3:30pm (EST)

What a difference a week made…

The market is now in the red year-to-date (YTD) as the bears showed just how brutal they can be.  Often times, the market or stocks will fall faster and harder than they rise and there were plenty of warning signs we used to go short as the indexes started to break key support levels.

The fact that the market turned on a dime made it easy to call the recent top and here where our thoughts on Thursday morning:

“As we prepare for this event, it’s really is hard to say where the market goes but we do feel the Dow could move 400 or 500 points over the next few weeks.” (END)

Well, we were right but way off on our timing. 

On Friday, despite a solid nonfarm payrolls report, the Dow lost another 140 points, or 1.3% to finish the week at 10,380.  The end result was a 628 point beating that put the index at its lowest level since late February.  For the week, the Dow fell 5.7%, its worst weekly percentage decline since March 2009.

We were watching 1,150 as support for the S&P 500 and we knew once it fell, it was going to get ugly.  The index gave up another 17 points, or 1.5%, on Friday to settle at 1,110.  For the week the S&P lost 6.4%.  

The Nasdaq which failed support at 2,400 and was hit the hardest, lost another 54 points, or 2.3%, and finished at 2,265.  The index tanked nearly 8% for the week.

Of course, most of the selling pressure came on Thursday when the Dow traded within a 1,000-point range, fell below 10,000, and finished the day with a 350 point loss.  Friday was a 300+ swing from positive to negative territory.

The Dow started 2010 at 10,428 and is down less than 1% YTD.  The S&P 500 started at 1,115 and is also off by less than 1% while the Nasdaq is down 4 points from its 2,269 start.

Uncertainty on how Thursday’s wild sell-off happened will now go to to the Hill (imagine that) next Tuesday and U.S. Representative Paul Kanjorski has said he will investigate the cause of the plunge.  He went on to say that the market’s drop was “startling,” and said the computer glitch that caused Procter & Gamble’s (PG, $60.31, down $0.44) stock to plummet below $40, briefly, and the market’s slide was unacceptable.

And what about the VIX?  The CBOE Market Volatility Index (VIX, 40.95, up 8.15) surged to an 52-week high, peaking at 42 on Friday.  Folks, the VIX was at 16.5 last Sunday and here were our thoughts:

“The VIX has traded as high as 36 to its recent low of 15 over the past year and we called for the VIX to trade to 15 back on March 9th.  This, along with our targets having been nearly been reached, is why we are a little cautious”. (END)

We told you this index measures “fear”; high readings mean Wall Street is nervous and bearish.  A low reading indicates calm and the Street is bullish.

Well, we saw fear and panic during the sell-off but we used it as an opportunity to open some put option trades, not to get out of the market like most people were doing.  We have told you we are neither bullish, nor bearish, by nature…we just want price action and we are finally getting it. 

This type of environment can be tricky to trade because there will be snapback rallies and huge intra-day price swings but we thrive in markets like this.  We are still researching some of the downside targets on where the market might be headed but the trend right now is lower.

At quick glance though, you can almost bet the indexes will test their lows from Thursday:  Dow 9,787, S&P 500 1,065 and Nasdaq 2,185.

The first line of defense for the Nasdaq would be 2,050 and for the S&P looks like it could test 1,030.  The Dow could fall to 9,500 if the selling continues.  If these levels are broken then we could get a nasty correction.

Our 2010 CLOSED Trades Portfolio has been updated and we have a quite a few positions still open that we are monitoring.  The good news is we are picking up momentum, too, as the portfolio is up nearly 20% YTD, including all of our open trades.

We will be back in the morning with another update but we wanted to remind you that you shouldn’t be nervous trading a down market.  We have been closing some of our call options and adding put options to take advantage of the downslide.  Although we got caught in a few positions, we think there will continue to be plenty of opportunities in the weeks and months ahead to make some great trades.