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.