REVERSAL POINT?

Despite the rally over the last few days, we could soon start another move down...and it could happen as early as tomorrow. Last week I mentioned that we could be in a wave "C" of a bearish ABC pattern...and that we could possibly rally up towards the 1227 area on the S&P 500. Although 1227 is still a possibility, the stronger area of resistance seems to be right here...near 1210. There is resistance here from the 8/15, 8/16, and 8/17 highs as well as the 4/23/10 and 4/26/10 highs. The Dow has resistance here at 11550 (3/16/11 low as well as the 8/15, 8/16, and 8/17 highs). The very strong Nasdaq resistance is at 2600 which is very close. Despite the large move higher today, the volume was half of what it was on Friday. Although we could still move a little bit higher (1227 is only 17 points away), we will likely start another move down very soon. I don't know yet if that next move down will carry the market to that 1040 target area, but we should at least get back down to the 1120 area which would still be a nice trade. I love the reward to risk right here. I bought puts at the close on SPY, DIA, and QQQ. I also bought calls on the FAZ. The FAZ is a leveraged inverse ETF for the financial sector. I am still very bearish on the financial stocks...despite Warren Buffet's purchase of Bank of America stock. The financial stocks may start to stabilize (I said may) in the near future, but I don't think it will happen until at least another move down. The chart on the FAZ shows a great possible bullish ABC pattern with a clear stop loss area below its 50 day MA (and the early June resistance area around $52). If I'm wrong and I stop out about two dollars lower (around $50), I'll lose a little bit of money. If I'm right and the financial stocks make another move down, the FAZ could end up testing it's previous high...AROUND $80!!! You could wait for some confirmation on all of these trades...which I will normally do. I didn't wait for confirmation this time because the resistance areas (and support area on the FAZ) is so strong. The volume today backs up my prediction of a possible reversal right here. There is also Fibonacci confluence. Although technically we would turn more bullish if the S&P can close above 1258, I'd likely stop myself out if the S&P closes above 1227. If you don't want to trade the FAZ, you could look to buy puts on some of the individual financial stocks. JPM, WFC, and MS all have very bearish patterns. NFLX also looks like it is ready to make another move down.

Many of you have heard arguments on CNBC about a great buying opportunity right here. They use 2008-2009 and last year's sell off as examples. Don't forget that these rallies were due to QE1 and QE2 (the Fed's quantitative easing policy). We currently don't have these safety nets below the market right now. The problems in Europe have not gone away and will likely keep dragging the world markets down. We'll see what happens over the next few days. If I'm wrong, I won't lose that much. If I'm right, I'm going to hit the jackpot. That is the beauty of a great reward to risk position. If we start breaking above these key resistance levels, I won't have a problem turning more bullish.