September 22, 2011

See you at the Futures and FOREX Expo in Las Vegas!  Don't forget the book signing Friday at 5 pm at the Traders Press booth

Bulls bleed red but the lows could be in, or near

Quote boards around the world were flashing red; the only green on the screen came from the U.S. Dollar, the Japanese Yen and Treasuries.  Even gold, an asset that is supposed to do well when the world is ending, dropped sharply.  Nervous investors have a tendency to sell first and ask questions later, and that is exactly what they did.  This isn't the first time we've seen this type of mass exodus in the last few months but it never gets any easier to watch. 

Ironically, the few corporate earnings reports that have trickled out have been positive and recent economic data isn't the catastrophe the quote board might suggest.  Nonetheless, the market is turning positive news into negative (no QE3?) and negative news into panicked selling. 

Because fundamentals don't hold much weight in this market, we'll focus on the technical aspects.  In yesterday's newsletter we mentioned that we felt the selling would continue into today and we'd see some stop running...but we completely underestimated the magnitude of the move.  Our mid-1130's support in the S&P proved to be nothing more than a speed bump.  The latter area of support displayed on the chart was 1109 but we didn't feel it was in play for today's session...we now know, it was. 

Is it possible that the lows are in?  Yes, it is.  We believe that if they haven't been made yet, they are very near and will be found within the next few trading sessions.  After all, the Russell has been the market leader and it managed to close above support at 640 (despite easily slicing through it on the way down); also, much of this move is currency related and the Dollar index appears to have reached some sort of climactic high in early session trade.  Even if this overall trend lower is to continue in equities (which is not our opinion), it seems we are due for a snap-back rally...just as we have seen the last three times the market has visited these levels.  Unfortunately, one never knows where the exact bottom will be until after the fact.  Therefore, it is best to approach things with caution...We aren't counting on a retest of the August futures low (which occurred overnight) but we can't rule it out either.  It is entirely possible futures trade below 1100 temporarily before strong buying comes back...so don't put all of your chips on the table from the get go. 

On the flip side, a "normal" bounce on a drop of this size in this time frame are pointing toward 1155/1160.  So, if you are holding profitable bearish positions it's probably a good idea to move to the sidelines.  The risk a market bounce vs. the reward of making another 10 to 20 handles in the S&P seems to be lopsided. 

In general, it was a depressing day for the bulls in any asset class but it could always be worse: http://www.cnbc.com/id/44624663/?slide=1

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Please note: An e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini.  Unless otherwise noted, profit and loss will be based on the mini version.

Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade -

Flat  

In other Markets...

9 - 6 - Some clients are holding synthetic puts in the 5-year note in which they are short December futures contracts and long December 123 call options.  Depending on entry, total (limited) risk on the trade is between $700 to $800 and we have until late November for something to happen.

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.