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.