PROCEED WITH CAUTION

Friday's move down signaled that the next move lower is probably underway, so why did I title this entry "proceed with caution"? Just look at my headline for Thursday's entry. The price action on Thursday was fairly bullish at the market close. It looked like there was some real buyers coming back into the market. Then Friday the market sold off and reversed the rally. With the strength of the move down on Friday, it looked like we could get some follow through today...but that didn't happen. The downtrend looks like is is starting another move down. Friday's sell off was on the 7th market day after the July 7th rally. I was pretty close on my prediction...unless we rally up past the July 13th high in the next day or so. I was off by about 28 S&P 500 points. I expected the correction to end around 1071, but we managed to go as high as 1099. The rally managed to turn the trading crowd from extremely bearish to extremely bullish...all in about 1 week. This shows that there really isn't much conviction in the market right now...even amongst the professionals. Everyone wants to justify their bullish positions based on some of the earnings that have come out along with the hold on the projected estimates. I thought that many of the companies would hit their earnings targets, but lower their forward guidance based on the possible slowing of the economy. No one has really lowered guidance. Some have even raised guidance. This would appear to be very bullish, but I saw the same thing happen around the Lehman collapse in 2008. Follow the trend of the charts. News can be manipulated or massaged, but the charts cut through all the spin. The trend of the market is down. We had an impressive rally last week, but Friday's move wiped out almost half of it. The Elliott Wave pattern still points to a massive move lower. The basic trend analysis that I taught you in Course 1 says that we should at least test the July 1st low. There is a pretty good reward to risk right now in the market. If you entered into put option trades over the last two days (or if you enter in tomorrow), you can use the 7/16/10 S&P 500 opening price of 1093 as a stop loss point. If we move above that point in the next few days, you would want to be stopped out of the trade. The initial downside target would be the July 1st low of about 1011. If we see another 200+ drop in the Dow over the next day or two, you will start to see the panic enter back into the market. Keep an eye on that 1040 area. If we move below that area, we might get another "flash crash" situation...although I don't think it would be that massive with all the new circuit breakers that are supposedly set up. I'm still bearish on Financials. I re-entered AXP on Friday after getting stopped out last Tuesday. I also have a position in FAZ (call option). There are a lot of earnings coming out this week which could cause the market to swing back and forth if the results are mixed (good and bad news). Gold is continuing its move down. The GLD dropped another dollar today. More and more people are talking about deflation rather than inflation. Over the last few months, I have been one of the few people saying that this market feels more like a deflationary environment rather than an inflationary environment. Don't get me wrong. I think there will be plenty of inflation in the future, but for now we will probably go through a period of deflation. In deflationary markets, commodity prices often get hit the hardest...especially gold. If the GLD breaks below 115 (support from the uptrend line connecting the 11/13/08, 2/5/10, and 3/24/10 lows), it should have little resistance down to 112. If it breaks 112, it should have little resistance as it moves down to about 102. There are many nice bearish patterns out there, but I will stick to my advice of "proceed with caution" until we can get back below the 1040 area on the S&P 500. If you do enter put option trades, use Friday's high as a stop loss point. Have a good Tuesday. Apple reports tomorrow after the bell. That should be an interesting earnings report. My prediction a few months ago of 200 to 210 on Apple may not look as crazy right now as it did back then. If I'm right on that call, I might get some of you to finally trust my opinion once in a while.