1040...HERE WE COME

With the rally now out of the way, it looks like the next stop is 1040 on the S&P 500. I expect the market to drop tomorrow (Wednesday...I posted this very late Tuesday night/Wednesday morning)...although I will check the futures again before the market opens. Thursday could be interesting. There will be another Treasury note auction that day. The past auctions have resulted in a short term rally of the markets. This means that we could be down tomorrow, up Thursday, then down again on Friday. For those that can watch and trade the market throughout the day, there could be an opportunity to ride the market down tomorrow (assuming we do drop tomorrow)...sell out at the end of the day...possibly buy calls in the expectation of a short term rally on Thursday...then reload on the puts near the end of the day on Thursday...and finally ride the market back down on Friday. Now I don't know the future, so this type of a trade would be total speculation. The safer trade would be to trade a possible move down tomorrow, cash out at the end of the day, wait for a rally on Thursday, then set up put option trades for Friday and beyond. If you can't watch the markets throughout the day, just set up your put positions and hold them through a possible Thursday rally. Any trades should be planned out with stop losses and proper money management. I still like stops to be just above the August 11th high. I'll repeat again that I don't know the future. It just looks like a possible scenario based on the charts and the recent Treasury auctions. It looks like the market is completing a small bearish ABC pattern. This pattern can be seen more clearly on the 60 minute chart (intraday chart). It looks like we completed the pattern around 1:30pm Eastern Time and started to sell off going into the close. Regardless of what happens in the short term, the probability is that we are on our way lower. We could possibly rally up a bit more tomorrow, but that would still be considered a rally within the downtrend. For confirmation on new put positions, wait for the S&P 500 to get back below its 50 day MA. This would create a safer entry into your put positions. I am mindful that many of you are cautious right now. A close back below the 50 day MA would significantly increase the probability for a move back down to at least 1010 on the S&P 500. Buy plenty of time for you put options...October expiration would be a good start. Although we could move down very quickly, we must plan for it to take some time. I recommended the TLT as a bullish trade on Sunday night. We got the big gap up on Monday, but many of you were unable to participate since you probably weren't already in the trade. I didn't like the bearish move today in the TLT. If you didn't get into that trade, stay out for now. If you did get into a call option trade on the TLT, set a stop loss below today's (Tuesday's) low. If we move lower tomorrow, get out and we'll re-evaluate the trade later on. Monday's gap up is starting to look like an exhaustion gap. Did anyone end up trading POT? I mentioned it in a post a couple of weeks ago. I was waiting for it to pull back a bit more and I missed the big move up. That can be the danger of waiting for a bigger pull back. It might have more room to rise if they get a bid from another company that is higher than BHP. The trade I like is calls on POT and puts on BHP. BHP looks like it has completed a larger bearish ABC pattern and could move lower despite the run at POT. I also think that since other potential buyers now have a starting price, there could be some higher offers for the company. POT has already said that the current offer is too low. I would actually prefer to play this with a Bull Put Spread or a Bull Call Spread since the options are likely going to be inflated by all the speculation. An August 140/135 Bull Put Spread looks pretty good right now.