A POSSIBLE RALLY ON FRIDAY?

If you just looked at the closing price of the DOW today, you didn't see the whole story of the market movement in today's session. We were down as much as 180 points at one time. We were also down as little as 50 points with 15 minutes left in the day. What a wild final 15 minutes! It was really hard to read the tape for that last hour. If you take away the last 15 minutes (the market was rallying hard during most of the last 2 hours), I would think that the buying was strong enough for the market to rally tomorrow. However, you can't ignore that last 15 minutes. I was watching that 1085 support level in the S&P 500 for most of the day. We closed just below 1085 (1084.53 to be exact). I don't know if this is far enough below 1085 to be considered a significant break of support. Here's what's interesting though. When the market was down early in the day, the VIX was barely up. This indicated to me that there wasn't much fear (or uncertainty) in the early morning drop. As soon as the S&P 500 dropped below 1085 for the first time (approximately 11:15am Eastern Time), the VIX spiked up pretty high. This told me that the 1085 support area is pretty significant. We could be in a big win/win area of the market...if you have put options. If we continue to fall below the 1085 support/resistance area, look for the VIX to spike way up and for the market to possibly fall fast...especially at the end of the day. If we are well below 1085 at the close (at least 1080), there should be a flood of sellers looking to get out before the weekend. The next support area is around 1040...that's a huge potential drop! If we end up rallying tomorrow (especially if we rally up to about 1114 or 1117 in the next few days), this would provide a great opportunity to enter into new put option trades. There is enough resistance in that area (1114 to 1117) to believe the market won't break through. That would then mean an even bigger potential fall to that 1040 support area. I've already got my bearish trade on the SPY and the QQQQ. If we rally up tomorrow (or in the next few days), I will look to buy more puts (not necessarily the same strike prices). This is a dangerous market for beginners. I'm not posting this as a low risk trade since I won't be using any stops (at least not on my current position). The path of least resistance right now is down. The market wants to go down. I'm not going to fight that. For those that are looking at possible bullish trades, be very careful. Look for some decent confirmation. When the market drops, about 80% to 90% of all stocks will drop. Those probabilities are not in your favor for bullish trades. On steep sell offs, I will often just trade the market using the DIA, SPY, or QQQQ. The trade recommendations on HOG and BBY have worked out very well. Even that bearish recommendation on BJ looks to be working out (although I was stopped out on that 1/20/10 rally...where did that come from?). We won't talk about some of those bullish recommendations from last week. However, it does provide a great teaching moment. As trend traders, we will always get hammered when the trend reverses. Since you can never know for sure exactly when it will reverse, you need to keep trading it until it does. If you can get good at recognizing the trend reversal early on, you can make up for any losses by trading the new trend. In other words, I've already made up for my losses on those bullish trades last week by bearish trades (in the last week to two weeks) in BBY, HOG, SPY, QQQQ, and DIA...and we still have more room to fall. Remember, it's all about reward to risk baby! Have a great weekend!