Trade Ideas for Halloween

Today was a nice inside day, taking a breather after a multi-day rally. The question now is whether we take off immediately or pull back some more before taking off. On the one hand, the mood has palpably changed; an abrupt shift from fear to greed. Many charts were up 10+%, among these issues from the most speculative sectors (e.g., FSLR). On the other hand, we are entering a bear market rally phase, not a go-go-go bull, so it follows that further pullback comes before further gain. Keep in mind also that the same setup happened about a week ago (the 20th), only that time the rally turned out to be a spasm within a basing pattern. Observe the similarities in this chart of SSO (2x S&P 500):


The setup this time is much improved, but there's nothing that says the same fake-out breakout won't happen tomorrow, followed by another swoon. However, in this game, you have to play each opportunity. If you played on the 20th/21st, you have to play tomorrow. As long as you respect your sell-stops and get out early, you have the luxury of testing the waters many times over until the rally finally sticks.

I warned yesterday to avoid the open, and sure enough both ideas from yesterday triggered in the first 45 minutes only to fade the rest of the day. If you stayed away but still want in, my entry price for AMAT is 12.21 and for GOOG 368.71. These are buy-stop prices, meaning the market price has to trade up to that level before I'd buy.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
PQ	8.07	9.66	+19.7%	8.36	None	Chart
AMAT	12.47	12.08	-3.1%	11.84	None	Chart
GOOG	371.01	359.69	-3.1%	346.19	Consider selling on a close < 354	Chart

A bunch of ETFs for tomorrow. This is in case we don't get that pullback and instead just take off from here.

Trade Ideas for 10/31/08

Ticker	Entry	Exit A	Exit C	Chart
SSO (Ultra S&P 500)	32.31	29.58	27.49	Chart
XLK (Technology ETF)	16.92	16.27	15.74	Chart
SLV (Silver ETF)	10.07	9.44	8.69	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/30/08

The rally has begun, and all told it should last at least 2 or 3 months, with the 200-day moving average as the target. The action of the past few weeks illustrates why buying a bottom is so difficult. We got the bottom on 10/10, but needed time to form a base off that bottom. And even though the Dow and S&P never breached the intraday low of that day, so many charts fell below their respective lows. It's misleading, but in the record books we'll see 10/10 as the day that marked the temporary bottom, and not 10/27, which is when the basing process finally completed. Just remember this for next time; buy after the bottom, after the base has formed.

As expected, the FOMC announcement caused the market to move in 3 different directions. It sold off, rallied, and then sold off again. Take a look at action in the Russell 2000.

Note that the action was a neat staircasing pattern up until 2:15pm when the announcement was made. At that point, the candles became longer and more unpredictable. The major averages ended up closing near where they opened, and thus their charts show today's action as the gravestone doji, presaging (short-term) downside. This massive rally from mid-day yesterday really does need to correct, preferably sooner than later.

Both of yesterday's ideas gapped up on open, and PQ touched back to the buy price. CEF didn't go that low, so I'm not including it in the table. If you bought it, stop is 8.39.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
PQ	8.07	8.53	+5.7%	7.21	None	Chart

Ideally we correct tomorrow, maybe even into Friday, so I would avoid buying the open. If you agree with my read that the bottom is in, then most stocks that have rallied off their 10/27 lows should not see price go below those lows. For your favorite stocks, you can try to buy on a pullback in the next couple of days, using as a conservative stop their lows of 10/27. This is only for stocks that have rallied since 10/27, preferably a strong rally (e.g., AAPL, GDX, SSO).

Trade Ideas for 10/30/08

Ticker	Entry	Exit A	Exit C	Chart
GOOG (Google)	371.01	352.36	346.19	Chart
AMAT (Applied Materials)	12.47	11.84		Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/29/08

The market's job is to fool as many people as possible. Two days ago I wrote that I was still open to the possibility that the market would go up and recommended buying call options on IWM, EEM and SPY. My openness was based on Andy Askey's Gann analysis marking 10/10/08 as a low, and the almost miraculous way that the market was managing to stay above that low, even though it should have fallen far, far below that point. That's not a lot to hang one's hat on, especially in the face of yesterday's action, during which the market cratered in the last ten minutes after limping along all day. At that point I threw in the towel; in the fight between the trend and the "mystical technicals" Gann and Elliott, it looked like trend trading was going to win this one, and we'd see a new low.

Perhaps I gave up too early? The market sure fooled me. The bears were in total control after today's open, and they pushed the markets down hard, but out of nowhere resistance sprang up on a breach of yesterday's low, around 11am. Take a look at the two-day chart:



After the bounce, a 3-hour struggle ensued, and then the markets took off, in a major way. The question becomes, Did the market take off "for good"? Not long ago, it was, Is the bottom in? The urgency, the power of today's action answered that question. We can officially sound the all-clear when the market makes it above the high of the 14th. In the meantime, we are really overbought and need to pull back a little.

Tomorrow is Fed announcement day. Forget all that you read about what the rate cut will be, or what traders are predicting it to be, etc. In my experience, whether those expectations are met does not determine how the market reacts. I don't know what does, but I do know that the market is very unpredictable on Fed Day. I've seen price spike heavily in one direction right after the announcement, only to reverse for the rest of the day, and then the following day reverse yet again. For that reason, I don't know that it's such a great idea to jump in. Most likely it'll be a volatile environment. I think options are a good way to play your hypotheses as to which way the market will go. You can also day trade, selling your positions just prior to the announcement. You can elect my ideas after the announcement has been made and the market has taken some time to digest the information. Or you can simply skip the day and wait for Thursday. If you plan to hold through the announcement, consider pulling your stops around 2:10pm until such time as the market regains its footing. (FOMC makes their statement at 2:15pm)

As for our positions, we sold SH and bought and sold SKF. I posted a little before the last hour of trading to close your shorts, and about a half hour later the market stopped out those shorts for us. It was quite the squeeze.

Trade Ideas for 10/29/08

Ticker	Entry	Exit A	Exit C	Chart
CEF (Central Fund)	8.89	8.39	8.25	Chart
PQ (PetroQuest)	8.07	6.99		Chart

I currently own shares of CEF.

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Closing Shorts

I closed my short positions—the lows held despite a good effort from the bears, and tomorrow's FOMC announcement is potentially game-changing. For risk management purposes I'm out. I suggest call and put options if you're looking to play the Fed announcement and can't be there for it. There are arguments to be made either way for a sharp move up or down (or both) right after the FOMC statement, and using sell-stops has too high a likelihood of getting one whipsawed.

Trade Ideas for 10/28/08

On Friday it was unthinkable that there wasn't a much lower low in the Dow given what happened in the futures market. Maybe it was a miracle, but it's probably a mistake to read too much into that stay of execution. If the market had taken flight at the open today and kept rallying, then I'd be singing a different tune, but instead the market struggled and gave a half-hearted rally, and then everything sold off hard right at the close. What that tells me is that there are no buyers. It looks to me like the bears are gathering for another push downward, so either join in or step aside.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SH	94.91	96.20	+1.4%	88.21	Consider selling on a close < 91	Chart

As I said yesterday, odds favor downside, and that's why my ideas for tomorrow are on the short side. However, there is a major wrinkle, which is that the FOMC will make its decision Wednesday as to whether or not to cut interest rates. In my opinion, there isn't a problem with demand for credit, so who cares what they do. But every time the FOMC makes its statement, the entire market waits and listens. Some people play the FOMC decision, which requires paying attention Wednesday right around 2:15 pm. I personally think it's a good idea to close out most if not all of one's positions prior to the FOMC statement. It's not uncommon to see the market move in 3 different directions right after the announcement. My perspective is, why take on that extra risk? So if you do play any positions tomorrow, consider getting out by Wednesday around 2pm.

Trade Ideas for 10/28/08

Ticker	Entry	Exit A	Exit C	Chart
SKF (ProShares UltraShort Financials)	180.12	157.26		Chart
PSQ (Short Nasdaq-100)	85.86	81.78		Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/27/08

The lows in the Dow held, and they may yet hold. Perhaps capitulation occurred pre-market Friday when futures were halted. Whatever the case may be, so far the putative 10/10/08 bottom has not been breached (at least not during market hours, which is what counts in this game).

No charts look good to me, and although SH was officially elected Friday, it had gapped so far up that I don't expect anyone to have been purchased it. Nevertheless, odds continue to favor downside, so if you did purchase it, there's no hurry to sell.

But I am open to the increasingly possible idea that the market is heading up from here. If indeed the market decided to triple bottom before reversing, it certainly did its job of fooling the maximum number of people. Especially Friday, when prior to open something happened that had never happened before: S&P futures went limit down, halting trade. TK of Trading with TK said in early October that to mark a bottom we needed a day that was unprecedented, like the Dow dropping 1,000 points or servers overwhelmed, swamped with sell orders, stranding brokerage customers. We've basically had both of these things happen, and still no definitive turn, which speaks to the enormity of this bear. But maybe tripping an exchange's circuit breakers will finally cause the turn to get going in earnest. Let's see. For those who want to take a chance, I suggest buying up to 0.8% of account equity in call options on the ETFs: SPY, EEM, IWM. Unfortunately November expiry is not for 4 weeks, add to that the unbelievable volatility and you get premia that will be on the outrageously expensive side.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SH	94.91	93.40	-1.6%	87.89	Consider selling on a close < 90.87	Chart

Gold

Let's take a break from the broad market woes to talk about gold. Since the day I mentioned that GLD filled its gap, gold has fallen 5%. Conversely, if you had purchased DZZ (UltraShort Gold ETN) on the 14th or 15th based on my hint to do so, you'd be up as much as 20%. Meanwhile reports of supply shortages in the bullion market (i.e., gold coins) aren't jibing with the precipitous fall in the price of gold. I want to take a little detour first and discuss the significance of gold before delving into the technical aspects of its chart.

Not too long ago, gold was the tangible asset underlying dollars. Every dollar was a claim against some amount of gold, and thus the dollar was known as the "gold standard," eventually becoming the world's reserve currency. Why not—it was redeemable for gold, which for millennia was what humans had deemed fit as a medium of exchange and store of value. Over the course of the 20th century, the dollar-gold relationship lost much of its luster as modern economic theory took root, and the importance and centrality of gold as the basis of the dollar became increasingly compromised. During Nixon's presidency, the relationship between gold and the dollar was finally severed. From the mid-70s onward, every dollar has been a claim against words spoken by the US government, so air, really. We've had the "mold standard" as the global reserve currency for 30+ years; I think we'll soon see how well this experiment has turned out.

Alan Greenspan in 1966 wrote a marvelous piece titled "Gold and Economic Freedom", which I first read in Ayn Rand's great but dated essay collection Capitalism: The Unknown Ideal. The essay highlights some very interesting phenomena. Prior to the creation of the Federal Reserve, banks' reserves were gold—not CDs, not government securities, agency debt, Icelandic krona or whatever passes for bank reserves these days. Gold acted as a check against foolish behavior. If banks were too loose with credit (think financial bubbles), they'd run out of lending ability because they'd hit the limit on their gold reserves. To avoid a bank run they'd have to curtail lending. Interest rates would then rise, reflecting scarcity of supply, borrowing would slow down and recession would hit. Then the cycle would start anew. This was the boom-and-bust cycle that characterized the economy prior to WWI.

Well, some economic brainiacs (precursors to the financial wizards that invented collateralized debt obligations, the stuff that brought down Wall Street this past year) thought this was dumb and decided gold was the problem. What if banks had more reserves? Then they could lend out at will, the economy would grow indefinitely and we could permanently avoid severe recessions. Just increase your reserves! Since you can't spin gold out of thin air, the Federal Reserve was created. The Fed (via Treasury) has the power to issue debt ("paper reserves") and use that to give "value" to the dollar. So now the thing underlying the dollar is no longer a tangible asset (gold), it is an I.O.U., a promise made by the government against future tax revenues, a liability! Nowadays banks can hold gold as well as paper reserves. What do you figure the ratio is between your bank's gold reserves and its paper reserves? 1:100,000 is probably too generous.

The interesting thing about nature, specifically the law of identity, is that you can't cheat it. In terms of the current financial crisis, loose lending based on a seemingly limitless supply of paper reserves got us into our current pickle; and now the government's solution—bailout, money market guarantees, nationalization of banks and related entities, de facto creation of a sovereign dearth fund—is to issue more credit???!!! You can't create something out of nothing for nothing; it comes at a price, and the price here is looking like currency collapse. For argument's sake, imagine that the national debt stood at a quadrillion dollars. If you owned government debt, how comfortable would you feel that the money you loaned would get paid back at all, let alone with interest? US government debt is debt that Treasury expects to repay from future tax revenues—i.e., what we pay to the I.R.S. every year. Somewhere between the current national debt figure of $10.5 trillion and $1 quadrillion is a tipping point where the dollar will cease to be good. Because at that point, so much would be owed that only default or debasement (the printing of dollars) will appear as viable options. At that point, our national currency will become the New Dollar, and an old dollar will be worth about as much as an Icelandic kroner. Gold, which cannot be debased as it is a scarce resource (unlike paper), would hold up its value; hence its attractiveness. Even as the price of gold has been dropping, gold coins have been selling out at coin dealers everywhere. Usually, when supply tightens, the price of the good goes up (think short squeeze), so this is a rare circumstance indeed.

Now to the technical aspects of gold. Gold's chart history is short because it moved with the dollar until the 1970s. The other interesting thing about gold (and oil, for that matter) is that its Elliott Wave cycle is not related to the general market cycle. While the recent plunge in equities was a warning shot portending a multi-generational bear market to come, the recent plunge in gold was merely a pullback within a secular bull market. In 1980 gold hit its Cycle 1 peak, and then Cycle 2 lasted for about 20 years. We are currently tracing Primary 2 within Cycle 3. The chart below depicts price action in CEF, a Canadian fund whose holdings are solely gold and silver bullion, from 1993-present. This security is a proxy for gold itself.

Notice that from late 2000 until early this year, gold put in 5 stark waves up, and then from January until now has traced an a-b-c correction. As usual, the C wave is the fiercest of them all, falling farther and faster than anyone thought possible. Gold could correct even farther, but it cannot fall below the beginning of Wave 1 in 2000, and probably won't get much lower than the bottom of Wave 4 in mid-2007. The best news of all is that once gold stops correcting, it will begin Primary 3 of Cycle 3. Typically Wave 3 of 3 is one of the most bullish. So I will be watching the gold sector for signs of life and a good setup in the coming weeks.

Trade Idea for 10/24/08

An up-and-down day that closed with a rather powerful rally. While the lows held in the Dow, the S&P breached its 10/16 lows. We nearly bought SH by a couple of pennies. In fact it was the lower low around 2pm that touched off the late-day rally, so a good thing SH didn't get elected yet! We'll buy it if it breaks through Friday though.

The overall action is questionable, and right now the system is all cash as the market struggles for direction. If the markets head south, I think it could fall a fair amount—although not as much as earlier this month. If the market rallies from here, I just don't see much evidence of bullish strength. I'd feel better if it set up for a couple days. Either way, the idea that a powerful rally could take place seems far off now.

Trade Idea for 10/24/08

Ticker	Entry	Exit A	Exit C	Chart
SH (UltraShort S&P 500 ETF)	94.91	88.22	82.99	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/23/08

Well, so much for upside. While we're still above the lows of 10/10 and those of 10/16, the picture has really changed with today's action. There was bad news, yes, but at market bottoms we need to see the bad news being bought, not sold. With sentiment so negative, we might not see the lows hold. Below is a chart of the crash of 1929.


Note that in late October 1929, what looked to be a bottom was put in, followed by a dead cat bounce and what looked to be the beginnings of a rally; only for the market to plunge anew. We might be in the same boat currently. Here's the current picture:



Even if the lows do hold, it would require quite a change of appetite to see significant positive price action. Too much damage was done today; if people were hesitant before, they're scared to death now; if they were scared to death before they're comatose now. This puts us in a wait-and-see position, rather than one of opportunism.

We're still holding on to one position, the rest having been sold in today's slaughter. It's painful to let go of holdings at a loss, but by the same token the sell-stops protect small to medium losses from becoming gigantic ones. What seems like a painful parting at the time often turns out to be a lifesaver in hindsight.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SPR	14.01	13.51	-3.6%	12.98	Consider selling on a negative close	Chart

A couple of very wide-risk ideas, but that reflects the environment we're in, with every other day's action a Top 10 one-day gain or loss record on the Dow.

Trade Ideas for 10/23/08

Ticker	Entry	Exit A	Exit C	Chart
SPY (S&P 500 ETF)	99.11	90.63	86.49	Chart
SH (Short S&P 500 ETF)	94.91	82.99	78.36	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/22/08

The market threw a curveball today. After gapping down at the open, it seemed like it would surge a couple times throughout the day, but it never got enough momentum going. I got my hopes up only to see them dashed, and we got a nasty close. It felt worse than it looked; probably because we finished at the day's highs yesterday and at the lows today. However, on the daily chart, we had an inside consolidation day. Not a continuation day, not a reversal day, just basing. The triangles that started forming last week are getting long in the tooth now. Whatever move is going to unfold, I hope it unfolds more quickly than that mid-July to September stretch of nothingness. It ought to; the S&P chart looks much more dynamic now. It really looks something should happen tomorrow or Thursday. I still think the move will be upward, but it could just as easily go the other way.

We sold WB in advance of earnings for a nice gain, which was tempered by an equal-sized loss in poor RIMM, hit by an analyst downgrade yesterday and unable to recover.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
FORM	18.46	17.51	-5.1%	16.85	None	Chart
IPHS	21.51	22.01	+2.3%	21.11	Raise sell-stop to 21.38 if price gets above 23.42	Chart
SVVS	8.06	8.49	+5.3%	7.85	None	Chart
SPR	14.01	14.61	+4.3%	12.57	None	Chart
HW	10.66	10.34	-3.0%	9.95	None	Chart

Just like yesterday, the major index ETFs have nice setups for tomorrow. The following ideas are presented as a higher-risk alternative to those ETFs.

Trade Ideas for 10/22/08

Ticker	Entry	Exit A	Exit C	Chart
DRYS (DryShips)	25.01	22.24	21.24	Chart
ERF (Enerplus Fund)	27.58	25.39	23.99	Chart
CSUN (China Sunergy)	4.83	4.49	4.29	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/21/08

The charts look better today than they have at any time in the past six months. So many charts are forming a sharp W pattern, which often marks market bottoms. This afternoon's surge really seemed to change the tone of the market; we'll see tomorrow if the bulls can hold on to that momentum. But I think it's time to jump in if you haven't already. Not for the long haul, but for trades of up to a month's duration, depending on how the charts unfold.

My list of trade ideas for tomorrow is overflowing, and it would be even longer if not for the large number of companies releasing earnings this week. It's imprudent to hold shares of a company that's about to release earnings. The risk of discontiguous prices is heightened, so it's much more difficult to control risk via sell-stops. Therefore, I recommend that you sell your stocks in advance of earnings. In particular, Wachovia (WB) releases earnings Wednesday BMO, so if you hold it, sell it tomorrow by the end of the day. If it doesn't go below the sell-stop, the official sold price will be the closing price.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
WB	5.21	6.07	+16.5%	5.82	Sell by market close to avoid earnings risk	Chart
RIMM	62.38	53.91	-13.6%	52.49	None	Chart
FORM	18.46	18.28	-1.0%	16.85	Consider selling on a negative close	Chart
IPHS	21.51	23.25	+8.1%	21.11	None	Chart
SVVS	8.06	8.94	+10.9%	7.85	None	Chart
SPR	14.01	14.24	+1.6%	12.57	Consider selling on a close < 13.60	Chart

So many ideas for tomorrow; I'm offering a few that are narrow risk, but major index ETFs like QQQQ, IWM, DIA, etc. look great too, just wider ranges between entry and exit. As good as the market's prospects look, it's still crucial to manage your risk. Don't take on more positions or more risk than you can handle. Stick to your sell-stops. Figure out how much you stand to lose if all your positions went against you and hit your sell-stops; make sure that the total number is not more than, say, 6% of your portfolio equity. That way, if it turns out this was all just one big fake-out by the market, you'll still have 94% of what you own today; at the same time you'll have enough skin in the game to profit well if the market takes off.

Trade Ideas for 10/21/08

Ticker	Entry	Exit A	Exit C	Chart
KRE (Regional Banks ETF)	34.13	32.46	30.29	Chart
HW (Headwaters)	10.66	9.99	None	Chart
SID (Companhia Siderurgica)	15.36	14.26	13.23	Chart
EWT (Taiwan iShares)	9.34	8.81	8.39	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/20/08

Right now classic charting and Elliott Wave analysis are at odds with one another. Under classic charting, risk is to the downside. Long-term trends are down, and the (tall) symmetrical triangle that formed last week shall most likely break in the direction of the long-term trend. The only bullish timeframe is short-term, as the 5-day moving average has turned upward. In contrast, my Elliott Wave analysis suggests that we have just completed the first wave off the lows, tested those lows (thus completing the second wave) and are now beginning a steady advance. Thus, risk under EWave is to the upside.

Under the latter interpretation of the charts, it's interesting to note that sentiment seems to have shifted from fear-striken selling to a cautious sense of bargain-hunting. My best friend points out the parallels between Buffett's sudden cheerleading and that of the Rockefellers soon after the crash of 1929. Indeed, after crashing in October of 1929, the Dow rallied into mid-1930 before collapsing further.

Friday turned out to be a consolidation day rather than a continuation day, which set up charts in the financial sector, particularly regional banks, very nicely. By the same token, Friday's consolidation could portend further downside, as implied by the classical charting interpretation. In case my read is incorrect (and there is further downside up ahead in the near term), get out on breach of last Friday's lows, if not this past Thursday's.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
FORM	18.46	16.92	-8.3%	15.43	Consider selling if unable to break through 18.20 by close	Chart
RIMM	62.38	59.01	-5.4%	52.49	None	Chart
WB	5.21	5.97	+14.6%	5.61	Consider selling if unable to break through 6.46 by close	Chart
IPHS	21.51	21.77	+1.2%	18.49	None	Chart
SVVS	8.06	7.70	-4.5%	6.77	Consider selling on a close < 6.99	Chart

Many charts are setting up for Monday. While risk remains high, strong price action would give me some assurance that higher prices are ahead. That's why we buy on a breakout rather than a pullback. Don't forget that breakout failures are more common at open than later in the day, so make sure to enter these after the open if possible.

Trade Ideas for 10/20/08

Ticker	Entry	Exit A	Exit C	Chart
SPR (Spirit Aerosystems)	14.01	12.57	11.59	Chart
IAT (Regional Banks ETF)	30.06	28.43	26.99	Chart
CPST (Capstone Turbine)	1.46	1.29	1.24	Chart
FDO (Family Dollar)	25.61	24.24	23.14	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Gap in GLD filled

A gap in the daily chart occurs when price jumps from one day to the next such that there is no price in common between the two days. It appears on a candlestick chart as a gap, hence the name.

Something along the lines of 90% of gaps are eventually filled, meaning price subsequently goes back up or down to the gap and all the prices in between are filled in. Gold filled its gap from mid-September today. I think of gaps as outstanding obligations. Before a chart can continue its eventual move, it will need to revisit the gaps it left behind. That doesn't mean gold will take off after this; to me it simply means that gold is free to take off now. Keep in mind that some of the best technicians in the business say that if gold doesn't hold above $750 (spot price), then it won't make the run that so many (including myself) think it's going to.

One final counter is that since gold is a 24-hour market, it's hard to say whether gaps need to be filled. However, all gaps before have been filled. In the chart below, I drew rectangles around certain gaps and their eventual fills, and an oval around the latest gap and fill.



The fact that gaps are almost always filled is one reason why they say SELL THE GAPS!!!!

Trade Ideas for 10/17/08

Something I've observed is that Wednesdays tend to be quiet days or continuation days, while Thursdays anything can happen. So it was fitting that the reversal should happen today. With today we have completed Waves 1 and 2 off the low, and Wave 3 lies ahead. Thankfully, Waves 3 take longer to develop and don't correct nearly as much as Waves 1. So we can breathe a little more easily now. Don't say I didn't warn you about the craziness of Wave 1! Unless you traded quickly, you didn't make money on it.

I hope some of you took my advice yesterday to make the sell-stops market-on-close. We officially lost JRCC by a penny, so I won't include it in the table. However, I still hold it, and my sell-stop is 14.23. We also bought IPHS today. Let's see how our holdings develop. Tomorrow should be a continuation day, so just hold our stops and focus on the new ideas.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
FORM	18.46	17.38	-5.9%	15.43	None	Chart
RIMM	62.38	59.24	-5.0%	52.49	None	Chart
WB	5.21	6.45	+23.8%	5.59	Consider selling on a close < 6	Chart
IPHS	21.51	22.35	+3.9%	18.52	Consider selling on a close < 19.79	Chart

Time to jump in, either tomorrow or Monday. Friday's setups are on the wide-risk side, but we might not get better setups Monday. It's also time to consider upping the risk percentage (e.g., if you were risking 0.2% per trade before, now go to 0.3-0.4%).

Trade Ideas for 10/17/08

Ticker	Entry	Exit A	Exit C	Chart
SVVS (Savvis)	8.06	6.85	6.77	Chart
CPST (Capstone Turbine)	1.46	1.24	1.19	Chart
BJS (BJ Services)	14.21	11.79	10.87	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/16/08

They sold the gap down this morning and kept selling, and in the last 5 minutes of trading, the selling even accelerated, and charts closed at their lows. Think maybe they wanted to punish the panic buyers?

Tomorrow's the big test. Can Friday's lows hold? At this point the correction the past two days has been so deep that I think the best we can hope for is a consolidation day tomorrow. A V-shaped reversal might be too much ask for. The silver lining is, consolidation would bring some excellent setups. By the way, my mom sent an updated DJIA chart with projections for the next few moves; here's the original post.

With today's washout, we didn't buy anything new and lost WFR. If the lows should hold tomorrow, it's still very possible that some of our holdings will touch below their sell-stops, only to bounce. To account for such whipsaws, you could treat the sell-stops as market-on-close, but recognize that that will increase your risk exposure. For purposes of tracking these holdings in the blog, I am sticking to the sell-stops as written (excepting action in the first minute of trading, of course.) Whatever you choose to do, don't be afraid to sell your positions. I could be completely wrong about Wave A having ended on Friday; that is why we have sell-stops in place and don't take on more than we feel comfortable with. Historically speaking, double bottoms are a common occurrence, but even more common are setups that look like double bottoms but end up being bear flags.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
JRCC	18.93	14.94	-21.1%	14.25	None	Chart
RIMM	62.38	55.75	-10.6%	50.21	None	Chart
FORM	18.46	16.02	-13.2%	15.26	None	Chart
WB	5.21	6.06	+16.3%	4.29	Consider selling on a negative close	Chart

Even with the severity of today's pullback, I still found a few charts that look OK.

Trade Ideas for 10/16/08

Ticker	Entry	Exit A	Exit C	Chart
TCB (TCF Financial)	19.92	17.82	16.38	Chart
IPHS (Innophos)	21.51	19.49	15.32	Chart
BJS (BJ Services)	14.21	12.14	10.87	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/15/08

As has been the case so often of late, they faded the open, and unlike yesterday they made it stick. But I have been waiting for a pullback to provide a low-risk, high-reward entry. As a consequence, many charts have started to set up nicely. It's time to raise the amount risked per trade, and to consider using the more aggressive exit price. The turn took place, we've gotten a pullback, and the next move up will be Wave 3 off the lows. Waves 3 tend to move the farthest of the impulse waves. As such, they must be caught and ridden. There'll probably be some more pullback, but as we saw today that might just be a gap down that's faded.

Most of our holdings were taken down below their entry prices. They still look good to me though. We bought FORM today, and it followed the market up and then back down.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
JRCC	18.93	18.95	+0.1%	14.89	Consider selling on a close < 18.34	Chart
RIMM	62.38	60.12	-3.6%	50.21	Consider selling on a close < 59.96	Chart
WFR	24.83	24.20	-2.5%	19.99	Consider selling on a close < 22.28	Chart
WB	5.21	6.31	+21.1%	4.29	Consider selling on a close < 5.25	Chart
FORM	18.46	17.38	-5.6%	15.26	Consider selling on a close < 17.26	Chart

For tomorrow, some charts I'm actually excited about. Whenever the pullback phase ends, these charts look to benefit the most. They are already champing at the bit.

Trade Ideas for 10/15/08

Ticker	Entry	Exit A	Exit C	Chart
RMG (RickMetrics)	17.93	16.49	15.99	Chart
LINE (Linn Energy)	14.51	12.89	12.16	Chart
CAF (Morgan Stanley China Fund)	26.41	24.24	22.74	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

How I Trade Options

I was asked to talk about how I trade options. I'm not a habitual options trader, but I have traded my share over the years. Unlike my stock trading system, my options system is high-risk. I don't think of options as a way to make a steady income; instead I consider it a way to go to Vegas while staying at home. There are low-risk ways to trade options, such as a strategy based on buying deep in-the-money calls instead of stock. But that's not for me.

First off, I want to caution you that this post will assume you know all the basics about options, meaning you grasp such concept as expiry, strike price, underlying, calls vs. puts, and in-the-money vs. out-of-the-money. If not, try this course.

I trade options when I anticipate a significant reversal in trend. Rather than bottom-fishing with equities, I'd rather limit my risk with options. I can hold the options even if I pick the wrong spot and price falls below my "mental" sell-stop because I'm OK with letting my options expire worthless. Keep in mind that my entire purchase is equal to that 0.2% risk figure. With stock, that same risk figure represents just the difference between entry and exit price. Imagine buying an 0.2% risk's worth of stock. In most cases I'd be lucky to afford a round lot!

My options strategy is to buy guts options, preferably in the week prior to expiry. Guts options are options that are several strikes out of the money. For example, on Friday when EEM was trading at 23, I bought calls for October expiry with a strike price of 30, 7 points out of the money. Those calls cost me 0.19/contract, and they peaked today at 1.50. (I managed to sell 2 at that price, but I've been selling ever since Monday, some for as low as 0.35). So the profit potential is very high, but to achieve it demands great discipline, nimbleness, and accuracy. Not only do you have to be right about the direction, you have to be right about the entry and exit timing. That's a lot to ask, and I still need so much work on the discipline part since I tend to sell so tragically early. Until yesterday I was probably a net loser on options because of some horrible trades early on in my trading career. There's no surer way for a beginner to be wiped out of the market than by experimenting big with options. I have heard many stories of people who made 6x their equity trading options in their first month, only to be broke six months later. Maybe that's the new rule of thumb: you'll be out of the market in as many months as the degree of your first month's option trading return! In that case I'm glad I lost money the first time I tried it! Seriously though, use great caution, and limit your risk to very small numbers!!

Back to my EEM purchase. How did I choose the $30 strike? Thursday night I looked at the intraday chart of EEM and eyeballed where I thought it could go if it were to bounce. I cross-checked with the daily chart and chose $29 as a likely target.



Then I went to my Ameritrade Izone account and looked up open interest in contracts around $29. The screenshot below is the current snapshot of the EEM option chain, but it's reflective of what I saw Thursday. Namely, that open interest was several times greater at $30 than at any price below it. In general, as a small trader, you want to go where the volume is. In high volume issues, prices are less likely to be distorted by big players, and the bid-ask spreads narrow, both of which are to everyone's advantage.



So that's how I came to choose the EEM 30s on Thursday. I confirmed yesterday that the optimal strike price is around the price you think the stock will get to on the day you want to sell it. In this screenshot are yesterday's lunch-time prices for the DIA option chain with strikes from 80-100. The price for the underlying is the top row (red column bid price, green column ask, the next column last traded), and the shot is taken from my Interactive Brokers trading platform.

Note that the daily return peaks with the strikes that are close to the current price of 90. Also, note that some contracts actually fell in value, because even though DIA had risen 8% at that point, it didn't look like it would have enough juice to make it all the way to, say, 98 by expiry this Friday. In quant-speak, neither volatility nor price was high enough. Later that day, after DIA showed even greater strength by hitting 94, that all changed, and we see the peak daily return coalesce around the new DIA price:

So, in a nutshell, my strategy is to guess the maximum price that I think the stock can achieve on reversal, pick the closest strike to that price that has high open interest, buy that contract around when I think the reversal will happen, and sell that contract when I think the reversal has run its course. It is a strategy fraught with risk, which I account for by not buying too much and making sure only to act when I am highly confident of a reversal, based on Elliott Wave or Gann analysis (i.e., whenever Andy Askey says the market will reverse!)

Sell the Gaps?

We are set to gap up today. As we know very well, traders have been selling the gaps rather consistently the past few weeks and months. But will it happen today? Could they buy the gaps instead? Even yesterday they faded the gap, although markets went on to greater new heights. So I don't know, but be alert. I plan to dump 90% of my option holdings at the open myself.

Trade Ideas for 10/14/08

They say that all bear markets are different, but one thing they seem to have in common is unbelievable countertrend rallies. As I wrote on Thursday,

Bear market rallies are sharp and take place over short periods of time. But the swing in price could be so dramatic that it's worth it to me to try and play it.

Today's rally smashed the previous one-day point gain on the Dow (almost quadruple digits), and futures are showing triple-digit continuation tomorrow as of this moment. I hope you were able to make some money based on my blog posts, first by getting out of the short trade Friday, then with the suggestion to go long Friday and finally with today's trade ideas, 4 of which were elected. All credit to Andy Askey for another in a long line of legendary calls. He had pinpointed 10/10/08 as the turning point as early as April of this year on his blog, and elsewhere earlier than that.

Now that the market has completed Primary A, it's time to turn our attention to what's to come. Short-term there's the upcoming pullback to consider. We are currently tracing the first wave off Friday's lows. The first wave of a move can correct up to 99% in what is variously called a double dip, a double bottom and a dead cat bounce. We still haven't seen the top of the current explosive move, but it could come as early as mid-day tomorrow. That's right, you can't breathe a sigh of relief yet. Looking out medium-term, we are going to go higher for a little bit, probably at a 45 degree or flatter angle, which is the signature of a B wave. Primary B could last anywhere from 3 months to a year, but according to E-Wave it cannot get any higher than the Intermediate Wave B high of 13,137 (DJIA). 11,000 is an attainable target. That's still quite a bit of upside, but the main point is that the high will hold. In fact, according to Elliott Wave, neither in our nor in our children's lifetimes shall we see the Dow above 14,000 again.

During Primary B, consider accumulating physical gold in your long-term account, and prepare to sell all your non-gold longs by the end of it. During Primary C (to complete Cycle Wave A), we are probably going to see hyperinflation. Also the market will experience a crash even worse than last week's; specifically it'll be worse by a degree. Many people believe that gold is a hedge against inflation, and since a deflationary recession is upcoming, they believe gold won't be of use. In fact, gold is a hedge against monetary inflation, which means Bernanke using his storied printing press and debasing the currency. By supplying an unlimited source funds to banks, governments around the world are demonstrating their commitment to debasement of their money. As a trade, gold doesn't look good right now. DZZ (Double Inverse Gold ETN) actually has a good setup for tomorrow, in fact. But as part of a long-term portfolio, gold has never been more imperative.

Turning now to today's elected trades. WB gapped up on open but touched down to our buy price, so it gets a spot in the table. UWM never did come back down, so I've omitted it. The others traded up to their entry prices. Too bad the risk was so wide, because even though the percentage returns look good, those of you who elected the positions know that you weren't able to buy very many shares. Especially with WB, which you would've had to reduce even further since it traded down, rather than up, to the entry price.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
WB	5.21	5.85	+12.3%	4.29	Consider selling on a close < 5.15	Chart
JRCC	18.93	21.25	+12.3%	14.89	Consider selling on a close < 18.40	Chart
RIMM	62.38	63.87	+2.4%	50.21	Consider selling on a close < 59.56	Chart
WFR	24.83	27.22	+9.6%	19.99	Consider selling on a close < 24.00	Chart

Plenty of nice-looking charts for tomorrow. The only risk is that upcoming pullback dangling over us like the sword of Damocles. I'm only giving out two since we hold so many already. Email me if you want some of the other ideas on my list.

Trade Ideas for 10/14/08

Ticker	Entry	Exit A	Exit C	Chart
FORM (FormFactor)	18.46	17.24	15.26	Chart
SONS (Sonus Networks)	2.61	2.39	2.06	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Futures Status

Looking good, markets are set to open 4% higher at this juncture. But anything can happen.

Extra Idea for 10/13/08

A bit different in that it uses an intraday setup rather than one from the daily charts. While the risk is still high, the advantage is that it isn't outlandishly wide, so buying stock is more feasible. Thanks to Smith for the suggestion.

Ticker	Entry	Exit A	Exit C	Chart
UWM (Ultra Russell 2000)	26.48	24.14	22.76	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Trade Ideas for 10/13/08

So, was that the bottom of Primary Wave A? I know I just wrote a huge article proclaiming that it was, but honestly, I can't be 100% sure until I see further price action. If the charts make it above Friday's high, that's encouraging. But it's not official until the previous resistance level is breached. For DIA that would be around 95, for SPY 100. Even if it is the bottom of Wave A, right now is not the optimal time to trade. That will come soon after the bottom, after a double dip setup (or some kind of pullback, however minor and brief).

We sold SCC Friday for a huge gain, and no new positions since gold did one of its typical fakeouts, so we are now officially all cash. I personally bought a slug of index calls that I will be selling if the market rallies. A double dip, if it unfolds, will happen within a week or so. This means that, although upside could be great, the window of opportunity is narrow. Optimizing gains means using intraday stops, selling gaps up, and getting out at the first sign of danger. It's not for the average buy-and-hold investor, that's for sure. It's more like guerrilla trading, messy and ruthless.

For Monday, my ideas are sure to please the bottom fishers among you. But there are several problems with them. First, they are extremely high risk. The charts are all in long-term downtrends, and so for them to work requires a reversal that has momentum. In most markets, that is too much to ask for, so my picks are predicated on my read that the bottom of A is in. Secondly, the double-dip scenario definitely applies. That means that using my recommended stops may not be adequate. You are encouraged to use intraday stops if you elect any of these trades. Thirdly, the risk is wide. The difference between entry and exit prices is on the order of 20%. This means you can't buy that much, especially since I am recommending that you risk at most 0.2% of account equity on these ideas. Therefore, one thing you might consider is buying call options instead. If you had originally planned to risk 0.2% on the ideas, instead buy 0.2% worth of calls once price exceeds the buy price in the table. By doing so, you wouldn't need to worry so much about sell-stops; if the option becomes worthless, you are only out what you had originally planned to risk. I can't advise on which strike price or expiry to use, but there are tools out there like the Max Pain estimator that attempt to predict where prices will end up on expiry based on the theory that that price will be such as to inflict the maximum pain on option buyers. Finally, I must add that there is no reason to do anything on Monday. The juicy setups—low-risk, high-reward—are just around the corner. Right now, the opportunities are high-risk and moderate reward, and it's absolutely OK if you want to pass them up.

Trade Ideas for 10/13/08

Ticker	Entry	Exit A	Exit C	Chart
WB (Wachovia)	5.21	3.99		Chart
JRCC (Jones River Coal)	18.93	14.25		Chart
WFR (MEMC)	24.83	19.99		Chart
RIMM (Research in Motion)	62.38	50.21		Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.

Elliott Wave implications

If you've been following my blog, you'll know that one of the primary tools I use is Elliott Wave analysis. I mainly use it on short-term timeframes: a day, a week, a month. And it works. I use it to vet my trade ideas, but it has proven most effective in getting us out of SDS and SCC at their respective peaks. In addition to these practical applications, Elliott Wave can be used on an abstract theoretical basis, as a tool that can forecast likely paths a market (and therefore a civilization) will take centuries into the future, replete with price targets. From the actions of a few in the blink of an eye, to the cumulative actions of all of humanity over an entire era, Elliott Wave can provide guidance.

Despite its effectiveness (which you have witnessed), E-Wave gets very little respect within and without the technical analysis community. Aside from the fact that it purports to "predict the future," which people don't like, it was also re-introduced to the world in the 1980s by Robert Prechter, who famously made astonishingly accurate market calls for years, becoming a crossover celebrity in the process. That is, until one day when he started making every call wrong. From hero to hated to laughingstock; it can happen that fast, and to anyone. Since then, Elliott Wave Theory has fallen from favor.

How did Prechter get it so wrong? I firmly believe it's because he had the wrong wave count, although he still refuses to admit it 20 years later. Elliott Wave, because it's so much an art (of counting waves), has a particularly revisionist bent to it. E-Wave technicians have to constantly go back to charts they've annotated and do a wave recount based on future information. So there is a question of reliability. To me, this represents the beauty of E-Wave: nothing is preordained. Part of the human condition is that we have free will: make the right choices, the wave count shifts, and a higher price target emerges, representing improvements to our society, to our culture and our civilization. Make the wrong choices, and bear markets come sooner, last longer, and are more devastating. There are only a finite number of ways to count the waves; it is not infinitely interpretable. Furthermore, the predictive elements only come into play once Wave 1 of a move has been completed. And there is no way to predict beforehand what wave 1 will do.

I'm going to share with you a chart from the best Elliott Wave technician that I know. That person is my mom. It's a messy chart, and one that she annotated in March of 2007, 1-1/2 years ago. It's messy because it shows two counts. The "primary count" represents Prechter's count, which I must emphasize, is WRONG. It also presents my mom's "alternate count" in pink. Considering that using her count, my mom in March of 2007 nailed the October 2007 Dow peak price of 14,198 within 220 points, or 1.5%, I tend to trust her over Prechter! (The prices on the chart are the actual ones people experienced, not the prices you find in Google finance, which are slightly off, distorted by adjustments). Without further ado, the chart:



First, some terminology. Keep in mind that people use different terms to describe the relative degrees of the waves. Also, in my analysis of what will happen in Wave A of a particular degree, I use the principle that Wave A is similar to Waves 2 and 4 of that same degree. Note that Wave C can only be likened to waves of a higher degree, as it is much worse than anything witnessed thus far in that wave sequence.

Degree of Elliott Wave Sequence	Time Span on Above Chart (5 Waves Up)	Subwaves Labeled As	Total Gain in DJIA	Entire Sequence Comprises	Timeframe for Corrective Wave A of this Sequence	Magnitude of Calamity During Corrective Wave A	DJIA Target
Intermediate	10/10/2002 - 10/11/2007	not labeled	7,017	Wave 5 of Primary Degree	October 11, 2007 - January 22, 2008	During Intermediate A, banks failed, culminating with Bank of America's rescue of Countrywide.	11,634
Primary	10/04/1974 - 10/11/2007	circled numbers and letters	13,625	Wave 5 of Cycle Degree	October 11, 2007 - October 10, 2008	During Primary A, major banks (Bear Stearns, Lehman Brothers, WaMu, Wachovia) and entire nations (Iceland) failed, and America went into recession. By comparison, Primary 4 was the Tech Bubble crash.	7,882
Cycle	1932 - 10/11/2007	Roman numerals I, II, III, IV, V	14,158	Wave 5 of Super Cycle degree	October 11, 2007 - 2010 ???	Major disruptive war. Cycle 2 coincided with WWII, and Cycle 4 took place during the Vietnam War.	573—999
Super Cycle	1780 (birth of America) - 10/11/2007	(IV), (V) Roman numerals in parentheses	unknown - based on historical records prior to 1896	Wave 5 of Grand Super Cycle degree	October 11, 2007 - 2020 ???	Depression. Super Cycle 4 was The Great Depression.	40—400
Grand Super Cycle	1000 - 10/11/2007	not labeled	unknown - based on historical records prior to 1896	X Wave 1	October 11, 2007 - 2050 ???	Unprecedented mortality. Grand Super Cycle 2 took place in the period of the Black Death (bubonic plague), 1350—1400 AD. For our times, nuclear holocaust or a Heat Age are candidates.	There might not be a stock market at this point.

This chart has grave implications for the fate of modernity and humanity in the coming years, as you can tell from the above table. The main points are:

• From the end of The Great Depression until 10/11/2007, we were in a secular bull market, a long one comprising Super Cycle Wave 5. (In fact, we were in a secular bull since the invention of modern stock markets, comprising the latter parts of Grand Super Cycle Wave 5.) Very few if any current market participants were trading in the market prior to 1932. Therefore we have been in uncharted territory for exactly one year now: a true secular bear market of Super Cycle (not to mention Grand Super Cycle) degree that could last as long as a century or two. Everything you've ever known about investing: that markets always go up in the long run, buy stocks in your 20s and save them into your 60s for a fortune, etc. gets thrown out the window under this scenario. Those investing truisms were based on historical data within Super Cycle Wave 5, which is in the past now (1932-2007). Ever wonder why the significance of the 1929 crash has not been surpassed, not by 1987, not by 2002? It has stood the test of time because 1929 represented the beginning thrust downward of Super Cycle Wave 4. Since then, the most we have seen are corrections of Cycle degree (e.g., 1962-1974) and Primary degree (e.g., 2000-2002). Note that the crash in 1987 was a correction of an even lesser degree (Minor) and it barely shows up on the chart. The 8-day crash we just experienced marked the end of Primary Wave A. And next up, after we rally for a few months, is a corrective phase that will be the equivalent of World War II: Primary Wave C, to conclude Cycle Wave A.
• Corrective waves unpeel like onions. What we just completed this past year was an a-b-c correction, each wave of which was of Intermediate degree. All that tumult and heartache merely added up to Wave A of Primary degree. As mentioned in the above point, there's still Primary Waves B & C to come. After Primary Wave C, we will have only completed Cycle Wave A and need to do Cycle Waves B & C, the latter of which could be a global depression. And then comes Super Cycle Waves B & C, and then Grand Super Cycle Waves B & C. I don't know what those'll entail, but it'll be bad. Anything from mass mortality to the onset of a new Dark Age in Grand Super Cycle C.
• The stock market is a proxy for human civilization. As our civilization grows, so does our economy, and vice versa. We are fortunate that in this age we have a way to precisely measure our progress in the form of a stock market average. Consider the one past civilization that was completely modern: Rome. We can't go by a stock market average; instead we must use historical records to determine the Roman Grand Super Cycle. The Roman Grand Super Cycle impulse waves lasted from 700 BC to 337 AD. In our current Grand Super Cycle, Wave 1 began in 1000 AD, and we completed Wave 5 on 10/11/2007. About a thousand years for each civilization before their declines began. What happened to humankind after Rome reached its apex is due to happen to the modern West (well, just the first 100 years; we won't see a 200-year Dark Age as happened from 800-1000), at least according to this count of the Elliott Wave. We are at the beginning of the end of American, and Western, hegemony.

Here is an excellent historical perspective counting Elliott Waves from 10,000 BC that I ended up using as a primary source for this blog post. It describes waves greater than Grand Super Cycle degree, calling them X, Y, and Z. Fortunately (at least for the generation that will be born in 80 years or so), the article states that we are still in the impulsive phase of the X sequence. Grand Super Cycle Waves A, B and C will make up X Wave 2, and upon completion we will commence X Wave 3. Considering that X Wave 1 lasted a millennium (1000 AD - 10/11/2007), I think as a species we will survive. It is not the end of humanity that is upon us; it is merely the end of the American Age, and of modernity as we have known it for over a millennium. But that is scary enough. Please enjoy the time you have right now. It will get a little better but then it will get far worse—not just in the market, but across our entire civilization.

SCC chart updated

If you were in it, I hope you got my note Friday to exit at 166.29. That would have been a 58.2% profit, representing a 16.21R return assuming the Exit A figure on the day I recommended it. That means whatever amount you chose to risk, 0.2% (for example), would have been returned to you 16.21 times. An initial risk of 0.2% of portfolio assets therefore means your entire portfolio would have increased in value by 3.2%. That is an entire month's return in a bull market. It also illustrates why the saying "you can never go broke taking profits" is actually kind of a lie. You need the gains from these big winners to pay for all the losers. This is a lesson I have yet to master; taking profits early is something I do way too often, especially when I'm on the short side. Anyone else exhibit this same self-destructive tendency?

Don't count your chickens

...but it happened. It took all day, but with the market unable to carve out a lower bottom in the afternoon, buyers poured in just after 3pm and we got the turn that so many the world over were looking for. A lot of people thought it would happen soon, but only Andy Askey called the timing of 10/10/08 months and months in advance. Really we shall see late Sunday when the futures market opens (we need to see a gap up open), but I'm 80% convinced. Please note that Andy and I have differing Elliott Wave counts. My next post will present the long-term wave count as I see it. Meanwhile, the picture Friday for the Dow:



The chart of the inverse ETFs is even more convincing. Take a look at the one-month QID.



The five waves from 9/19 are stark, with a complex wave 5 beginning on 9/30. The magnitude of the drop late Friday—in terms of how much it fell and how quickly—is on the order of a Wave A. No champagne yet; we could easily see a kickback rally back to the QID 82-88 area in the coming days, probably (fingers crossed) after some continuation of that late Friday afternoon move. Any such rally should not exceed Friday's peak; if it does, my count is wrong.

Update

Can it hold?



Double top in SCC? Consider moving stop to 166.29.

Not so fast

Back to the lows - now what?

P.S.

Chart from a previous October 10th: back in 2002, the bottom of wave 4 of Cycle degree. Check out subsequent action! What is it about this time of year??

What's Next?

Could it be a (gasp) bull flag? Everyone is watching...

Trade Ideas for 10/10/08

Yesterday I was looking for one final downward move to make the stalwarts toss their cookies. And toss their cookies they did! A close at the day's low, a sickening slide on top of a few days of sickening slides. Everyone's in a panic and shell-shocked. Just in time for D-Day, Friday October 10th. Read the article that sums up why I believe October 10th or 13th will mark a major reversal in the market. Historically, bear market rallies have been incredible. They can make up 1/3 - 2/3 of a downward move within the space of a week. Imagine something on the scale of the Dow recovering 2,000 points by next Friday.

Keep in mind that maybe there won't be a reversal at all, that this is not a sure thing. (e.g., if a major international city were to be attacked, forget about a rally. I don't think even this market is that perverse!). But let's say the reversal does happen sometime tomorrow or Monday. First of all, we'll want to close out our position in SCC. But then what? You can always do nothing. Cash is safety in this market. But if you want to take a chance, you can try to play the bounce for profit. The textbook way to do this is to watch the intraday charts for signs of reversal, and then act upon those signs. My personal plan is to risk 1% of my portfolio equity on call options in various market index-based ETFs.

• Why 1%? For me that figure strikes the right balance between the opportunity as I see it, and the risk that the market just keeps sliding. After all, this is NOT part of my trading system. It is not my expertise, so that's why the figure is 1% and not 10%.


• Why call options? Options, used properly, are a great way to limit your risk. The amount at risk is equal to your initial investment. Unlike with (non-penny) stocks, options can move in huge double-digit percentages within a single day. With even a paltry 0.2% of assets at risk, you could make a return equal to 1 or even 2% of assets. On the flip side, the most you'd lose is that 0.2%.


• Which index-based ETFs? I'm looking at a wide variety: DIG (oil & gas), EEM (emerging markets), IWM (Russell 2000), FXI (China), SPY (S&P 500), QQQQ (Nasdaq-100).


• When to buy? If the reversal should occur, it will occur at a particular point in time, possibly with a sharp move downward. Rather than buying while the downward move is going on, consider buying during the recovery phase, upon seeing evidence of a price recovery. Likely times for a turn to happen are just after market open, during Magic Twitching Hour (10:15-11:30), at the end of the lunch hour, or at 3pm. Basically, just about anytime during the day! If you can't watch the charts and want to participate, consider spacing purchases out throughout the day.


• When to exit? Soon! We're talking a few days. Bear market rallies are sharp and take place over short periods of time. But the swing in price could be so dramatic that it's worth it to me to try and play it.

OK, back to my trading system proper. SCC violated the sell-stop in the first minute of trading, but then rocketed up. If you got stopped out, you now know firsthand why I do not enter orders prior to the market open. Those first minutes of trading are treacherous and not representative of a true market. So we wait. In addition to my belief that the turn will take place tomorrow or Monday, SCC is also doing a 5th wave extension—a parabolic move similar to what SDS did on September 18th. (More evidence to support a reversal tomorrow or Monday.) Therefore, we must close our position.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SCC	104.53	155.00	+48.3%	148.75	If you can, follow along on the intraday chart, and sell on a violation of the prior low.	Chart

For tomorrow, my official system picks are in gold. Today I got the setup I had been looking for all week: minor pullbacks in the miners; and in the metal itself, a quick pullback and recovery that suggests further upside. Gold is a dangerous trade. Take a look at some past juicy setups in gold and miners that went on to bust badly.

Trade Ideas for 10/10/08

Ticker	Entry	Exit A	Exit C	Chart
KGC (Kinross Gold)	16.31	14.99	13.49	Chart
DGP (Gold Double Long ETN)	21.81	19.93	19.32	Chart

I currently own shares of KGC.

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.