Options Trader Outlook: It's Fall-Down Friday, Dubai Cruel World!

| About: ProShares UltraShort (GLL)

Well, you can’t say we didn’t see this one coming.

Not Dubai in particular, but I’ve been warning for weeks that we have gone too far, too fast and just this Wednesday I pointed out that gold had gone insane (the GLL calls I outlined in the morning post will do amazingly well today) and we pressed our short bets on Wednesday and went over 60% bearish into the holidays. In fact, at 11:56 on Wednesday, my comment to Members was "On the whole, I’m fighting the temptation to short everything…"

Anything could have triggered a sell-off in this market of denial. As Tommy Lee Jones points out in "Men in Black": "There’s always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they Do… Not… Know about it!" That’s our burden as we discuss the market fundamentals while others party in blissful ignorance - we are the men in black and we do know what’s really going on in the world…

While it may make us overly cautious at times, it also helped us digest our food yesterday and wake up in a great mood today as we are well prepared for this little market correction. I quoted PT Barnum Wednesday and, since my point is made so well this morning, I’ll quote him again because it’s good advice for all traders to follow:

"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."

Even this morning, as the Dow futures hit 10,200, I sent out a 5 am Alert to Members discussing a trade idea to use the long Dow futures to hedge anticipated gains from our short positions. It doesn’t take much of an up move in the futures to return a hell of a lot of cash and we have a clear stopping line at 10,200, but it’s the FTSE we’re watching for our exit point as they struggle to stay above 5,150.

Click to enlarge8:30 Update: 10,250 was our stop line on the Dow as that’s a nice $250 per contract and we are going to be using that as our watch line for the day. I will remind members that 10,250 is the support level we were aiming for last week along with S&P 1,100, Nas 2,187, NYSE 7,000 and Russell 600. Very simply today, 3 of 5 below is bearish, 3 of 5 above is bullish (not very but we’ll take some bullish momentum trades).

The Dubai story by itself is not something that should be taking us down, it’s merely a reflection of how sensitive the markets are to bad news. Today is "Black Friday" for the retailers, traditionally the "make or break" day for the year, but this year is already broken and even if all the king’s horses and all the king’s men show up to the mall and BUYBUYBUY they aren’t going to put retail together again no matter how many remotes GE/CNBC tries to show you of busy stores like Best Buy (NYSE:BBY) (who carry a wide range of GE products) and no matter how many idiot analysts (2 already this morning) who tell you you’d better join them before inventory shortages cause you to miss out (seriously, there have actually been people saying this!).

On Monday we charted the 2.5% down levels for the week. For the FTSE it’s 5,199, so that is our expected bounce line for that index. The 5% rule dictates a 20% retrace of the drop from the high of 5,375 so that’s 175 points, which means we need to see 5,235 on the FTSE before we have anything more than a weak bounce. I was smart enough to calculate the retrace levels for us on Monday’s chart since I knew I would be on vacation today and without my usual spreadsheets (aren’t I clever), so we’ll be looking for: Dow 10,125, S&P 1,060, Nasdaq 2,100, 6,950 and Russell 576 to hold up if the above support levels fail (and it will not be good at all if they don’t!).

Sorry there is nothing more profound than watching our levels, but I am on vacation and we’re perfectly set up for this (and we just pulled a nice win on the Dow futures) so all I can say is have a good weekend and - watch those levels!