good examples of sticking to your trading plan. I made almost twice the money on HOG that I lost on SMH. That is how you grow your account.

SUCCESS STORY

Guys and gals, Jerry's method is not rocket science. A lot of it is common sense. Now having said that, before I started his class, my loosing percentage greatly outweighed my winning percentage. Now it wasn't that i was always picking bad stocks, most of them eventually went in the direction I had predicted. My problem was I had no money management stragety implemented, and i let emotions dictate my trading. This led to a large drawdown of my account. I now am a firm believer if you follow his methods and have a sound money management technique and STICK TO IT, you should make money. And i can say this because my winning percentage is improving, and my buy and sell signals are now based on technical analysis and not emotion, or what CNBC says.

I bought BBY put options on 1/7, based off of one of Jerry's blog postings. Using the methods he teaches in his classes, i was able to sell on 1/20 for a 65% profit.

Thanks Jerry!!!

Howard M.

Panic?

Is it time to panic? By the sudden influx of e-mails, I would assume than many of you are panicking. The VIX made a huge spike to 22.27 and closed at its high for the day. This would indicate an increase in concern by the professionals. This spike in fear shouldn't surprise us too much. I told you about the key support area on the VIX (at 17) a couple of weeks ago. I've been talking about a possible correction for the last 3 months. Is this the start of a larger correction? If I knew that for sure, I'd never post a losing trade for the rest of my life. When you trade a trend, you must accept the fact that you will lose money when the trend finally changes. Professional traders worry more about managing reward to risk than they do about predicting the future. Many of you may wonder why I posted several bullish looking patterns on the day before the market dropped 200 points. The postings were based on stocks that looked to be in a nice reward to risk position. Even when we calculate the reward to risk, we sometimes forget the possibility of the risk or loss. We can also get caught up in the game of looking at things in hindsight...believing that we should have seen it coming. The S&P 500 is sitting on its 50 day MA. The trend is still considered up. If the trend moves up from here, you can say that the 50 day MA held as support and that you should have known to buy right there. If if the market breaks below the 50 day MA tomorrow, you can point to the spike in the VIX and the huge selling volume from today as reasons why you should have known it was going to go down. Ultimately you can't know for sure what the market is going to do next. I know I say that a thousand times, but I'm hoping that some of you are starting to understand it. Professional traders will tell you that the more they learn about the market, the more they realize that they can't predict the market. Don't focus on what you can't control. Focus on what you can control. What can you control? You can control how much money you risk in a trade. You can create consistency by trying to enter and exit trades based on a core philosophy or system. You can chose to trade or not to trade based on conditions that you feel are in or out of favor. The point of having a sound money management plan is so that you don't lose all of your money on a 2-3 day drop in the market. If you find that you are very upset over a trade that went against you, you need to understand that you did not fully accept that risk. The amount of the risk was too high...and your level of anger is a reflection of that. The higher risk brought with it the potential for the higher gains. The focus probably shifted from the possibility of the loss to the potential of those higher gains. If you did suffer a drawdown over the last two days, don't try to get it all back immediately...especially if you are upset with the loss. Take a few days off and allow yourself to calm down. There will be many opportunities to get it back. This is definitely a time to build your cash and reduce your risk in the market. If the market does continue to fall, you will be glad that you kept most of your money out. It will also give you an opportunity to make a lot more money when it starts to move up again. One area of hope...each of the last big spikes (up) in the VIX has been followed by a rally in the market. I will be watching tomorrow to see if the buyers are strong enough to keep the uptrend going. I haven't been stopped out of my trade on the SMH...yet. HOG reports earnings tomorrow before the market opens. We'll see if it finally makes a move down, or if we get stopped out on that as well. I'm emotionally prepared to accept either result. Have a great weekend.

SUCCESS STORY

Hi Jerry,

I was reading your blog and saw that you asked for success stories. Here are a couple of my successful trades.

I bought 4 Jan 40 TS calls on 12-11-2009 at $2.09. I sold them on 12-29-2009 at $3.50 for about a 67% profit.

I bought 4 Jan 50 TROW calls on 12-15-2009 at $1.90. I sold them on 12-29-2009 at $4.20 for about a 120% profit.

I bought 8 Jan 49 HPQ calls on 12-01-2009 at $1.73. I sold them on 12-18-2009 at $2.29 for about a 32% profit.

I just finished the Advanced Options course. It was just as informative and packed full of essential trading concepts as the first course.

Thanks for your fantastic instruction and willingness to answer all my questions. It is greatly appreciated.

JJ Milton

SUCCESS STORIES

I need to post some success stories!! Please send in a success story if you had a successful trade or two over the last few weeks. Thanks for your help.

Also...If you are new to the blog, please join the Followers section. We are at 90 followers and I'd like to hit that 100 follower milestone soon. I might plan a bonus class for blog followers when we hit that 100 number.

BUYING INTO THE CLOSE

I'm looking to buy some call options into the close today. The S&P 500 has rallied off its lows (which happens to be at the 1130 area on the chart...the support area I mentioned last night). This is a nice reward to risk area for some bullish trades. I still like the patterns on BAC, ESRX, and AET. You could look for more confirmation if you like, but I think a stop below the recent lows would provide a great reward to risk for these patterns. I also like call options on the SPY or DIA. There's no guarantee these stocks will go up. I just like the position they are in and the reward to risk for the trades.

Hold off on BJ. It blew through that strong resistance today. A good example of the wisdom in using confirmation. A 10 day MA works well for a simple confirmation tool.

STX had a nice earnings report and I love the bullish pattern. WDC reports tomorrow and the pattern is also pretty good. Both of these could possibly pull back a little bit more before going up, but the reward to risk is pretty good right here.