THE RALLY FAILED

Here is an unauthorized copy of a picture of me near the top of the "Ragnar" mountain from my race two weeks ago (I haven't purchased my pictures yet. If anyone from Flo-Foto is seeing this, I will buy them soon!) I was about 100 yards from being done and this was the flat part of the climb. The toughest part was behind me. I probably look beat up with the tape and foot brace, but it really wasn't that bad. Somebody remind me next time not to wear all black in 95 degree heat while running straight up a mountain! And yes...I'm doing it again next year! There's your proof that I'm not mentally stable (like you needed any proof).

Today was a great day to enter into new put option trades on the market. The early rally sucked out the option volatility that was created by Tuesday's drop. In other words, many of the put options were undervalued. We knew that the small market rally was not likely to hold for long. The end of day selling coupled with the significant increase in volume during the last hour of the market showed us that the selling could kick into high gear soon....yes, I'm saying that we haven't seen "high gear" yet. We could likely gap down at the open tomorrow. If you haven't gotten into your put option trades yet, you might need to wait. Don't chase the market if it gaps down. We will get plenty of opportunities to get in over the next few weeks. Don't force a bad entry into a trade. For those that were waiting for the market to dip below 1040 before they were planning on getting in, today was your day to enter. It was a perfect day to enter. There is significant news coming out throughout the world markets Thursday and Friday. This weekend is a holiday weekend. The markets will be closed Monday due to the 4th of July holiday. This could create some heavy selling prior to the weekend. Normally the days before the 4th of July are historically bullish. This might be a year when that trend isn't followed. If the markets do remain flat on Thursday and Friday, use that as an opportunity to build your bearish positions. We've had a lot of big moves down on Tuesdays lately. Maybe we see another one next week. At the time of the posting, the S&P futures are around 1020. If that holds through the night, we will see a decent gap down at the open tomorrow. Send me some success stories if you have had some good recent trades. I'm still waiting for my gift certificate for a Hawaiian vacation (my wife said she has to be included)...who is going to step up to the plate. We could do some early morning trades before hitting the surf. Make that near market close trades (the market closes at 10am in Hawaii...it opens at 3:30am I believe). I could also use a new Ipad or laptop. Okay now I feel like I'm making a Christmas wish list for Santa.

WARNING ON LEVERAGED ETF'S

Here is an article that I originally posted on the blog in March of 2009. It a warning about leveraged ETF's. I recently recommended the FAZ which is a leveraged inverse ETF for the Financial sector. I still think it is a great shorter term call option trade, but I think everyone needs to read this article before getting involved in leveraged ETF's. Here is the link:
http://news.morningstar.com/articlenet/article.aspx?id=271892&pgid=etfarticle

Watch 1040

This is one of my rare intraday postings. We are near the 1040 area in the S&P 500. This is the key support area. I think we will finally break below 1040. If we don't break below it today, I think one of two things could happen. We could get a little bounce as buyers try to anticipate this area acting as support. Any rally should be considered as a chance to enter put option trades. The other possibility is that we gap down below 1040 on the next trading session. This could ignite some panic in the market and we could sell off pretty hard. I'd like to add to my positions when the market breaks below 1040, but I might not get a good chance to do that. I might need to add to my positions today. I might wait until the end of the market to see how things are setting up. I expect the market to continue the downtrend through the end of the year. There will probably be some rallies along the way, but they will likely be similar to this last one. Make sure you give your trades plenty of time.

OUTSIDE WEEK

We completed an "outside week" last week. This is a technical pattern that is seen on the weekly chart. In this pattern, the stock reaches a higher high and a higher low than it did the prior week. The future direction of the stock depends on where the stock closes. If it closes the week near the high, it will likely go higher. If it closes the week near the low, it will likely go lower. The market closed the week near the low last week. This indicates the continued weakness of the market. The volume has lightened up over the last two trading sessions. This could just be a pause for another move down, but I will continue to watch this carefully. I've liked all the bearish signals that I've seen over the last week, but I'm still concerned about the volume. I'd like to see a significant volume spike on the next downward move in the market. If we happen to get a decent move up on significantly higher volume, I will be concerned that we could get a short term rally. Q2 ends this Wednesday. We might not see any significant movement until after that date. I've gotten a lot of e-mails related to July options. I've kept mine because I was willing to risk the entire amount. If you risked a significant amount on the July options, you might need to change your plan for the trade. You might want to use any drops in the market to try to recoup some of the losses or try to break even on the trade. You might still be able to profit if we break below 1040 on the S&P 500, but you might not want to risk your entire account on that possibility. I've preached money management over and over and this situation is an example of how important it is. The key to your success is your ability to survive. You can't overcome a draw down if you don't have any money left. It is possible that we are in the beginning stages of a huge move down. I've targeted 950 on the S&P 500, but it could possibly be much lower than that. I'm very bearish through the end of this year. Don't get wiped out of your account by July expiration. If you have to get out of the July options at a significant loss, you could still possibly make it up from July to December if the trend continues lower.

VOLUME INCREASING

The market didn't drop much today, but the volume has increased each day for the last three days. With today's bad housing numbers, the sellers are gaining strength. We might see a steady drop to 1040, but the selling should increase dramatically if we move below 1040. There are bearish patterns on most of the financial stocks including JPM, BAC, AXP, PNC, C, and WFC. For turbo charged results, try call options on the inverse leveraged financial ETF called the FAZ. Some tech bearish plays include AMZN, GOOG, and EBAY. Just to be clear, these would be put option trades. Always remember your money management. Never put yourself in a position where one or two losing trades wipe out your entire account...especially when you are trading options!

VIX SPIKED TODAY

The VIX spiked up today as the market sold off. This could be the start of the move down. The gap up this morning was strong enough to be that last push higher that I mentioned last night in the blog. We would still need some confirmation. We would need the selling to continue tomorrow and the VIX to continue to move up. We would also need to see the volume pick up. The volume was still fairly light. This is actually a good place for a trade. If the market opens down tomorrow, you could buy your puts and place a stop above today's high. If we move above today's high, you would want to be stopped out of the trade. It ends up being a very nice reward to risk. We can't control the direction of the market, but we can often control the reward to risk of the trade. I actually set up some Bear Put Spreads near the close today. It is more of a hedged position. I might buy some puts if the market starts selling off tomorrow.

ONE MORE PUSH HIGHER?

This is what I kept asking myself on the last part of my race, but I will talk about that later. With the continued sideways price action of the market over the last few trading days, the probability is getting stronger and stronger that we will get one more push higher to complete this "C" wave of the bearish ABC pattern that I showed you in the last posting. This last move up could reach the 50 day MA which is currently around 1140 on the S&P 500 (1139.15 to be exact). I bought some call options on Friday morning (before I left for my race) in order to try to take advantage of the expected short term move up. If the market opens near its Friday close, you could try to get into some calls for a short term play. This would be a very short term trade. If the market gaps up on Monday, don't try to chase it with any bullish trades...especially if it is close to its 50 day MA. If it gaps up on Monday, wait until this last move has completed and the market starts to turn down. The key signal will be a spike in the VIX. If this happens, you can do one of three things depending on your level of risk. 1. You can sit on your current positions and wait until the move down makes them profitable. 2. You can buy more puts (once the spike in the VIX confirms the sell off) and make money on the move down. 3. You can hold onto your current positions and add to them when the S&P 500 drops below 1040...which was the original point that I said to add to your position. In Elliott Wave analysis, you often come up with a Primary wave count and a few Alternative wave counts. The original call for a move down was based on a Primary wave count. That is why I encourage the students to get into bearish trades and take advantage of the move. Since then, the market has followed the Alternative wave count which allowed for a longer correction process. Both counts point to another big move down, but the Alternative count required a bit more time to get there. The problem is that you can't know which count is playing out until certain rules and levels get broken. This can sometimes test your patience. I don't place all my faith in these wave counts. I will also look at other contributing factors that might either back up the wave counts or possibly show other possibilities. What I have said all along in this bear rally is that the conditions haven't yet showed me that the market wants to go higher. In other words, it hasn't shown me that this rally isn't more than just a rally within the downtrend. Many of you might be impatient, frustrated, or even mad at me because we haven't had the move down yet. I'm going to ask you to trust me. Not to trust me that the market has to go down...no one can perfectly predict the direction of the market. Trust that I have analyzed the probabilities correctly and that those probabilities point to another big move down. If my analysis proves to be wrong and the market reaches a new 52 week high, I will gladly accept your wrath. If I prove to be correct, I expect your apologies for doubting my ability to read the probabilities of the market...and I'll expect that vacation to Hawaii so that I can recover from this race I ran this weekend. By the way, the race was fantastic. It was from Logan, Utah to Park City, Utah...188 miles (no I didn't run all 188). I ran about 15 miles in all (three different relay legs). My last leg of the race was a 4 mile run up the "Ragnar" hill which was a rise in elevation from 7,233 feet above sea level to 8,864...which is the top of the Dear Valley resort for those of you that have skiied in Utah. That's 1,631 feet in 4 miles! Yea, it was tough and yes, I did end up walking part of it. I can barely walk today and I'm sure it will be worse tomorrow. I've had a bad foot injury so I wasn't able to train as well as I wanted to. I got a cortisone injection on the morning of the race and just toughed it out. We finished the 188 mile race in just over 33 hours. I will say that the race route is one of the most beautiful in the world. If you ever want to take a fantastic scenic drive when you come to Utah, look up that race route using the web address I gave you in the last posting. Let's have a great week!