Today's rally should not have surprised anyone in my classes. I've been telling you to watch for it over the past week. We get so used to trading the pull backs within the uptrend that we forget to trade the rallies within a downtrend. This is the basic stair step process that we talk about in our trend analysis class. I received a few e-mails that showed concern for the rally today. Although I do not know the future, I still have a lot of confidence that the market will make another move down. The main characteristics of this latest downtrend have not really changed. The rally today was on much lighter volume than the previous few days. We did close back above 1085 which is a break above resistance. There is a chance the market could rally back up to the 1115 area on this latest move. The 50 day MA is in that vicinity...so is the upper range of the November/December channel. That area would also be near the 50% retracement (actually 56.4%) of the latest move down. Bottom line...if you have put options, follow your trading plan. If you get stopped out, you will probably get another chance to get back in. I didn't use stops on my latest trades, but I limited the risk by taking on smaller positions. I've already added to my original position. I will probably add more if we rally up to that 1115 area. If we drop from here, I will just keep the original position...I don't like to buy puts on heavy selling (the options become too expensive due to the increase in implied volatility). Also keep in mind that "earnings season" will be winding down after this week. If the market didn't rally on some of the nice reports we received earlier, it's hard for me to believe it will rally after everyone is done reporting.
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