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.