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.