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Weakening Weekly Wrap-Up

What was that?

Did we just finish lower on Friday than Monday?  We almost forgot such a thing can happen in Obama's magic market-land but here we are with a week in which the stock market had not one, not two but three (3) red days out of 5.  You have to go all the way back to the week of June 22, when the market was finishing a 600-pont down leg from June 15th, to see so much blood on Wall Street.  I have, for a month, been drawing parrallels betwen this market top and the market top that ended on June 12th and it's all about next week as options expire and things begin to get very interesting

As you can see from David Fry's chart on the right, we hit the very tippy top of our expected range on the Qs and then could not close the deal above our $40 line.  It didn't seem too much too ask – just a teeny, tiny little breakout and we would have been happy to buy some GOOG and get back into SPWRA and find some other 4-letter stocks to play with, even some semiconductors if the SOX had finally taken out our 308 mark but nooooooooooooo – the Nasdaq couldn't hold 2,000, let alone our 2,017 target, which they teased us with two weeks ago but never came back to.

And don't even get me started on yesterday's close.  For those of you who have ever doubted the power of the stick, David and I say HA!, as there has never been a more bogus end to a trading session than the despicable display of market manipulation that went on yesterday, just before the close.  The only good thing I have to say about this very sad state of unregulated market affairs is that at least we called it practically to the penny and played it perfectly because, as I often say to members: "We don't care IF the markets are rigged as long as we know HOW they are rigged so we can place our bets accordingly."

As shamefully despicable as these "stick saves" are at least they fall into a pattern that we have learned to recognize and profit from in Member Chat.  I was, of course, very bearish in the morning post as we expected a minimum 1.25% correction (1.27 on the SPY chart) by Monday, on the way to a 3% dip, minimum, so we can properly let some of the air out from under this crazy 15% run from July 10th.  3% is the bare minimum to satisfly our 20% (of the run) pullback test under the 5% rule and I set those targets in Wednesday's post as: Dow 9,100, S&P 980, Nasdaq 1,950, NYSE 6,400 and Russell 550 – those are the marks that will become next week's breakdown levels.

As to our break-UP levels, I had generously lowered the bar for the Nasdaq by 2 in my 1:07 Alert to Members on Thursday, where I said: "30-year auction went welll.  2.54 bid to cover on $15Bn at 4.541%, that’s strong demand and will give them an excuse to boost the market yet again!  Levels are:  Dow 9,432, S&P 1,017, Nas 2,015, NYSE 6,632, RUT 576 so let’s see if we can do it this time but not good if they fail."  Despite Thursday's late afternoon "rally" it was close but no cigar for 4 of the 5 with the Russell just ever so briefly making it to the promised land before also giving up for the week.  So we were loaded for bear on Friday morning and we removed our covers on our long DIA puts (very bearish) and ADDED move DIA Sept $90 puts (extremely bearish) as our first play of the morning. 

We were very satisfied with the dip by 11:14 and I set a downside target and said to Members: "If I were in charge of the stick, I’d let the market test 9,250 first as that’s going to burn off a lot of sellers and maybe attract some sideline play at the 2.5% rule (9,200 to be exact) and that’s where I’d make a stand and try to get 1.25% back (9,300-9,350) into the close." 

By 12:40 we took our cues to cut and run on the put side as I noted the EU had held Monday's average and set targets for a stick save finish in the Afternoon Outlook Alert at: Dow 9,350, S&P 1,005, Nas 1,990, NYSE 6,540 and RUT 570, reminding our Members "Getting back to there would be fake, fake, fake and failing there would be very bearish going into the weekend."  And where did Mr. Stick leave us at the end of the day?  Dow 9,321, S&P 1,004, Nas 1,985, NYSE 6,537 and Russell 564, not bad for a bottom call made 5 hours earlier! 

Yes, it may be an evil, market-manipulating program but it's one we've gotten the hang of and that can make for some very profitable trading while it lasts.  Of course, we are still looking for more of a downtrend next week as we test our 3% pullback lines.  Last Friday (Aug 7th), when we got a mega pump for no reason off the jobs report, I had said: "We may get a nice pop as technical traders come off the sidelines but we’ll still be looking for short opportunities this morning, probably buying out our DIA putters yet again.  It’s all about how we finish and, sadly, you never know that until the bell rings with all these crazy last-minute programs.  What will be our key indicator this morning is volume.  If we break out but the volume stays low – then it’s more likely the volume will come in to the downside later."  That was pretty much our blueprint for this week as well… 

Monday Morning we were very pleased with ourselves as we had gone very bearish into last Friday's early morning rally and those trades were all nice winners by Tuesday morning but already looking good at the week's open.  We made Russell 574 and QQQQ 40 (Nasdaq 2,000) our key indicators for the week and that guided most of our trading decisions.  Still we looked at bullish plays on IHI in the morning post and I wisely called for a quick exit on our FXI calls as they hit their high for the week.  We took advantage of a nice entry on CMCSA with a long buy/write and set up a long ERY bull call spread as well as an Oct/Aug spread, which is working nicely and has been much less stressful than playing USO this week.  I put my foot down on COF as they tested $35 at lunch and we went with the very aggressive Sept $40 puts at $6.15, which we took $8 and ran on the next day (up 30%).

Monday afternoon we picked up a very well timed spread on TIE as they bottomed out at $7.90 and we had a huge winner on FRE, which we got out of the next morning with massive gains.  At 2:30 I laid our our DIA put-selling strategy, which was essentially to sell the Aug $93 puts for $1.50 and buy them back for $1, something we had several chances to do this week including a very successful day-trade to close the week on Friday.  9,320 was the line I set for the Dow in my 2:30 comment on Monday afternoon and 9,321.40 is where the Dow finished the week Friday at 4pm.  

Despite my warning that the Dow volume was "stickable" at 2:53pm, we took a very bearish backspread on EOG, which was paying us $2.15 for the Sept $80 calls, now $1.40 (up 35%) but we're in no hurry to close them yet.  After the market closed, we set up another bearish backspread, this one on KBH, expecting them to fail $17.50 at September expiration.    

We had another "Testy Tuesday Morning" where we still expected a breakdown of our old breakout levels levels of Dow 9,297, S&P 1,000, Nasdq 2,017, NYSE 6,438, Russell 562 and SOX 308 despite Monday's stick save close and despite the pre-market pump.  My comment that morning was: "Of course it’s total nonsense but it’s total nonsense we can count on with 8 stick saves of at least 50 points in the last 90 minutes coming in the last 10 market sessions accounting for 400 points of Dow gains or ALL of our gains since July 20th when we "broke out."  I was concerned about our nation's housing vacancies and overall hoursing debt and the growing acceptance of "tent cities," a sign they are not going away soon.  I also predicted a short squeeze to top out FRE in the morning and they shot up to $1.89 just 20 minutes after the market opened, up over 50% from our Monday entry.   

In my opening Alert to members, I predicted: "If we do hold our levels – great!  But, if not, then probably a big sell-off ahead of the Fed, maybe 200 points by tomorrow morning."  At 12:21 I pointed out that 9,220 was continuing to hold on the Dow and, as that was down just 150 points, we decided to flip bullish on our DIA covers with a tartget to go more bearish if we failed 9,220 (we never did).  I was dead on with my bottom call at 1:03, saying: "Treasury Auction went off at 2.89 bid/cover at 1.78% on $37Bn in 3-year notes.  This is meaningless as it’s short-term but still an excuse for a little sticking…" and the Dow ran exactly up to our 9,270 bounce target.  We even took a quick bet on the DIA $93 calls that quickly stopped out.  

I also had my worst trade idea of the week with an LDK Sept buy/wrie at $9/10 ahead of earnings.  They are down at $9.22 now and we've taken out the callers at .35 and we're waiting a bit but, not the best trade overall…  We also did a too bullish backspread on LDK but the nice thing about backspreads is they are very easy to adjust.  Unfortunately, we were too bearish into Tuesday's close as the DIA Aug $93 puts hit our $1 target so we went into the evening with just the half cover.  Notice that Tuesday was not much of a trading day as we were already quite bearish so it was more about watching how well the levels held than anything else.  It takes more than a one-day breakdown for us to believe that things are really changing.

Thanks to the Fed is was another "Which Way Wednesday" and we had a good morning discussion about our levels and Fibonacci levels and overall market ranges so a good read if you need to catch up.  The pre-markets were very down but we set up and downside levels to watch in the morning Alert and we quickly broke over the upside, forcing us to flip bullish.  I also reiterated our plan to take a DIA strangle ahead of the Fed, those always seem to work and Wednesday did not disappoint with a 180-point move off the bottom followed by a drop back to the open by Friday.  At 10:16 I pointed out to Members that there was a Congressional Oversight Report on "The Continued Risk of Troubled Assets" which was getting strangly little MSM coverage and if you Google it today, you'll see it's still being ignored even though it contains the following: 

The problem of troubled assets is especially serious for the balance sheets of small banks.  Small banks’ troubled assets are generally whole loands but Treasury’s main program for removing troubled assets from banks? balance sheets, the PPIP will at present address only troubled mortgage securities and not whole loans.

If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value. Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.

The problem is compounded by the fact that banks smaller than those subjected to stress tests also hold greater concentrations of commercial real estate loans, which pose a potential threat of high defaults. Moreover, small banks have more difficulty accessing the capital markets than larger banks. Despite these difficulties    , the adequacy of small banks? capital buffers has not been evaluated under the stress tests

Just this morning, there is a follow-up to this in this morning's PSW Report (our Members' EMail Newsletter) by Mish who declares: "As of Friday, August 14, 2009, FDIC is Bankrupt" as the last 5 bank failures this week have pushed them over the edge with Colonial Bank costing $2.8Bn that the FDIC certainly didn't have.

Now where were we?  Oh yes, Wednesday's member chat….  So it was 10:34 when I reminded members: "Speaking of time.  Don’t forget you really want to be out of any Aug calls you have RIGHT now.  Not the calls you sold, the ones you own.  It was very lucky to get this kick back up – don’t push your luck."  It turned out luck could have been pushed a bit more as we ran up another 70 into the fed but we also caught a nice entry on the naked sale of the ERY (ultra-short energy) Sept $17 puts at $1.25 after seeing the oil inventories had yet another build.   We were in and out of DIA puts and calls into the fed, scalping dimes where we could on the bouncy action.  The only other play we made ahead of the fed was selling naked X $45 calls for $1.50.  That has not been going well so far and we'll have to decide what to do about it if we don't get the drop we expect next week.

We got the Fed statement at 2:15 and by 2:22 I had a highlighted version of the minutes sent out to members and my comment was: "This is NOT bullish – pretty much as expected but October is not far away.  Just the wishy-washy BS we expected on the whole…"  34 minutes later, watching the insane sudden run to 9,420, my insightful comment to members was: "WTF?"  Fortunately, I regained my composure 4 minutes later and said: "LOL, we got head-faked!!!   Good time to take out DIA $93 calls and Roll Dec $95 puts up to Dec $96 puts for .50."  That went well as we were able to buy back the DIA $93 puts we sold for just .80 and the roll up on our now-naked long puts gave us a 5% better delta to the downside, which turned out to be 180 points from that spot!  We also speculated even more bearish with the DIA Sept $90 puts at $1.20, which flew up to $1.70 on Friday (up 42%). 

My closing note to members at 3:47 was a bit less than bullish: "Bear case – This move was total BS of a nothing Fed statement that didn’t change a thing and the volume indicates there is less buying interest at these "breakout" levels than we would expect.  I see no reason to get bullish off this move as we haven’t broken Friday’s highs and we weren’t bullish then either (and we were right).   The big drops came on expiration weeks, not the week before and that was our worry from the start – that we’d have this prolonged top before the fall."  I wonder if my negative note led to the sudden market sell-off into the close?

Thursday Morning the futures were on fire and I wrote in Thousand-Point Thursday for the S&P 500: "I hate to be a gloomy gus but I had to point out to members last night that Foreclosures Set 3rd Record High in 5 Months."  The problem with being a fundmentalist is that I do worry about such things like – how is the economy recovering if 500,000 MORE people lost their jobs in July and 360,000 MORE families lost their homes and 140,000 MORE people filed for bankuptcy?  One out of ten homes in California is now up for foreclosure FOR 2009 – JUST 2009!  Come on folks, get real, if I told you the great depression was so terrible that one in 10 people lost their homes you would think that was just an awful statistic yet here we are just 1 year into a crisis and one in 10 people are losing their homes in Californa.  Just 2.5 years at this pace and we do catch up to the entire 12-year peak of the Great Depression.  

Notice that the image I used for my outlook on Thursday's action (left) is pretty much exactly what the S&P actually did into Friday.   It's not a coincidence, we used the same image for the June crash.  My morning outlook was: "… All these pesky "facts" that make it seem like you’d have to have a screw loose to buy at these prices…  I think it’s going to be cover or cash tomorrow, no matter what the market does today."   

We followed through with our plan, adding a short play on OIH by selling the naked $105 calls for $2.20, now $1.50 (up 32%) despite the stick save on Friday.  The Sept $100 puts are still $3.40 and we still like them if the markets sell off – we spread them with the Aug $100 puts at $1, now .85.  At 11:20, as the market finished it's morning pump I said to Members: "This is totally a commodity rally folks.  Materials up 1%, Energy up 2.5% so that’s about 0.5% on the indexes, which is all of the greens today.  If you regret not shorting something yesterday, now would be a good time to give it a shot.  SRS $12s at .55 are a fun play for those of you who like the pain, they could gain 50% real fast if the rally turns red."  SRS has been a catastrophe for us in the $5KP but this is a great example of the value of both scaling and taking your 20% losses as the next day the $12s made it to $1, where we took the money and ran.  That's an 80% gain, which erases 4 bad entries that lost 20% each time.  We are starting a new $100,000 Virtual Portfolio next weekend and scaling in and position sizing will be major topics of discussion.

We didn't do much during the day but into the close we added XLB Sept $30 puts at $1 and those were great as they hit $1.40 the next day.  We were actually too bullish into Thursday's close as the generally strong action led us to keep a 1/2 cover on the DIA puts at the day's end but that was something we quickly fixed on Friday morning, where I wrote up a whole post on "What's still bothering me" as we were holding our levels pre-market.  I said in the morning post: "We’re out at the top (we think) and looking forward to the opportunity to buy into the next dip but we will continue to watch out levels and stay ready for anything."

As I recapped above, anything was pretty much what we got on Friday and we caught the turn on the nose and made the right plays as we nailed our target zone but, as I said above, those levels are fake, fake, fake and we're literally not buying it but we're not so brave that we're going all out bearish just yet.  Cashing out our long plays into the run-up leaves us flexible into expiration week

We left ourselves with the 1/2 cover on the DIA Sept $93 puts into the close so a little wishy/washy in our bearish stance but we also added FAZ calls, expecting trouble in the banking sector (and we're already seeing some this weekend).  As I've been saying for a couple of weeks, the real sign of a turn will be when the media turns and we're still not getting that quite yet from what I've been seeing and reading over the weekend so far.  The tone for next week will be set in China, who are long overdue for a proper sell-off but you won't be hearing any bad news in the Chines press until it's too big to sweep under the rug.

So we watch and wait into expiration week, bearish but not committed to it just yet and we can only be disappointed but by an upside breakout here as we'll be missing the bus if it happens too suddenly.  Still, it's a lot easier to sleep knowing we're well covered this weekend, ready for the next opportunity to come along.

 


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  1. Hi Phil,
    About a month ago (before I was a subscriber) I shorted equal dollar amounts of FAS and FAZ.  As of today the FAS short is down 72% and the FAZ is up 46%.  So I’m down but actually pretty happy as my goal is to hold these until both go to sub 10 again.  Hopefully a bank pullback is in the cards soon as that will flip me to a net profit in a hurry.  In the meantime I plan to sell FAS puts as you recommended to a poster to lessen the paper loss.  Frankly until I joined PSW i probably wouldn’t have thought of doing that so THANKS!!
    Also, looking forward the the next 100k portfolio!


  2. You are very welcome Eben – glad it’s working for you.  Sometimes I worry if I’m doing enough to convey the most important concept of this site which is SELLSELLSELL options – that’s the best way in the market to make money.  You seem to have gotten that very quickly!