The headlines on CNBC.com tell it all:   “Dow, S&P Log Worst Thanksgiving Week Since 1932″, “Gold Set for Second Weekly Loss, Technicals Weigh”, and “Asia Ends Lower on Europe Deadlock”.

Below is the current chart of the S&P 500.  You can see that it closed at its lows on “Black Friday”, an ironic coincidence.   You can also see that it has been down for 7 consecutive days, which is really quite rare.  This latest downturn bears a close resemblence to the one we had at the end of July.  That one went from 1350 to 1125, almost a 17% drop.  If the current decline is of a similar nature, that would bring us all the way down to about 1054! 

Well, one way to hedge against being too early on a trade is to cut your allotment in half and make two trades instead of one.  I did this the other day, and it paid off nicely for me.  On October 18, sensing that the Nasdaq was becoming overbought and weakening, I bought November 19 QID calls at 2.85  (QID is an exchange traded fund that double shorts the Nasdaq 100). 

About a half hour after I made my purchase, and with my position basically flat, it was announced in a British newspaper that Germany and France had agreed to boost a euro zone financial rescue fund to two trillion euros ($2.76 trillion).  This was more rumor than fact, but it nonetheless caused an immediate panic buying reaction in the U.S. stock market.

Stocks blasted higher over a 15 minute period, pushing QID down from 44.65 to a low of 43.50 (about 2.5%) in only 15 minutes! My call options of course, were crushed.  Before I knew what had hit me, my options were down to about 2.30!  (See two day chart of QID below)

                                                                                   Chart courtesy of bigcharts.com

 But I have learned from much experience that you don’t panic in those situations.  If nothing else, the Nasdaq market makers have just bought an awful lot of quickly dumped stock that they will need to get rid of at higher prices.  As they push the bid/ask spreads higher, the stocks will climb back, and at least retrace a portion, if not all, of the panic trading period.

 One way to really take advantage of this is to buy the second half of your position following the meltdown.  But you must ensure that there are signs of stability, so that you are not simply “catching the falling knife” and about to lose even more money.

 Signs of stability will include candlestick figures such as a Doji or hammer, along with some decent sized volume on the first upside bar.  But you have to react quickly, or you won’t derive the benefit of buying near the bottom.  Stocks can rebound in a NY minute, as they say.

 So I bought the second half of my position, at 2.35, and watched intently as the QID wiggled higher.  We were near the closing bell, and I was hoping we would get out of Dodge without another wave of buying.  But not to fear, after the initial panic buying, a sense of calm had returned to the markets, and they were now shrugging off the news out of Europe. 

Perhaps they were now getting wind that the news was unconfirmed, or maybe the news had already been “baked” into prices.

 By the time the closing bell rang, QID was at 43.97, my calls were back around 2.55, and I was much relieved.  I was closing the gap on the loss of my first half position, and was making a profit on the second half.  Right before the bell, the Nasdaq was getting beat up pretty good, and that was an excellent sign of what might come the following day.

The next day (yesterday), the Nasdaq gapped down on the opening, following Apple’s (AAPL) earnings report.  That meant that QID was gapping up, to about 44.40.  Soon thereafter, I sold my 2.35 calls at 2.70.  I could have held the position longer, but I like to take my profits when they are ready for the taking. 

Still holding a small loss on the original position, I held onto my 2.85 calls, sensing that we might get a much weaker Nasdaq market today.  The gap up on QID gave me additional confidence that it would go higher later on in the day.

No point in taking a loss when you still feel that you are on the correct side of the trade! 

I was right, but it took awhile for it all to shake out.  QID traded sideways for much of the day before beginning a rally around 1:30 that would eventually take it much higher.

I sold my 2.85 calls a little bit after 2 PM at 3.25.  The total profit before commissions on both positions was over 14%, not too shoddy for less than a 24 hour period.

As usual, I sold a bit too early.  However, I maintain that it’s far better to give up some additional gain than it is to give back a nice profit.  So I’m happy.

Lessons learned:  1)  Never panic and sell at the lows.  2)  It often makes sense to cut your money in half and buy your options in two separate purchases.  The additional commissions are chump change when compared to the additional money you can make by buying the second half position even cheaper.

And if you happen to be correct in your first purchase, and the call increases in value, you may not have made as much money as you would have by buying all the shares at one time, but at least you are still making some money.

And that’s what Fast Profit Trading is all about!

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Regular readers of this blog know that I have been bearish for several months.  In fact, I had a very large long position on the S&P 500 that I moved into cash at the very end of June.

I see the S&P 500 at a crucial juncture right now.  After the last decline, which brought the index back down to recent support levels at 1100, we saw the S&P kick back up to the 1160 area this week, on decent, if not spectacular volume.

And after three consecutive days of rally, it was inevitable that we might pull back on Friday, especially with another tepid jobs report coming out.

We didn’t get a huge sell off, because the 103,000 non-farm jobs created last month beat expectations by a large margin.  However, if you looked more closely at the numbers, over 40,000 of those “newly created jobs” were Verizon employees returning to work after a strike.  If you take that number out, the non-farm payrolls were pretty close to expectations.

Take a look at the chart of the S&P 500 below.  Do you see the declining 50 day moving average (blue line) just above the current 1155 level?  Since August, that has kept the index moving lower, and acted as overhead resistance on any rally attempts.  

Once again, coming up to the declining 50 day moving average...

                                                                                                        Chart courtesy of stocktrades.com

Also, if you look closely at the 200 day moving average (red line), it  appears that since mid September, it too is beginning to decline.  That would indicate a longer term bearish period is ahead.

Furthermore, look at the recent lows.  On several occasions, the S&P held at 1125, with one occasion in early August reaching an intra-day low of 1100.  Now, while many technical analysts minimize the importance of intra-day lows or highs, it is interesting that we had two consecutive days recently in which the low for the day matched or slightly exceeded that August intra-day low. 

And on the second day, the index actually dropped to a new intra-day low of 1075!

Also note how the 14 day RSI has rolled over around the 50 level the last FOUR CONSECUTIVE TIMES it has reached there.  Will Friday’s small pull back continue that trend, and if so, will the S&P 500 fall below recent support levels?

It would not surprise me to see that happen.  Oh, I could make a slightly bullish case, by saying that the MACD seems to be on the verge of a buy signal, and after a couple of declining peaks, the stochastic has moved a tad above the last peak level.

But to be fully convinced that the bulls are back in force, I would have to see the S&P 500 rise above the declining 50 day moving average, and stay there for awhile.  Even the flirtations above the 50 day back in July were short lived.  I would also want to see the MACD rise above the zero line for confirmation.

So for now, I’m sharpening my pencils, looking for possible Puts to trade, and hope to have some recommendations coming soon.

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Here is the chart of QID, prior to the market open today: 

Watch the stochastic...

                                                                                                         Chart courtesy of stockcharts.com

Despite chart technicals that indicate QID could be ready to pop much higher,  such as the rounding of the RSI, and lingering on the verge of a stochastic buy signal, I remain cautious.   Mr. Bernanke (aka “The Candyman”, as I call him) and his crew of half a dozen, are about to meet and greet today.  That’s always a challenge for the trader, and I don’t want my QID position to be caught in some kind of “twister” or QE3 full nelson, where the market goes up 300 points in the last hour and a half.

 Whenever the FED meets, it’s always a strange day, and you have to be ready for anything.  So I may sell into the QID strength this morning, take some profits and wait to see what is next.  Worst case scenario, I sell too early, and best case scenario, I make a little money, while avoiding a huge loss.

I will gladly take that risk/reward ratio, and perhaps buy back into QID if and when we get a rally.

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Sounds like a day when the Dow should open down 150, right?!

Wrong!  ECB and the Fed to the rescue once again.  As CNBC.com reported, 

 “Stocks were higher Thursday following news that major central banks across the world agreed to lend U.S. dollars to European banks, taking pressure off funding issues across European banks.”

Whoopie!  Haven’t we seen this scenario reenacted time and again?  Bailouts for European countries remind me of the self-absorbed teenager who blows all of their allowance, and then goes to Mom and Dad one more time for that quick advance on next week, or next month.  Or in the case of the U.S., the advance is due to be paid back by the teenager’s future grandchildren!

And as always, once our teen gets their hands on that fresh new $20, it’s off to the mall to blow it again as quickly as before.

So, let’s take a quick look at the S&P 500, following this morning’s market rise:

Like a teenager off to the mall....

And then with Hurricane Irene poofing out over the Atlantic, it was time to reverse roles, and buy several PUT contracts on BECN.

Late Tuesday afternoon, I bought the October 22 puts, at 1.90, and again sold them late afternoon yesterday at 2.40, for a 26.3% profit in less than two days!

And of course, since I frequently sell too soon (those reading this blog may choose to hold my positions longer, I just like taking the profits sooner, thus the name of my site), BECN dropped some more today, with the Put going higher this morning than where I sold.

But who cares?

So we’ll let the Put ride out some more, as the general market blow down on bad jobs news continues, because off in the distance looms Katia, with the potential for some sweet call option profits after Labor Day….

A quick look at the BECN chart:

What goes up, must come down!

Now what happens when the hurricane winds blow?  Right!  Roof shingles go flying off of homes all across the Southeast. 

But then an interesting thing happened.  I checked the charts, and what do you know–BECN is down some 30% off it’s recent highs!  Can you say OVERSOLD AND HURRICANE PLAY?!

Holy tornado, Batman!

So between the hurricane and the oversold conditions, the time was right for a serious pickup of some BECN shares.  And it doesn’t hurt that we now have RSI and Stochastic buy signals (see chart below):  

Well, so much for the best laid plans of Mice and Men…..the hurricane moved out to sea, sparing those of us in Florida from another bout with Mother Nature.  But landfall may still happen in the Carolinas or Virginia, as I write this blog.

And oh by the way, after I bought my shares, BECN still went up a whole lot, and I today I sold my shares and contracts.  I made 16% on the option contracts, and over 3% on the regular shares since yesterday.

Done deal?   Not on your life.  I’m simply waiting for a retracement, and may get back in.  Even if this hurricane hits nobody, it’s only August 23, and we are just getting into the meat of hurricane season.  With BECN this oversold and the chance for a few more hurricanes to come our way, BECN remains a great intermediate play as well.

BECN is the Babe Roof of the hurricane stock plays, and this one is a sure home run!

The "Babe Roof" of Hurricane Stock Plays!

I am pleased to say that I rather quickly closed out my Call on SPY with a 6.5% gain.  By doing so, I gave up some additional profit, but I really was afraid to stay too long at the fair, and I’m glad I cut the trade when I did.

So what now?

Well, there seems to be two modes of thinking.   The first is that we are heading for another recession, and the bears are fully in control.  There is ample support for this theory, including a long column of O’s on the  NYSE bullish percent index:

                                                                Chart courtesy of investorsintelligence.com

In addition, yesterday’s big loss created what is popularly known as the “death cross” for the S&P 500, in which the 50 day moving average crosses below the 200 day moving average.  This is the opposite of the “golden cross”, where the 50 day moves above the 200 day M.A., and is extremely bearish.

So is there a bullish argument to be made?  Well, the VIX was up 20% yesterday, and will probably climb higher this morning.  On a SHORT TERM basis, it is getting extremely overbought.  Ditto for all of the inverse ETF’s, such as QID, DXD, and SDS.

So  what I’m saying is you can try trading for a short term bounce today by buying PUTS on VXX, or calls on QLD.  But this strategy is NOT for the faint of heart, because it is difficult to say with any authority whether we are sitting on the mother of all market crashes right now, as I write this.

The other tricky trade is going short, or buying PUTS on the general market or individual stocks and ETF’s, because the market is already down a lot from yesterday, and could open signficantly lower this morning.  As I am writing this, the Dow futures are down 140.

Ideally, what we want to do is trade the extremes, not try to catch the falling knife as the indicators are heading lower.  The RSI and stochastics rose above oversold levels during the Candyman bounce period, but have now turned lower. 

So for swing traders,  I would certainly wait for the indicators to get back to oversold levels before initiating any long positions, while shorter term daytraders may be able to play a bounce in one of the long index ETF’s as early as today or perhaps Monday.

Either way, cash is still king right now, so make sure you have plenty of it on the sidelines.  The oil stocks were absolutely destroyed yesterday, and I will be watching for a short term bottom on those today.  But there are no specific recomendations as of yet.

Stay tuned!

So what happened this morning?  Did the children have a bad tummy ache from all that candy?  The Dow opened down, and at its worst has been over 400 points lower today.

So why did I buy the September 17th calls on SPY (the ETF that mimics the S&P 500) this morning right around the trough of the morning?  Because I can’t resist a good bargain, and right now I am playing the candyman bounce.  See chart below:

The Candyman Bounce is coming!

                                                                              Chart courtesy of stockcharts.com

I’m no sucker for the candy, but I’ll take a stochastic buy signal and an RSI at 27 any day of the week on a five week option trade.

So now everybody sing:

“Who can make the market rise?  Dow and Nasdaq tooooo.  Cover it with interest at ground zero for a year or two.  The candy man can, oh the candy man can.    The candy man can, ’cause he mixes it with love and makes the ‘conomy look good!”

Ok, with apologies to Sammy Davis, Jr., my little version of The Candyman” song.  And of course, if you haven’t guessed by now, I’m talking about Fed Chairman Bernanke, and his two year extension of zero interest rates.

I don’t think it’s the answer to this crummy market long term, but I’m thinking we get a good enough bounce here to lock in a nice option profit on my SPY calls.

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In that blog I wrote that you should lighten up on your longs and even consider buying the inverse ETF’s.  Those who took my advice profited handsomely on Thursday, when the Dow sank 512 points, and the Nasdaq and S&P were also trounced.

But I’m not here to say, “I told you so.”  Well, ok, I did tell you so, lets get that out of the way.  So where are we now?  What do we buy/sell/hold now?

Well, last night S&P downgraded the U.S. credit rating from AAA to AA+.  Doesn’t sound so bad, right?  Getting simply an A+ in school would have been terrific, right?

Well, it’s a disaster, and it remains to be seen how the markets will take it on Monday.  But one can only surmise that the reaction will be anything but dancing in the street.

So what should investors do right now?  Get your cash on the sidelines, continue to hold your inverse ETF’s, and wait for the blood to stop running in the streets before you dare go long on another stock.

On Friday, I was going through a number of charts, hoping to find something that looked like a decent Call option play.  After an hour of seeing one dismal chart after another, I just gave up.

What was making it difficult was the roller coaster ride the market was taking, with the Dow up 100 one minute, down 240 the next, and finally ending up 60.  Unfortunately the Nasdaq was lower and the S&P flat.

It was a great day for aggressive traders to make a ton of money, and some of them did.  But it was also a day for other less fortunate traders to get knocked upside the head.

If we get a huge sell off on Monday, it could put in a temporary bottom.  For those with long term horizons, and some disposable income, it might be a good time to add to 401k and IRA plans.

But the technical damage that’s been done so far, with the S&P slicing through the 50 and 200 day moving averages, and then sinking below long term trend lines, makes me think that we still have more downside to go.  And the weekly chart of the Nasdaq Composite below, looks abysmal.  In one week, the Nasdaq managed to give up several months worth of gains:

RSI and Stochastic are dropping, and the MACD looks terrible

                                                                               Chart courtesy of stockcharts.com

One final word.  As is their custom when the market gets bearish, CNBC has been trotting out the usual old school analysts to try to calm the masses from bolting to the sidelines.  You know, the old gray haired guys with their “don’t panic, stocks are now cheap, look for opportunities” drivel.  They will tell you how each time there has been a 10% “correction”, the market was higher 3 months later or 6 months later.

Perhaps that’s true, but it doesn’t mean you can’t get out and get back in six weeks from now when the selling madness has abated.  I’d gladly trade a few round trip commissions for being able to buy back the same positions another 10% cheaper.

These guys will tell you to buy Coca Cola and Philip Morris and all of those great stocks paying 4% dividends, because they are “safe”.  You want to know what “safe” really is?  “Safe is buying Coca Cola and Philip Morris at the end of a bear market, when the dividends are 7% or 8%, or even higher.

But what happens near the end of the bear market is these same idiots will caution you that the high dividend yields could be cut.  Sometimes that’s  true, but more often the yields are not cut, and when prices rise, all of that talk is forgotten.

The bottom line:  Don’t believe any of the opinions that you hear on television.  They are just a bunch of guys trying to suck you into staying at the casino called Wall Street for as long as possible while the house has the advantage. 

Remember, in April, they were telling Joe Mainstreet how high the S&P could go, while the big players on the sidelines were getting ready to dump their shares.  Do you think it’s just a coincidence that the Dow was down 512 on Thursday and the S&P rating was cut on Friday night?

Keep your powder dry, folks, and be ready for what is coming next.

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