Looking at the bigger picture, both the weekly and daily charts show the market in an undisputed downtrend. Lower highs, lower lows, and the 200-day and 50-day moving averages headed downward. Only on the intraday timeframe, is there more of a back-and-forth, especially counting the after-hours action. Late in the day rumors of a final Fannie Mae/Freddie Mac rescue started taking hold, and this rescue may indeed provide some impetus for further upside in the short term. The question is, will there be enough upside momentum to change the picture on the daily or even the weekly charts?
It's unlikely. However our place is not to be stubborn in the face of market evidence to the contrary. Given the suddenness of the counter-trend rally, how soon it occurred (less than 2 days after breakdown), and the fact that it's attached to news the market finds significant, I'd say the bears are not in the clear. Don't get me wrong—the look of the chart favors downside, with Friday's rally likely to be the start of a sucker's rally (and thus a last chance to get rid of longs). But this market has shown us that anything can happen, and it certainly doesn't pay to get stuck with one point of view, especially if it turns out to be the wrong one!
There are several ways to play our position in SDS, depending on your tolerance for risk. Definitely sell SDS if price should get below 63.14—that would change the look of the chart completely. Consider selling if it should close below the breakout point of 67.81; and if you're very intolerant of risk, consider selling at breakeven to preserve capital. You can always re-enter on subsequent strength in the SDS. On the other hand, there is an opportunity here. Since downside is favored, this countertrend rally puts price at an attractive level if you wanted to risk a little extra on a bet to the downside, either by adding to SDS or buying some puts on the SPY. How much you choose to risk should be tied to how price is doing at the time. You can always wait for another setup in the SDS, too. Whatever you do, don't take on new positions at the open, or even in the first hour or so. The market needs to figure out how it's going to react to the Fannie Mae and Freddie Mac news.
Aside from SDS, our other positions are still live—I think. BPOP had a wild open, hitting some lows in the first minute, only to recover immediately. This is the reason why I do not recommend entering orders until after the market opens. You do not want to get stopped out on illegitimate action like that.
| Current Holdings | ||||||
|---|---|---|---|---|---|---|
| Ticker | Basis | Closing Price |
Perf. | Sell-Stop | Additional Exit Guideline | Chart |
| LYV | 16.63 | 15.97 | -4.0% | 15.19 | Consider selling on a negative close | Chart |
| SDS | 67.81 | 69.66 | +2.7% | 63.14 | Consider selling on a close < 67.78, or at breakeven to preserve capital | Chart |
| BPOP | 7.67 | 8.73 | +13.8% | 7.99 | Let's see what it can do | Chart |
I continue to watch gold with some fascination. Is its movement tied to monetary inflation, as is classically thought, or is it tied to fear, as The Real Time Trader theorizes? The Fannie Mae/Freddie Mac rescue would be telling; the rescue is definitely inflationary but also reduces fear. The chart is much closer to a breakdown than a fight-back rally, so that's the direction I continue to look at. Also on the list is a low-volume stock that I've been tracking. Do not risk very much on either of these ideas, and please wait a little while before making any move in tomorrow's market.
| Ticker | Entry | Exit A | Exit C | Chart |
|---|---|---|---|---|
| DZZ (Gold Double Short ETN) | 35.91 | 34.15 | 31.95 | Chart |
| BE (BearingPoint) | 1.21 | 1.05 | Chart | |
Book 50-100% of BE near the 200-day moving average of 1.72.
Please refer to "How To Trade The Ideas" (right-hand side) to read this table.
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