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Making Money In A Down Market!

|Includes:DECK, EOG, Goldman Sachs Group Inc. (GS), JPM, LVS, MGM, NFLX, PRU, SHLD, WFC, WYNN

In my Market Forecast for this week, I mentioned, "SPX 1120 could provide some initial support, but, below SPX 1120, the market could test SPX 1080."  On Tuesday, in our Trading Room , I said,

May 18, 2010 12:13 PM
should at least test 40 on this run...

From Monday through Wednesday, SPX tested 1120.  SPX closed just above 1120 on Tuesday, and, yesterday, SPX closed at 1115, below that SPX 1120 mark.  And, what happened today?  SPX plummeted down below 1080.  It fought with the 1080 level, trying to hold.  But, just before the close, the market sank lower and SPX barely closed above 1170!  VIX closed above 45 today!

This is the power of technical analysis.  As individual investors/traders, it is often not easy to gather all the information out there.  Even when you have the information, it is not alwasy easy to interpret the information correctly.  What the charts can provide is a place for "collective intelligence".  What is shown in the charts are the collective thoughts, intentions, positions of all the people that are driving the markets.  You just have to learn to "read between the lines"!

SHLD dropped another 10.91% today.  The May 105 puts that we happily took a +347% profit on yesterday at $7.1 were bidding at $16.3 at the close!  We got into these puts at $1.59.  That's a multiplication of more than 10-fold in just 3 days!  Of course, we are happy to have locked in the profits as we have to be cautious trading options that expire in just 2 days. 

I got up this morning, after seeing the board, the first thing I said was,
May 20, 2010 6:51 AM
good morning!

everything is down, take your pick!

Indeed, it was a day of "dart throwing".  If you had closed your eyes and picked a downside play in the morning at open, you probably made money!  I mentioned many plays in the Trading Room, but, because of how fast things move just before the expiration, many of these trades are for the Trading Room only.  This is also to help protect members that are following our trades through email alerts and not necessarily sitting in front of the computer, watching the market, and may not be able to react.  We did have a few nice daytrades published though:

May 20, 2010
11:59 | HappyTrading DECK ($128.00) Sold to Close 05P130 May 130 put, at $3.00 +25%
10:50 | HappyTrading EOG ($97.60) Sold to Close 05P100 May 100 put, at $3.20 +19%
09:59 | HappyTrading NFLX ($93.30) Sold to Close 05P100 May 100 put, at $7.00 +43%

As things were volatile towards the end, I decided to cash them out and not hold them overnight.  Both DECK and EOG look like they could take a big drop tomorrow if the market falls lower.  As mentioned above, in the last 30 minutes, the market did a quick nosedive.  SPX fell nearly 20 points!!  AAPL, in particular, went from around $141 to just above $137.  In the Trading Room, we were looking at the May 240 puts today.  I did a quick trade, just for fun, and made $1000 in 8 minutes with an in-and-out trade from $2.6 to $3.6.  No biggy, but, I thought it was kind of fun!    These May 240 puts closed at $4.5 today, and, could go much lower tomorrow.

Most sectors were weak, as you might have expected, but, financials were especially weak.  XLF fell 4.65%.  GS fell $4 to close at $136.1.  PRU was down 6.57%.  JPM and WFC lost 3.94% and 4.62%, respectively.

On Tuesday, I mentioned to look for downside plays on the casino names.  Today, WYNN fell almost 7%.  The May 80 puts gained +289.29% for the day!  LVS tumbled 8.74%.  The May 22 puts went up +231.82%.  MGM dropped 7.83%, but, since it's only a $10-ish stock, it's hard to trade options on.

The Dow ended the day down 376.36 points; SPX lost 43.46 points; Nasdaq tumbled 94.36 points.  Let's jump straight to the charts and skip the sector ETFs, as most sectors were deeply in the red:


SPX dropped 43.46 points to close at 1071.59, below the 1080 level.  Its daily MAs and MACD curved lower.


Nasdaq tumbled 94.36 points to close at 2204.01, barely above the 2200 level.

"Flash crash"?  What "flash crash"??  What happened 2 Thursdays ago turned out to be a good reference point for the downside, as we are visiting them again now.  Market does its things.  It might not make sense right when things happened, especially with big movements, but, eventually, things do kind of "fall in place" (no pun intended).  One thing about trading this market is that it's better to keep an open mind and not fight the market when it is going fast in a direction.  The daily MAs on the market indices are all pointing down and they are in a bearish formation (see Market Forecast).  In a market phase such as this, it is definitely easier trading the downside.  The hard thing for a trader to develop is to be just as comfortable trading the downside plays as the upsides.  But, with some practice, it is really the same.  Some of our traders used to screen-capture the charts and flip them upside down to look at downside play.  Not a bad idea, if you're new to reading charts.

This market has come down quickly, which is usually the case on the downside.  Barring any special news, the market should be weak in the morning and could test SPX 1060.  In the afternoon, we might see a short-covering rally into the close.

Good night and HappyTrading! ™

Disclosure: no positions