SUCCESS STORY

Hi Jerry, I thought it about time I gave you some feedback since tomorrow is my last lesson. I must tell you that I have had several traders who teach helping me but you are the first teacher who trades and that is why you are far ahead of all others. It has been a pleasure to be part of your class.  I also enjoy your website and know you enjoy success stories. On October 19, Rockwell Automation (ROK) popped out of MTS with a buy signal, backtested well and I liked the chart in spite of the 44 Rank. We were in the middle of stair-step, ABC pattern, etc. On the 24th I bought a call for $800 (cough). Today I sold it for $1265, a $461 profit. This is fun!! Thank you Jerry.

Frank H. 

P.S. See you tomorrow.

IS THE GRINCH GOING TO STEAL THE SANTA CLAUS RALLY?

Today was a significant drop. The VIX has started to move up again. The Dow Transports were down 2.5% compared to 1.6% for the Dow. The Russell 2000 was down over 3%. These can be a signals that a larger drop is underway. Though the Dow closed barely below 12,000, it is an important psychological blow to the bulls. Combine the technical indicators with the bad news coming out of Europe and you have a recipe for a decent drop. This doesn't mean that I'm recommending an all out rush to put options. We'd still like to see some follow through to today's move down. You could enter into some put positions on the DIA, SPY, or QQQ...with a stop above today's high (or even Wednesday's high). I entered into some FAZ and TZA call contracts at the close. I got burned on this trade last week when the Dow rallied 500 points. I'll play the probabilities and assume that rare event won't happen twice in one week. MAKE SURE YOU USE AT LEAST JANUARY OPTIONS FOR ANY NEW OPTION TRADES. I could see a scenario where we drop for a few days, then move a bit sideways through the end of the year. Most professional traders take the last two weeks of the year off...or at least the last week. Usually the only ones trading during the last two weeks are the amateurs and the professionals that are trying to trade against the amateurs. I told you a few weeks ago that I've never seen a market crash in December. This doesn't mean that it can't sell off a bit. It would be surprising to see a massive drop during the normal "vacation" period. This hasn't been a "normal" year though, so I'll be prepared either way. I still like BIDU, CF, and AMZN as bearish trades. If you have had a big draw down in your account over the last couple of months, you might want to be careful and wait for a bit more confirmation.

STILL IN LIMBO

The markets have moved up a bit since the last posting, but they aren't yet at the resistance areas that I talked about in last Thursday's posting. Even if we do hit them soon, I still think the markets will move more sideways until the end of the year. We did see the first divergence today in the Dow Transports and the Russell 2000. Both indexes were down while the Dow posted a 52 point gain. This doesn't mean that the market will plunge tomorrow, but it could be an early sign that the strength of the rally is starting to dissipate. I will watch that divergence closely tomorrow to see if it is gaining any momentum. I still recommend being in a mostly cash position. I know it's hard to be patient, but it is the right thing to do right now. Some stocks are starting to look very bearish including AMZN, CF, NFLX, WYNN, and BIDU. A continued market rally could hold these stocks up a bit...but when the selling starts, these stocks will likely be the first to drop. IBM and CAT look good for bullish trades if the market does move higher, but be careful not to over commit to bullish trades right now. I think the larger downside potential is greater than the smaller short term bullish potential.

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.