9:00am (EST)

“While we should get the pullback we have planned on, we still have to guard for a snap-back rebound because the Fed could be in play again.  Many believe the Fed wasn’t going to act on another round of quantitative easing because the economy was “recovering” but the latest headlines are painting a different picture.

The important clues to watch for will be the major support levels we have just covered.  If they hold, and the Fed does do something, then the pullback could be mild.  If the bears gather enough momentum and crack several layers of support while the Fed sits idle, then we will be on the verge of a trend change.”  (4/8/2012 Weekly Wrap/ Monday Morning Outlook)

The bears had to wait 3 days to slow down the bulls momentum but Monday’s open was worth it for those who are short the market like us.  The major indexes opened to a sea of red and spent all session trying to hold down the second wave of support.  The first wave was cracked during the prior week which our chart work showed but the bulls were able to hold off the onslaught just long enough to be saved by the closing bell.  Although the market finished slightly off their lows and above our near-term support targets for the session, Tech didn’t as the Nasdaq closed below 3,050.

Tuesday’s session was a follow thru as the bears were able to push the second wave of support and then some as the Dow closed below 12,800 while the S&P tested 1,350.  The major indexes were on the verge of totally collapsing as each was down 3%-4% for the month following the 2% pullback.

The talking heads were thanking Alcoa (AA, $9.85, down $0.32) for better-than-expected earnings following their report after Tuesday’s close as the market made an expected bounce on Wednesday.  Alcoa’s surprise was nice but it wasn’t the catalyst for the rally, it was a simple bounce off support.  We closed 6 winning puts trades in the morning as we figured a test to resistance, which was prior support, was coming. 

Typically, after a break of a strong uptrend, a stock or the market will go back and test the rising channel that had been broken.  These types of patterns are known as bear flags or dead cat bounces so we knew there could a continuation on Thursday as the bulls made up less than half of Tuesday’s losses.

Futures were pointing towards a huge open on Thursday before the unemployment figures were released but were hammered after Initial Claims rose by 13,000.  It didn’t matter though as the market soared and reclaimed some support following a 1+% gain across the board.  The rally lasted throughout the day as Wall Street eagerly awaited Google’s (GOOG, $624.60, down $26.41) quarterly results and the hope of a better-than expected China GDP (Gross Domestic Product) number which was expected to come in at 8.4%.  There was Wall Street water cooler talk that China’s GDP number could come in at 9% or better.           

Well, one-out-of-two came true as Google beat estimates (but missed on revenue by a smidge) while China disappointed as GDP came in at 8.1%, down from 8.9%.  Futures were down heavy before Friday’s opening bell which was exactly what we wanted to see as we have been loading up on put options over the past few weeks.