EARNINGS SEASON HAS BEGUN

Every three months, companies report their quarterly earnings. Most of the S&P 500 companies report during the same 3-4 week period. This period is referred to as earnings season. The big earnings months are January, April, July, and October. The period starts about a week into those months and ends about four weeks later. The earnings in January and April often cause the biggest market moves because January earnings reflect the 4th quarter of the previous year and April earnings reflect the 1st quarter of the new year. These are important barometers as to what the future direction of the market might be. Alcoa (AA) typically begins earnings season. AA reported today after the close and missed pretty bad on their 4th quarter target. This led to a sell off in Alcoa in after hours trading. Besides Alcoa, there are many other signals that the market will be down tomorrow. Let me go through some of them. First, commodity prices are showing a possible top after a recent rally. Most commodity related stocks (oil, gold, agricultural chemicals, etc) gapped up on their open and immediately started to sell off. That (by itself) is not always bearish, but it does signal possible weakness...especially after a run up in price. Second, the dollar index (UUP) gapped down at the open, but it is sitting on a very significant support area. If this area holds, we should see a rally in the dollar over the next few days. This would add to the selling pressure of commodities...and quite possibly to the overall market as well. Third, the VIX also gapped down at the market open but immediately started to rally. Remember, the VIX often has an inverse relationship to the market. If you look at a long term chart of the VIX, the 17 area is a very significant support/resistance area...probably THE MOST SIGNIFICANT area in the last 10 years. The fact that we gapped to, then rallied up from this significant level, tells me that we could be in for a sell off over the next few days. Also, the price action of today's candlestick on the VIX is very bullish. It finished up from the opening price, but still down compared to the close on the day before. This often signals a bottom and a possible trend reversal. A VIX that is trending upward often means a market that is trending downward. Combine all that with a sentiment indicator used by contrarians. The percentage of investment advisors that are bearish on the market is at its lowest in several years...even lower than after the financial and market collapse at the end of 2008. That means that most investment advisors are bullish on this market. If you look at that news as a contrarian, you would believe that the market is in a great position for a sell off...maybe a significant one. I'm not calling for a significant sell off...not yet anyway, but when this is added to those other market conditions, it helps to make a pretty good argument. Now keep in mind that I am sometimes a bit early on my predictions...and I do reserve the right to change my prediction (even suddenly) if the market tells me otherwise. Like many other professional traders in the last 6 months, I have been beat up at times when I have bet against the bull market. This is why I am keeping my prediction to just a pull back and not an outright collapse. This is also why you can choose to just sit out if the market does drop and look to go long if it gives more bullish signs in the future.

Now...how do I trade this information. First, find some down trending stocks to buy puts on. Be careful not to by put on up trending stocks...at least not right now. That can be a risky game meant for more experienced traders. BBY might be okay, but you might have missed a lot of the move if you are just getting in now. A much better pattern is HOG. I also like TRA for puts. If you still want to buy calls, look at the UUP (dollar index). You could also buy puts on the overall market using the SPY, DIA, or QQQQ. For gold stocks, look at puts on NEM, AEM, RGLD, and ABX if they get back below their 50 day MA (that is key confirmation by the way...don't ignore that). I do have a couple of bullish patterns that I like, but they would need some confirmation in light of the possible bearish market outlook. They are PCLN and SKYW. Confirmation for me would be that the 50 day MA needs to hold as support (as well as any other support levels that might be involved) and the stocks would need to move above their 10 day MA. Some financial stocks could be added to this put buying list if they end up closing back below their 50 day MA. I also like XLU as a possible bullish pick.