TRYING TO FIND SUPPORT

The markets rebounded almost as soon as they hit the 50 day moving average. The S&P 500 and DOW almost managed to close higher after selling off at the market open. Bad new continues to come out and the unemployment rate continues to rise. Keep an eye on how the markets continue to react to that 50 day moving average. Today's price action on the SPY and DIA was bullish. When a stock (or the market) gaps down but ends up closing higher for the day, it is considered bullish. The fact that it had this type of price action right at its 50 day moving average makes it worth watching. The trend of the markets is still considered up. We are still above the 50 day moving average and the 50 day moving average continues to trend upward...although it is starting to flatten out a bit. I haven't put on any new trades because I want to see what we do on Monday or even Tuesday of next week. Watch the price action closely...and not so much the news or commentary. More specifically...don't focus on the news, but rather how the market is responding to the news. The news itself is almost irrelevant. I've seen markets go up on bad news and down on good news. Remember...the price is always right.

Although we could move lower over the next few days or weeks, I'm not so sure there will be huge moves down or a big increase in volatility. Here's my theory...and its just a theory. Many institutional investors were late to this latest uptrend (March to September). They decided to get in late because they obviously believed that the markets should continue to move up in the long run. They also protected these positions with protective puts along the way...mostly because they were cheap due to the lack of volatility in the options and the market. It made sense to buy this protection because the trend had made historic moves up and the cost of the protection was so cheap. Because these institutional investors have this protection, they won't be as likely to panic if these stocks start to sell off. Sell offs in the market accelerate when the fear level rises as the traders try to get out of their positions. It will take longer for an institutional trader (trying to sell millions of shares) to get out than an individual trader. Because of this, institutional traders often accept lower prices because they have to...they've got to get out. With a protective put on their positions, the institutional traders don't have to sell out at the lower prices...or at least they don't have to rush to get out. For this reason, I think that the pull back (if it even continues to happen) will be more controlled. However, here is my theory. Most of these institutional traders have protected themselves with current month put options. This makes sense since current month options are much cheaper and it allows them to rethink each month whether or not they need that continued protection. In other words, if they feel confident about the uptrend continuing, they might choose not to pay the insurance (protective put) for the next month. So I think many of these institutional traders have October protective put options in place. However...here's the problem. October options expire in two weeks (October 16th). With this latest move down in the market, the volatility has risen, making put options more expensive. These institutional traders should be okay until October 16th, but what happens after that? They lose their current protection and the cost of future protection has already gone up...maybe even up so far that they won't be able to afford the protection. When this happens they will have two choices. Either pay higher prices for the protection (which would definitely damage profitability), or start selling heavily if the prices start to drop. For this reason, I can see huge volatility developing in the markets after (or around) October 16th...that is unless the market rallies back up which would allow those institutional traders to more affordably buy the November protective puts. Hope this all made sense. This is just a theory...a Friday afternoon ramble...we'll see how it all plays out.

Keep an eye on CHK, APA, JRCC, BIDU, AAPL...and many others. They all show possible bullish ABC patterns and they all are sitting on their 50 day moving averages (and other support levels as well). Now I did say to watch them. They would need confirmation before placing a trade. You might even want overall market confirmation as well. Wait for them to start exhibiting characteristics of an uptrend...like breaking above resistance levels. Those resistance levels could be trend lines or moving averages (10 or 20 day MA). I am very neutral on the market right now so I want to be clear about the need for confirmation. Put these stocks into a watchlist...and any others you might see with similar patterns. Have a good weekend.