WHAT THE #@%& WAS THAT?

This is what we all felt like today as we watched the S&P 500 go above 1140 and keep going...and going...and going. I was waiting for the late session sell off, but with about 30 minutes left I began to stop myself out. The squeeze was on. The volume was about the same as yesterday so I'm assuming that most of the trading was short covering. Since we closed well above 1040, I expect that the market will chop around a bit over the next few days. Upon closer inspection of the SPX chart pattern, I don't believe that the correction will be as long or as high as the May-June correction. Those with August options should breathe a sigh of relief...although you probably should have already stopped yourself out of the position. I expect the correction to last for about 3 to 7 days and I am targeting the 1071 area (50% retracement). If we sell off a bit tomorrow, it is likely the "B" wave. That would mean that there should be one more move up ("C" wave). If we continue to rally up tomorrow, it would mean that the "A" wave isn't yet complete. Once the market drops back below 1040 (I prefer a close below 1040), you can enter back into your put positions...but use September or October options. I think that trying call option trades on the rally might be a bit risky since I don't expect another move like we had today. You could wait for the "B" wave down and try to trade the "C" wave back up. If you don't know what that means, you shouldn't attempt to trade it. If you want to be aggressive, look to re-enter put positions after the "C" wave is complete. If you use September or October options, you can be a bit early on the entry. I'm in a neutral position right now. I don't want to enter new put option trades yet, but I also don't think the market is starting a new uptrend. I won't start to turn bullish unless the S&P 500 gets above the June 21st high (about 1131). If the market rally ends near 1071 (50% retracement), the next move down could possibly bring the S&P 500 down to around 875. I still can't wrap my head around that possibility, so I'll just keep the 950 to 960 target for now. The rally today shouldn't have been too surprising. We had moved down for about 10 days in a row and there were a lot of people turning pretty bearish (me included). The market will often shift when too many people get too far to one side. With most people bearish in the short term, any rally could squeeze them out of their positions...and that is what happened. I was looking for some sort of capitulation to the downside before I expected a rally to take place. Apparently there were many others looking for the same thing. This rally served as a reminder of the importance of a trade plan. You need to always plan for the possibility of a move against you. Once I realized that the break above 1040 was going to hold, I immediately executed my plan to take some losses and to close out the profitable bearish positions.

Gold will probably rally back up a bit and test that December 2009 high. Those looking for a second chance on the GLD put trade will likely get that chance. If it happens to rally above 120, wait until it closes back below it before entering into any new put option trades. I'll be out of town from tomorrow afternoon to Friday afternoon so there won't be a blog posting tomorrow night. I'll be at Fish Lake, Utah for a very short fishing trip with my sons (I wanted it to be longer, but there is just too much going on). The scary thing is that I will be out of phone and internet range for about 24 hours. Thank goodness for hedging strategies.