PANIC

There was definitely panic on the Street today. There seemed to be no safe place to go. Money was coming out of everything. We hit a lot of extreme levels today. Usually when we hit these levels the market snaps back a bit. Normally I would expect the snap back rally soon (and we may just get that), but tomorrow is Friday. I don't know if there are a lot of traders that will want to be long this market going into the weekend. For that reason, it could be another decent down day. Many have commented that these last few days have been bad. I don't necessarily agree...unless you have a lot of money tied up in mutual funds or other long term stock holdings. Remember that the market is never good or bad...it's just the market. We put these labels on the market. The market was very good for those that were short...or had large put option positions. It was bad for those that had long positions or call options. I'm suggesting that the move down over the last few days has been great for us traders. It has broken us out of the range that we had been in for the last 7 months. Now the market can start trending again. Remember what I had said in earlier postings...I said that I didn't really care which way we broke as long as we broke out of the range. We can still make money in a sideways range, but you often end up working twice as hard for half the profits. There are a few opportunities right now, but we might need to be patient. There are two main reasons why I don't recommend buying puts right here. First...the market is extremely oversold and due for a bounce. I don't know when the bounce will occur, but it is due. Second...the put options right now are inflated. Any rally or even small down day will deflate them. This means that you could have a small move down in the market and see your put options actually drop in value...possibly a significant drop. It also means that the only way you could make money with a new put option trade is if the market drops a lot...again. This would be a lower probability due to the already extreme oversold condition. The trade?...wait for the rally. Once the market snaps back a bit...even if it only a small amount, the puts will start to deflate. A significant snap back (300 or 400 points on the Dow) would relieve the extremely oversold condition and set up perfectly for another move down. Be careful not to get suckered into buying tons of calls on a big snap back rally. At the start of the financial collapse in 2008, the Dow dropped 774 points in one day...still the largest point drop ever (the "flash crash" saw the Dow down 1000 points, but it rallied back before the close to only finish down 342). The next day the Dow rallied 479 points...one of the top 10 biggest one day gains ever. That rally then led to a 3000 point drop in the Dow over the next 8 days! The "flash crash" in 2010 was followed by a 400 point rally two day's later. That rally led to a 1100 point drop in the Dow over the next 10 days. With the technical levels that we have broken, it is definitely possible that the market could test the lows of 2009. Yep, that would be the "double dip". Just a reminder....that was Dow 6469. Just to put things in perspective...the drop in 2008 was due to the financial collapse of banks and businesses. This drop could be due to the financial collapse of countries! In 2008, it was billions of dollars. In 2011, it could be trillions of dollars. As always, we will continue to trade the trends. If this is just an ordinary correction and the market moves back up, we will change from bearish to bullish and ride that trend. As of right now, the trend is down...so we will look to trade bearish. For those that are beat up a bit, I suggest that you stay out of the market for a week or so and allow yourself to get mentally prepared to work on the draw down. For those that are looking for a lower risk trade, you could try this one. Wait for the snap back rally....then buy a call and a put (same strike price) on the SPY, DIA, or QQQ (or try all three). This trade is called a Straddle trade. I cover the details of this trade in Course 2. It seems simple, but it is not a simple trade. I don't recommend that you go out and trade this strategy on a regular basis without learning the proper conditions. For this trade to work, you need the stock to make a big move up or a big move down. I think we have those conditions. Since you are buying both a call and a put, it is critical that the options are not inflated. This is why you must wait for a rally in the market to deflate the options. You must not get greedy on this trade. Normally this trade will give you a 10% to 20% return. With more volatile markets, the returns can get as high as 80% to 90%. During the financial collapse of 2008, I traded this strategy on almost every snap back rally. Although I wasn't making 300% returns with the trade, it was still "easy money" at the time. These conditions could end up being similar to 2008. This trade can work well in these conditions because if the market continues to drop hard, your puts will make money...if the market starts to rally and the shorts get squeezed, your calls will make money. If the market starts to move sideways again, you will lose money. I think the probability is low for an extended sideways trend...at least for now. Give yourself some time for this trade....about 45 to 60 days at least. SLV and GLD look like they are going to start their drops. I don't know that I'd trade them down unless I was using a Bear Put Spread or a Bear Call Spread (Course 2)...due to the put options being inflated. You can trade some spreads when the options are inflated. I'm expecting a correction in both the SLV and GLD, but then I'm expecting another huge move up. Instead of trying to capture the smaller move down (although it could end up being a decent move down), you might want to use the sell off to start buying January options...especially on the SLV. I think the SLV could pull back to within the $32 to $35 range. The GLD could pull back to around $154 to $156.