SEA OF RED

Today we saw some of the heaviest selling since the 2008 financial collapse. The market was extremely oversold last Thursday/Friday. Now it is beyond extremely oversold. We are due for a bounce. If it doesn't come by tomorrow or Wednesday, this market could really collapse. Don't try to time the bounce. If you have been buying calls over the last week (trying to pick the bottom), you have probably gotten hammered. The trade is not to try to catch the little bounce. That is a low probability trade because you would have to time it perfectly. The trade is to wait for the bounce and set yourself up for the next move down. If we have a snap back rally, look to buy puts on the SPY, DIA, or QQQ (or all three). Buy them out about 90 days to give yourself plenty of time to capture another move down. The safer trade would be to buy a call and a put (Straddle trade) using the same strike price. You could probably use the September options on that trade...although the Octobers would be a bit safer. Either way, you would still need to wait for the rally. The rally should be sudden and big...about 300 to 400 points. It will look like the market bottomed and is starting another rally, but it will likely just be a small retracement that is setting up for the next move down. If you are unsure about either possible move, try buying the call and the put. If the market continues to sell off tomorrow, you could look to buy some puts to try to take advantage of it, but don't buy too many. The put options are very inflated right now. You would need a big move down in order to make money on them. A smaller move down or a rally would cause the options to deflate. I've been trading for over 13 years and I don't think I've ever seen the NYSE advanced/decline ratio this high. There were 3033 stocks on the NYSE that were down today, just 44 that were up. Even though we are oversold, I still don't see any buyers. 1129 was the last support area on the S&P 500 and we just blew through that level. The next support is at 1040. If we get there without a market bounce, it would create a historic move that will be talked about for years. The SLV should continue to pull back. The fact that it barely moved up on such a big down day in the market tells you that it probably has further to drop. Gold looks like it is making the parabolic move that silver made a few months ago. You can buy calls on the GLD, but make sure you look for warning signs that may signal the end of the run. I think that any snap back rally in the market would also lead to some profit taking in the GLD. I'd also look to short the financials if we get a snap back rally. As with 2008, this is the most vulnerable sector to a global market sell off. You can trade the whole sector by buying puts on the XLF. If you want some additional leverage, try puts on the FAS or calls on the FAZ. All of these trades should be done on the snap back rally.