9:00am (EST)

The bulls were looking good on Wednesday and were in prime position to break another layer of resistance but cautious words by Fed Chairman Ben Bernanke stopped the bulls’ 4-day rally.  The market held up well in the morning after the non-reaction to Greece’s vote of confidence but we mentioned the “final” vote wasn’t due until next week.

That left the ball in the Fed’s hands and they quickly fumbled away the momentum as the bears took advantage of more excuses.  It seems the main causes of the economy’s slowdown can be pinned on higher gas prices, a continued non-recovery in housing, a supply disruption from Japan’s natural disaster, higher commodity prices, and no job growth.  Did we leave anything out?

Of course, Big Ben said some of these problems are temporary and once they subside, the economy should rebound.  There was no mention of “QE3”, either, as the Fed said the $600 billion bond-buying program would end by the end of the month, as planned.  As a result, the bears were able to mount an assault over the last hour of trading which pushed the market lower by 0.65%, on average.

The Dow fell 80 points, or 0.66%, to finish at 12,109.  The index managed to trade above our 12,200 target as it reached a high of 12,208 but still closed below this level for the second-straight day.  Support is at 12,000 then 11,800.

The S&P 500 dropped 8 points, or 0.65%, to settle at 1,287 after trading up to 1,298.  It was also the second-straight session the index failed 1,300.  The bears will likely push 1,275-1,250 if the market fades.

The Nasdaq declined 18 points, or 0.67%, to close at 2,669 after trading to a high of 2,693.  Tech failed the 2,700 level once again and will make or break the bulls this upcoming earnings season which gets underway in a couple of weeks, if not sooner.  There is risk down to 2,625-2,600 if 2,650 doesn’t hold today.

There has been a lot of chatter about the current market environment as the talking heads continue to switch sides and Wall Street analysts downgrade/ or upgrade stocks after the fact.  Of course, no one knows where the market is headed tomorrow, next week, or next year, which is why we play trends. 

The only thing that is different from a few months ago is the volatility but the bottom line is we remain in a well-defined trading range.  What seems to be working though is buying dips and selling rips.  This means your portfolio should own a mixture of call and put options to help offset some of the volatility that we are seeing.  However, because of the volatility, the trading landscape could never be better and the market is setting up for a big move higher or lower once we break out of this trading range.

We have added a few more trades to our Watch List, including one for Williams-Sonoma (WSM, $37.36, down $0.51), which is setting up for a big move.  If we are right, the options we are following could be a windfall.  You have to see this chart.

We also want to wipe the egg off our face after exiting a trade a little early this week. 

Well, it wasn’t entirely our fault as we were “whipsawed” out of the trade once our stop came into play but we still feel guilty. 

We have been pounding the table on Zagg (ZAGG, $14.94, up $2.34) since the beginning of June on shares making a run to $14-$15 when they were under $11.

Our subscribers made over 150% of the July 12 calls (ZAGG110716C00012000, $3.10, up $2.10) which were closed this week, but the market gods robbed us of another 600% as we recommended these options at 35 cents!  Sometimes being whipsawed can save you money when stops come into play; other times, the returns can be higher than anything you have ever imagined.

It’s hard to feel bad when you make triple-digits on a trade but we should have trusted our homework a little more and lowered our stop.   

Like we said, the action now reminds us of 2008 and 2009 which were incredible years to trade options.  Last year was a little harder for option traders as the market stayed in a range for 5 months but the back half of the year was ridiculously good to us and our subscribers and we were still profitable.  Now you know why we love trading options every day.

As we head to press, Dow futures are down 95 points to 11,928 while the S&P 500 futures are lower by 12 points to 1,267.  Nasdaq futures are off 19 points to 2,210.  Subscribers, check the Members Area for the current updates and a possible New Trade if we get confirmation that a breakout or breakdown is coming.