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.

Trade Idea for 10/09/08

Further new lows, and another close at the lows, but the slaughter was noticeably less intense than the past two days. Also, it feels as though people are becoming deadened to the losses. They are accepting that each new day brings further downside. This resignation is a key step in forming a turn. Once the vast majority believes that only downside lies ahead, that's when the reversal tends to happen. So what's the next step? Maybe one more gut-wrenching fall, as the final holdouts toss their cookies. Just one pleasant idea for what might come in the next couple of days. For your viewing pleasure, a cross-section of stocks that were high-flyers not long ago:



The one bright spot? Major gold miners. After gold's huge performance the past few sessions, the miners finally joined in. Harmony was up over a third. But I have to say, this move in gold as well as the miners feels really rushed. The odds favor a pullback from here, and from an Elliott Wave perspective, it looks like a B wave to me. Also, noticeably absent from the festivities were silver miners and most of the gold juniors. It's not a good sign when you don't have broad participation; in fact it's a sign that the move might be hollow. I'll still take a setup if it happens; and I actually did buy some, but I'm playing it as a bounce.

We sold AIG today for a loss, but there were plenty of opportunities to take nice profits. If you traded it, I hope you came out ahead overall. Its chart still looks pretty good. If you didn't sell it, use 2.99 as the sell-stop. A break above 5 would look really nice. For SCC I have chosen a very aggressive "official" sell-stop. This is because I think that's what you have to do as stocks approach a major wave 5 peak. Don't give it too much room to fall, but give it a little room to surprise you in case it can keep rocketing up. It's a tough balance. Feel free to use my recommended sell-stop as a closing basis-only suggestion.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SCC	104.53	140.00	+33.9%	129.99	Feel free to use the sell-stop as a closing basis-only suggestion. Be open to the possibility that there is only one more surge ahead, to come tomorrow or Friday.	Chart

The dollar and gold have enjoyed an inverse relationship, but that seems to be breaking down now that the other currencies (excepting the yen) are suddenly so much weaker than the dollar. A flight from euros into dollars AND gold? I notice that both gold and the dollar have been in uptrends since mid-September. Old relationships are hard to shake though, and if gold weakens as I think it might, the dollar still stands to benefit. So in the short term it could win either way.

Trade Idea for 10/09/08

Ticker	Entry	Exit A	Exit C	Chart
UUP (US Dollar Bullish ETF)	25.24	24.67		Chart

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

Trade Idea for 10/08/08

No buyers stepped in the last hour this time. On the contrary! The selling actually accelerated at the end of the day. The damage to the charts I look at is extreme. Take a look at TAN or ESRX: this is what a C wave looks like. Sharp and breathtakingly fast drops.

Our SCC has gone parabolic, just like SDS last month. If you own it, resign yourself to the fact that you won't get out at the top. The best way to play it is to count the waves to the top. I don't know what price the top will be at, but I strongly believe it's coming soon: Wednesday, Thursday or Friday. We lost MI today; it had a scratch entry but then again so did AIG.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
AIG	3.57	3.51	-1.7%	3.24	None	Chart
SCC	104.53	135.00	+29.1%	109.99	Start thinking about taking profits	Chart

No charts have good setups; the one I have for you is a crapshoot. Targets are the 50- and 200-day moving averages.

Trade Ideas for 10/08/08

Ticker	Entry	Exit A	Exit C	Chart
WB (Wachovia)	7.06	5.14		Chart

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

Trade Idea for 10/07/08

Was that the turn? It's too early to say, but the sheer magnitude of today's drop certainly fit the criteria I mentioned yesterday. Looking over the charts, however, really the only bullish thing I can say is that the charts didn't finish at their lows. Nevertheless, the late-day rally left some really long rat tails (candles with lengthy lower shadows). We will find out just how today fits into the big picture as the week unfolds. With luck there will be some nice setups in the charts when the turn does happen. In the meantime, if you want to speculate on the turn itself, buy some calls on your favorite index-based ETF, risking no more than 1% of your total portfolio, preferably no more than 0.3%.

SCC's parabolic rise made the parabolic performance of SDS on 9/18/08 look pale by comparison. I wouldn't blame you if you took some profits. Hold on if you have the guts; take partial profits if the heights are making you dizzy. We bid adieu to SIGA today.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
MI	23.76	21.23	-10.6%	19.99	None	Chart
AIG	3.57	3.87	+8.4%	2.99	Consider selling on a close < 3.63	Chart
SCC	104.53	124.27	+18.9%	104.99	OK to take partial profits discretionarily	Chart

For tomorrow, a chart that is holding up OK.

Trade Idea for 10/06/08

Ticker	Entry	Exit A	Exit C	Chart
BKS (Barnes & Noble)	27.51	25.26	24.28	Chart

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

Trade Idea for 10/06/08

Friday afternoon's action showed that trader sentiment is what guides market action, not news. Monday the bailout bill failed to pass, and the markets tanked. Friday the bailout bill did, in fact, pass, and the markets tanked. Different input, same output. Why? Because sentiment is horrible. Every piece of news right now is a selling opportunity. It doesn't matter what the news is, it will be interpreted in the worst possible way. The fools in Congress have no idea what they are dealing with if, as I am starting to believe, their goal is to make sure the market rises. The market will choose when it will turn, regardless of Congress!

Speaking of the turn, I actually think it may happen soon, maybe as soon as this week. How do we recognize the turning point when it happens? Generally speaking, by sentiment that is so panic-driven that it will exceed any panic-driven selling we've seen thus far. A waterfall decline that happens in a short amount of time. What a nice thing to look forward to in the next week or so :-) Andy Askey at PTV Investing has determined that October 11th, next Saturday, is a relatively important cycle turning point. And as TK of Trading With TK observes, September & October are the months of major market turns, marking tops and bottoms. Indeed, the major market top occurred last October 11th. It would be an interesting symmetry if this October 11th (well, the 10th or 13th) turned out to be the bottom... of Major Wave A. Yep, that's right; even if we do see a bottom, it will not be THE bottom. That might not happen for a few years yet.

In the same way that the move from last October to January 2008 formed a perfectly complete a-b-c pattern that was really just wave A of a larger pattern, so does the move from last October to sometime in the near future form a complete A-B-C that is really just wave A of an even larger pattern. It's like an onion, and the level of complexity is a function of just how large the 5-wave pattern was that peaked on October 11, 2007. Fortunately, even if it's not the bottom, the upcoming turn will be a tradable bottom. Please note that the last candle on the chart was one that I drew in for illustrative purposes.

How can we trade this hypothesis? In fact, the reversal itself is not that tradable. The best place to be right now is cash. The best time to buy is after the turn, as stocks are coming back up. Buy after the bottom happens, not in anticipation of it. At that time there will be setups, and I'll share what I find. If you feel like you just want to try to nail that bottom, buy some out-of-the-money call options with October expiry for the S&P when you recognize that the market is in a major panic mode. Or you can buy them Friday or next Monday (assuming the 11th will indeed be a turning point), spending an amount equal to no more than 1% of your portfolio, preferably no more than 0.3%. With options in this volatile a market, you must act as though you are risking your entire upfront investment.

On Friday AIG was up over 20% at one point, only to close in the red. Generally with gains of that size, you want to sell at least a portion. MI opened at 24.00, gapping over the buy price, only to fall from there. The recent examples of AIG and MI illustrate the hazards and opportunities when stocks open above their buy prices. In AIG's case, the gap up on the day we bought it was followed by a pullback that touched the buy price, only to take off from there. Congratulations if you bought on the pullback. However, MI never stopped pulling back, so doing the same with that ticker would have meant a loss. My preference for stocks that gap up is to buy above the new high of the day, because it's safer. MI never made it back above 24.00 the rest of the day, so following such a strategy would have saved you a loss. In the case of AIG, such a strategy would've meant buying at 3.83 instead of 3.57. If you did buy MI, at least it was a reduced portion (or should've been.)

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
AIG	3.57	3.86	+8.1%	2.99	Consider selling at open	Chart
SIGA	4.01	3.33	-17.0%	3.19	SELL!	Chart
SCC	104.53	113.65	+8.7%	103.99	Be on alert for a day of extreme panic-selling; consider selling that day	Chart
MI	23.76	22.60	-4.9%	19.79	Consider selling on a close < 20.74	Chart

Not a lot for tomorrow. It looks like a bad open, with futures pointing to another triple digit drop in the Dow.

Trade Idea for 10/06/08

Ticker	Entry	Exit A	Exit C	Chart
SF (Stifel Financial)	50.31	47.78	44.47	Chart

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

Trade Idea for 10/03/08

As the charts indicated yesterday, we had a resumption of downtrend today, and in a pretty big way. It took gold down with it, and we were finally stopped out of SLW on an official basis. The trend is clearly to the downside, and who's to say when it will end? We bought SCC today and got to participate in the trend.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SIGA	4.01	3.39	-15.5%	3.19	SELL!	Chart
AIG	3.57	4.00	+10.8%	2.99	Consider selling on a close < 3.75	Chart
SCC	104.53	108.68	+4.0%	100.72	None	Chart

Curiously enough, the only long signals I have are in the financial sector. Go figure.

Trade Ideas for 10/03/08

Ticker	Entry	Exit A	Exit C	Chart
MI (Marshall & Illsey)	23.76	21.61	19.79	Chart

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

Trade Ideas for 10/02/08

Today was an inside consolidation day. I think we all needed a little breather! But don't get complacent. Tomorrow the action might just start up again. The ban on short sales of financials has been extended, but to my eyes charts favor one more push to the downside. Bear flags abound. (Bear flags are setups that favor downside: a weak rally that doesn't really get anywhere)

We bought AIG today, and it should have been a reduced portion since AIG opened above our buy price. Recall that in this situation you can either buy at the original buy price (if it gets back down there) at reduced risk percentage, or buy at the new high of the day using the original risk percentage; either way it will be fewer shares than originally planned.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SLW	10.21	8.45	-17.2%	7.99	None	Chart
SIGA	4.01	3.57	-11.0%	3.19	Consider selling on a close < 3.48	Chart
AIG	3.57	3.95	+10.6%	2.99	None	Chart

For tomorrow, another beaten-down stock that could bounce (alongside AIG), a short-side bet, and good ol' Barrick. The latter has been basing in almost the same range every day for the past two weeks.

Trade Ideas for 10/02/08

Ticker	Entry	Exit A	Exit C	Chart
SPF (Standard Pacific)	5.26	4.69	4.29	Chart
SCC (UltraShort Consumer Services)	104.53	100.72	98.99	Chart
ABX (Barrick Gold)	39.61	35.92	32.95	Chart

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