THE SELLERS ARE BACK

The market had a big rally on Friday, but a closer look at the price action showed that it just completed a bearish ABC pattern. Look at the 60 minute chart of the SPY. The market started the day down (which completed the wave B), then it rallied up in a wave C. This rally up on Friday didn't quite fill in the gap on the S&P 500 (the gap created by the August 24th move down), but it did get filled on the SPY and the S&P 500 futures chart. The question I had at the open today was whether or not the "C" wave was complete. That question really didn't get answered until the last two hours of today's trading. We are now likely to move down below 1040 and possibly be on our way to 1010. The only thing that worries me is the light volume. Today was one of the lightest trading days of the year. This is expected in August, but it also tells me that the selling wasn't "heavy" today. We did get a rise in the VIX, but we are still below the 27.40 resistance area. The market could be waiting for August to end. I told you earlier that the major market crashes often occur in October and September (in that order)...not August. Although August is often a bearish month, it usually isn't associated with crashes. If you set your stops above that 1067 to 1068 area on the S&P 500, you shouldn't have been stopped out on Friday. I was traveling on Friday, so I was glad I didn't witness the wild swing that took place. I was only stopped out on part of my FAZ position. There are a lot of charts that look bearish. AAPL looks like it is going to make another move down...maybe to around $230. Oil looks like it is going lower which will likely push energy stocks down. Oil also looks like it has completed a bearish ABC pattern on its 60 minute chart. The initial short term downside target for oil should be around $70.70. Ultimately, I think it will get down to around $64. I can't believe that I am suggesting this, but AXP looks like it should continue to drop to at least that $37 support area. I've actually had a Bear Put Spread on that stock for the last few weeks. I gave up on the directional put option trade after being stopped out twice, but the spread is working great and I will probably hit my exit target tomorrow if the market is down again. If we do get a big move down over the next week or so...or if we get to 1010 on the S&P 500, make sure you take some profits off the table. We could get a short term bounce like we got at 1040. You might be able to lock in your put option profits and get into some short term calls. I'll alert you if I see any short term bullish trades...but only if there is a decent probability for success. I normally don't like to trade the counter trend moves within a trend. Keep this in mind...we really aren't that far below the 50 day MA (especially with Friday's rally) which means that we could possibly fall a lot further before we are in an "oversold" condition. As the selling gets more extreme, expect to see days like Friday where the market stages what appears to be a strong rally. These rallies should be used as entry points for put option trades. During the financial collapse in the fall of 2008, we had 700 point drops in the Dow that were followed by 300 point rallies. I used these massive rallies and entry points for my bearish trades. These massive one day rallies were almost always followed by even bigger moves down. This is why it is important to take profits on big moves down. You might not get out at the bottom, but you will allow yourself to be able to get back in after the rally and make more money as the stock "stair steps" its way down.