Falling Knives

Sold out of all my puts at the first higher high for a solid profit. Loaded up on DIG for a bounce in oil & gas.

Why?

1. Price action dictated to sell my puts.
2. It's the day before op ex. Traditionally, the fed likes to mess with anyone short on opex by announcing something the night before.
3. Doing that would force a double-bottom, giving technical traders a justification to buy.
4. Energy is oversold.

If we break the morning's low I'll have to bail. I'm not looking for a killing. Option premiums are too rich with the VIX at 75+ so DIG will get me 2x leverage without the potential for VIX contraction on a rally.

That was so yesterday

Instead of paying attention to the slow thaw of the credit market, the sellers are focusing on headlines like sharply lower retail sales. Shocker. If this kind of news is going to spark a sell-off then we have too much headline risk for any kind of sustainable rally, especially with earnings seasons where management is going to constantly issue cautious statements on their outlook.

Dow down 500. Armageddon is back on the table. Of course, it always was, albeit my thinking was that it would be delayed by massive government meddling on an international scale.

Bernanke said this morning that it would take time for the credit markets to open up again. Mr. understatement. I think we retest the lows and 50% chance we plunge right through.

100% short
QQQQ
IWM
SPY
EFA

Note: Gotta love the penny bid ask spreads on the QQQQs. It really does take the sting out of making moves.

Did I mention I have no patience?

Sold out of my longs and went short the Qs, Spy and IWM.

Took a pounding on my longs. What was I thinking? Oh yea, I was thinking that worldwide coordinated injection of a trillion dollars into banks might lift the market for more than a day. How silly of me. So much for that thesis.

I started worrying yesterday. Today was the key follow-through day and it's not happening so back to my original game plan of puts on the downside.

One thing about post 10/14 open is that it's a very consistent trade to the downside across the board.

Patience is a virtue

As the "Fly" says, "If this market is in classic melt up mode, it will trick the shorts into believing we are heading lower. They’ll get back in, then BAM, the guillotine of certain death will reign down on them, towards the end of the trading session." What I've noticed is that there is a lot of supply at these levels waiting to get out even. My thesis is that it will take some time to work through that supply, but only a day or a half-day. I would be very surprised if we roll over after the record run yesterday. But backing and filling is to be expected.

Let's hope that is the case. Patience is a virtue. You don't have to get it all at once. Wait for price action to dictate entry points.

Longs:
Drys
QQQQ
RIG
SPY
XLF

Buying at the open is for fools

Doubling down at the open. How many times do I have to learn not to buy into a gap up at open, even if the government is egregiously pouring trillions into equities.

Other problems with options at the open.
1. The spreads are too large.
2. Waiting for the spreads to come down to reason practically ensures you're buying at the spike.
3. You cannot properly judge the trend. Note to self: pre-market trading is a worthless leading indicator.

Flip to Long

This rally looks to hold. A lot of positive chatter from money managers that this is real relief in the way of international intervention. MS gets another investment look from a Japanese bank looking to inject 20% equity. Everything was cooling off the initial spike until that news hit. That was potentially a big issue.

Brian Shannon drew a graph at the beginning of the day that has played out almost perfectly.

I closed my IWM, SPY and EFA puts for a double instead of a triple. That's the difference between Friday and Monday. Live and learn. Next time I smell government officials meeting I'll sell my shorts early.

I flipped after the afternoon dip (also predicted by Brian) and bought the NOV/DEC SPY and QQQQ atm calls for a 500 - 1,500 point run to the upside.

"The Fly" says we will back and fill tomorrow and then smoke to the upside on Wednesday. He's often off on timing a few days but not the direction so I'm going to hold my calls inspite of a retreat tomorrow.

There's still dangerous headline risk so I'm cautious about holding too long. I'm not 100% long like I was 100% short. We are, after all, just hitting a snap-back rally in the middle of a catastrophic bear market. Brian showed a graph of prior declines where the rally on average retraces 75% of the decline. I don't expect that here but I do expect another 1,000 points to be reasonable before a retreat.