Not much changed today over yesterday…

After an extreme snapback opening rally in the first 6 (SIX) minutes of today trading, it was mostly downhill today, including a swift and sudden plunge beginning just before 3pm and continuing for about 20 minutes and 200+ points, before climbing back into positive territory in the last 30 minutes, regaining about 150 of the 20-minute/200 point plunge by the close.

Today’s huge range was similar to yesterday’s and certainly didn’t offer any clarity to what may lie ahead, and was clearly NOT positive.

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There is certainly a feeling that if any more negative economy or macro news comes out, or if there are any negative earnings reports this week, that the market could head south hard and fast. 

Significantly, LEH and COST both report tomorrow and if either or both miss estimates, or for example, LEH reports even larger loan losses than they predicted and/or COST reports slowing sales, it could be an ugly end to the week.

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We remain extremely cautious until some clarity emerges.

Coach BD

Obviously, the market did not repsond positively to the FED’s action today.

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It appears that everyone was expecting a 1/2 point cut and that the markets had already priced that in.  So once again we find ourselves back in No Man’s Land…

The DOW plunged back under its downtrending 50 Day MA but closed just above support at its 40 Day MA.  It also closed just below its downtrending 20 Week MA, but both the 40 & 50 Week trendlines remain positive and may provide support.

The S&P closed below its 50, 40 (both downtrending) & 200 (flattening) Day MA’s, and its 20 & 40 Week MA’s, but apparently found support at the still uptrending 50 Week MA.

The NAZ also broke below its 50 & 40 Day MA’s but still remains well above the 20 & 200 Day MA’s and at or above all of its still uptrending Weekly trends.

The DOW & S&P were both down on much higher volume while the NAZ was down on increased volume but still only average.

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Where we go from here is anyone’s guess. From a purely technical perspective it would appear that the ST trend of Lower Highs and Lower Lows is still in place, with all the averages having made attempts today at new relative highs but falling hard after the FED news.

We remain in extreme caution mode regarding Long exposure and will be looking for confirmation of a continuance of the ST downtrend to reestablish Shorts or add to existing Short trades.  We kept our neutral hedges on the majority of ongoing Short trades to guard against any snapback rally and will wait for a strong confirmation move or reversal before taking any action.

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Patience is the required in this Jekyll & Hyde kind of market.

Coach BD  

Though the market was strong out of the gate today, from about 10:30 on it was pretty flat on about equal volume to Friday’s action.  It is clear traders are waiting to see what the FED is going to do…AND, what they say about it.

Tomorrow we believe that whatever the response is to the FED’s action will almost certainly determine the direction for the remainder of the year.

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We are keeping most of our positions tightly hedged or adjusted to neutral ahead of tomorrow’s FED action. 

Coach BD

Hello All,

As I hope you all have seen, we are trying to post daily now and respond to questions from many of you about commentary and strategies, etc…

We are also constantly editing content and adding as we can.  My writer and I are hoping to have all of the content ready by the first of the year, and have the site fully functional.

We have run into one roadblock though…  We are now looking for a new developer to finish the website and get it up and running.  Our former developer was not an experienced WordPress developer and once we got into the details of the features and functionality we wanted the site to have he decided that it was a bit too much for what he had estimated in getting it launched.  Plus, we were driving him crazy with revisions and questions about how things worked, or would work, etc…

We have identified 4 possible new developers who are all very experienced with WordPress and who all have expressed confidence in getting done what we need.  Now it is just a process of deciding who we think is the best candidate vs the cost, who can finish the job on our timeline and be able to provide us with good support as we grow the service.  We should have somebody on board be week’s end.

Please be patient with us… we are trying to give you the best possible service and provide an invaluable forum for all of your investing and trading education needs.  Over the next couple of weeks this may result in not being able to respond to all of your questions in as timely a manner as we would like…  But be assured, that once the service is up and running our goal of provding timely commentary and response to your needs and questions will be priority number one.

Thanks to all of you for your comments, questions and support.

Coach BD

Excellent inquiry and understanding of our Long Trading Rules from Leo…  Our responses are included below.

Leo wrote:

“Good afternoon,

When you have a moment, please clarify one item if you would.Our Long Trade Rules (3) says…“…Our goal is to select the ITM position where the premium can
be “neutralized” by the sale of a front-month OTM Call…” By premium are you referring to the “time” portion only of the ITM
Call that we would purchase?”
[Coach BD]  YES. 

“For example…

…If the Front Month OTM Call premium is $5.00 with all OTM
premiums being 100% time value.

…are we looking for  an ITH Call option where the “time” portion
only is ~$5″
[Coach BD] YES. 

“In other words, we look for a Call option (our Target Month + 2
months) where the time portion of the Premium would have a time
value of ~$5.00.”
[Coach BD] CORRECT. 

“(Where the ITM Total Premium [Coach BD] PRICE  is $20 of which $15 is Intrinsic Value and
$5 is Time Value).”
[Coach BD] Remember “Premium” is the “Time Value”, or “Extrinsic” portion of the “Price”.   

“Please let me know if this is correct.”
[Coach BD]  Good work.  The strategy behind this goal is that we are able, if we choose, to neutralize the ENTIRE premium we had to pay for our ITM position with a single sale of an OTM strike, giving us a ”fair value” (all intrinsic value) position through expiration of the front-month short option. 

We may choose to do this on entry…

1) If we are entering a bit more speculative trade (we feel there may be some downside in the ST) or if our strategy was to leverage a larger position with the use the OTM sale (Leverage = the ability to enter a larger position with an equal risk than simply entering a long position without protection.

2) Again, we are a bit cautious about the ST volatility of the trade and we want to use “some” of the Premium sold to pay for Put protection, reducing the downside risk even further. 

We may not do this if…

We are very confident of our evaluation, and we believe the entry price is a value, or even undervalued, AND, we are following our rules for set percentage entries (i.e. 1/3, 1/4, etc that both Sam and The Trade Coach outlines).  Thereby, the percentage entry itself is the full amount of risk we are willing to accept to open the trade and there is no need to hedge it….YET. 

Though as both Sam and I have suggested throughout these past few months… In a market like this one, without any strong clarity of direction, most, if not all, trades should be opened with some hedge, unless the apparent value is so compelling that we feel the downside risk is almost nil.

Thanks Leo.

Coach BD

Well, we didn’t get that follow through rally we were hoping for today.  However, both the DOW and S&P closed above their 50 Day MA’s on generally weak trading, and on weaker volume.  Perhaps the market is simply digesting (a term technicians like a lot) the gains of this week before heading higher.

The only mildly negative today was that the NAZ closed lower and just back under its 40 Day MA, and made no real attempt at all at testing its 50 Day.

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Our guess is that Monday will be fairly uneventful ahead of Tuesday’s FED action.  We expect that things will get very exciting after that and by the end of next week we may have a pretty good picture of the market’s direction for the balance of the year.

Have a great weekend.

Coach BD 

As we noted in yesterday’s markey commentary, today both the DOW and S&P tested their respective recent highs for much of the day.  Finally, following the President’s announcement about mortgage rate action, all of the indices rallied strongly to the close.

All of the averages closed back above ALL of their longer term weekly MA’s (20,40,50) after spending much of this month below one or more of those longer term trendlines, and both the DOW and S&P closed strongly back above ALL of their Short-term MA’s (20,40,50).

Only the NAZ failed to show confirming reversal strength by closing right at its 40 Day MA, and still below its 50 Day.  It would be a very good sign if the NAZ could clear that hurdle and close above 2720 tomorrow.

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However… On the “remaining cautious” side of today’s rally, both the DOW and S&P advances today were accompanied by increased volume over WED but still only on average volume.  The NAZ’s advance was on decreased volume vs WED.   This is the only sign of caution we can see and a good reason to wait for a strong confirmation rally with a big increase in volume before making any long commitments.

Many market technicians would contend that we are in the process of making what is known as a classic “Head & Shoulders” pattern, and that we are in the process of completeling the the right shoulder.  In this classic TA pattern, we could expect a fairly meak rally up to around 14,000, mimicing the action of last July, and then we could expect a sustained correction.

Bottom line, in order to return to the good bull run action that we’ve experienced over the past year, all of the averages need to breakout above their OCT highs on increasing volume. 

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The Coach is somewhat dubious that we can muster that kind of optimism and comittment, given all of the bad economy news, to make such a move, at least this year.  It just doesn’t feel like there’s enough positive uumph… to get us there.

Coach BD

Today showed some positive signs but still nothing definitive, and all on just average volume.

Both the DOW and S&P made runs at their recent highs today but fell short.  The DOW also ran up against resistance at its 40 Day MA.  The S&P closed right at its 200 Day.

The NAZ had a generally positive day though the average is sitting in a kind of No Man’s Land.

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We would expect that both the DOW and S&P will try to break above their recent highs of last Friday and also attempt to rally back above all of the ST trendlines, most significantly the 50 Day MA.  If successful we may see some significant up volume return to the market in an attempt to reverse this downtrend.  If these attempts fail we wouldn’t be surprised to see another significant leg down similar to the action that occurred after the 10/31 highs.

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The one event today that gave us some optimism about a possible overall upward move was that after the Moody’s negative report on MBIA and ABK came out and these stocks began collapsing, the market digested the news and moved back up to finish near the day’s highs.  We hold both MBI and ABK as ongoing short trades.

Keep those hedges tight.

Coach BD   

A continuance of the downward trend still appears to be in place.  Over these first two trading days of DEC no positive action has occurred to reverse this trend.

Today the DOW closed back under its 200 Day MA for the first time since it broke above it last WED.  It also attempted breaking above its now downtrending 20 Week MA both last week and yesterday without success.

The S&P never made it above its 200 Day and now may be poised to test or break below its steeply declining 20 Day MA.  A break below the 20 Day would be a fairly bearish sign and yet another confirmation of the current short-term downtrend.

And finally the NAZ appears to be following its 20 Day closely on that trend’s steep decline.  The NAZ is also back below its 20 Week MA after closing just above it at the end of last week.

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Key levels to watch over the next few days are DOW and S&P closes below their respective 20 Day MA’s and a NAZ close below its 200 Day MA. 

Not currently an environment to be entering long trades.  Keep hedges tight or lighten up and be looking for short trade candidates.  

The news still appears to be getting worse with financials so the significant boost of last week’s action may offer some good entries on many of those over the next few days…  (i.e. GS, MS, LEH) …just keep in mind that The FED action next Tuesday (12/11) may give a temporary boost so that should enter into everyone’s thinking about any action prior to that.

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Over the past two days we have taken advantage of last week’s upward movement to cash some of our short trade hedges that we put on last WED in that big move up.

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Also some significant action with USNA today.  See USNA thread for details and analysis.

Coach BD