1:05pm (EST)
The selling pressure from Friday has carried over into today’s session as Wall Street gets back to work following a 3-day weekend. The overseas markets were weak on Monday and the futures markets here at home reflected a test to the downside support levels we mentioned in our Weekly Wrap and again this morning.
The rally from last week started to fade once we hit resistance, which we also nailed, as the bears finished with back-to-back wins. Economic news is light this week, following the flood to start the month, and today’s better-than-expected ISM Service numbers did little to stop the bleeding. The index posted a print of 53.3 for August, which is up from the 52.7 reading for July and greater than the 51.0 that was penciled-in.
The tea leaves from last week were an easy read once we saw trouble at resistance and the fact that the S&P Volatility Index (^VIX, 37.93, up 4.01) failed to take out 30 and is now approaching 40 again was a good clue. Last Thursday’s Initial Claims numbers were an omen and you could almost feel the wind come out of the bulls sails on Friday.
The Dow is currently down 207 points to 11,033 and has traded below the 11,000 level, earlier in the session, while the S&P 500 is lower by 21 points to 1,152. The Nasdaq is showing a decline of 42 points to 2,438.
The good news for us is that we added put protection in August and some of those trades have rebounded nicely which is the point we want to make with options. Sometimes, when you take positions, it is possible to have an option trade lose 70% of its value only to come back to hand you double and triple-digit profits.
Of course, sometimes losing positions don’t come back but the key is to give yourself enough time for the trade to play out and to stick with it if you still believe in the setup. If your chart work is telling you a stock is going to fall below $20 but makes a quick trip to $22 on good news, would you panic? Not if you trust your homework.
To make a long story short, we have profits to take as one of our current trades is showing a gain of 20% after being down 75%. This is how options work. They are volatile. Sometimes you can be up 100% in 2 days and suddenly find yourself closing the trade for only a 10% gain a few hours later.
It all comes down to how you handle the situation and how you control your emotions.
We know we have Rambled On for long enough but we wanted to explain how our chart work helps keep our emotions in check. We know we aren’t going to win every trade but we try to hit 70% of them which is what our 4-year track record shows.
Yes, we will have winning streaks and losing streaks; and at times the market will be choppy and volatile – and our trades will reflect this. However, our 2011 CLOSED portfolio is showing some sweet profits for the year and that is all you can ask for, especially when the major indexes are down 8% for 2011 with today’s action.
Subscribers, check the Members Area for the updates and make sure to ring the register on our Sony (SNE, $19.75, down $0.98) put option trade!
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