We need 3% gains today.
That's right, after dropping 15% our 5% Rule™ says a weak bounce should be 20% of the drop and that's a 3% bounce off yesterday's close just to keep us a tiny bit bullish and, thanks to China's expected market save (more on that later), we're getting it pre-market. We already played for these bounces, of course – as I noted in yesterday's morning post, we wanted to go long in the Futures at:
- Dow 15,840 (/YM), now 16,320 – up $2,400 per contact
- S&P 1,850 (/ES), now 1,946 – up $4,800 per contract
- Nasdaq 4,000 (/NQ), now 4,200 – up $4,000 per contract
- Russell 1,080 (/TF), now 1,152 – up $7,200 per contract
That's $18,400 (per contract) in gains from our suggestions in yesterday's morning post. Whatever you do DO NOT SUBSCRIBE HERE or you will get useful information like that sent to you pre-market every day. Of course, those gains are nothing compared to the shorts we abandoned at the same levels from last week's Live Trading Webinar, where we featured a short on the Dow Futures at 17,477 which were up $8,185 per contract at our target low of 15,840.
I was the first person to hash-tag #BlackMonday (which trended), tweeting it out at 5:05 am, long before the Futures fell off a cliff. We expected the sell-off due to lack of China intervention and, by the time I was writing the 8:20 post, we did a very good job of calling the bottoms but, at 9:42, in our Live Member Chat Room, I said:
I think this is almost a flash-crash. Someone (thing) is selling with abandon. I think since we wanted to grab a long, we should and I nominate Dow at 15,600, which is more than 10% down for at least a bounce and the DIA Sept $155s at $6.75 were $13 on Friday and I like them for a gamble with the intention of selling the $159s for $6 on a bounce (now $5.20) so 20 of those for the 5% Portfolio with a stop at $6 or if the Dow can't hold 15,600.
That's because the Dow, out of all 4 indexes we had predicted, was miles below where it should be, so it looked like an easy place to go long. The Dow was 15,400 at the time and our fill came at $8.62 for the $155s and $7.15 for the $159s and that's net $1.47 on the $4 spread, with a $2.53 (172%) upside potential in 24 days. Once things calmed down, you can see how our 15,840 line held up perfectly around 2am and that was our 4th chance to go long at our target in same day, with huge profits each time!
We'll be doing a Live Trading Webinar today at 1pm, EST for our Members (sign up here) and, if you want to follow our 5% (Monthly) Portfolio at Seeking Alpha, that can be found over HERE.
Meanwhile, the 5% Rule™ is in full forces (as is obvious from the way our Big Chart lines are being enforced) so we can calculate our expected bounce lines for each index as such:
- Dow 18,000 to 15,750 is 2,250 points (12.5%) and, if we're going to be bullish, we'd say it was a 10% drop with an overshoot. That means we need to see the -10% line at 16,200 re-taken or this is not a serious move. Since 16,250 is the -7.5% line on our Big Chart, that's two reasons to think that's going to be a critical area. At the moment (9am), the move in the Futures is taking us right to that line. Whether or not it holds it will determine our stance into tomorrow.
- S&P 2,100 to 1,850 is a 12% drop of 250 points and that means we're looking for a 50-point weak bounce to 1,900 but it's the strong bounce we need to see at 1,950 and 1,942.50 is our 5% line on the S&P so again we have a nice area to watch to set direction.
- Nasdaq 5,200 to 4,400 was a tragic 800-point, 15% drop and let's call the bounces 150 points (vs 160) to 4,550 (weak) and 4,700 (strong). We already had the intra-day weak bounce yesterday (the one we bet on) and we should open right around our strong bounce lines. Will we hold it is the question?
- NYSE 11,000 was the Must Hold line and it didn't. The drop to 9,800 fell below our -10% line at 9,900 and we'll need to see 250-point bounces to 10,050 (weak) and 10,300 (strong) – I don't see that happening today.
- Russell 1,300 was so promising but let's call this drop from the 5% line at 1,260 to 1,100 and that's 150 points (12%) and that's good for 30-point bounces to 1,130 (weak) and 1,160 (strong) and, like the other indexes, it should open near that strong line and whether or not it can hold it today will tell the tale.
So our road map for the day is clearly laid out. A failure to hold the strong bounce lines will have us shorting again because all we have today is a reaction to yet another China stimulus move – this time it's a 0.25% rate cut and a 0.5% reduction in reserve requirements, which is good for about $105Bn of stimulus. Unfortunately, it's a drop in the bucket when the $6Bn Shanghai Composite lost 15% ($900Bn) in two days, so I don't think this little boost will stand on it's own.
You will also hear a lot of people tell you there will be no Fed Rate Hike in September but I've been telling you that since March, so I don't see the news value there. The Fed still needs to hike in October but that won't stop someone from announcing September is off the table in an attempt to rally the markets over those strong bounce lines.
If it's a real rally, oil (we're long) should have no trouble getting back over $40 and gold (we're long) should be pulling back from $1,150. AAPL is up 5% pre-market, adding 40 points to the Dow and 1% to the Nasdaq all by itself. AAPL got the rebound started yesterday when Tim Cook and Jim Cramer got together to reassure people about China. As noted by Dave Fry:
Further another perhaps nefarious event Monday was the release of an email sent to CNBC’s Jim Cramer from Apple CEO Tim Cook. This email, even if released a minute or two after receipt by Cramer would constitute a Regulation Fair Disclosure violation of the rules if traders were responding to it.
The email is below:
Jim,
As you know, we don't give mid-quarter updates and we rarely comment on moves in Apple stock. But I know your question is on the minds of many investors.
I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.
Obviously I can't predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge.
Tim
The reaction by Apple’s stock was to rally from the early morning low of roughly $92 to nearly $106 very quickly. But those gains were short-lived as Apple turned lower. Let’s remember the stock is the most over owned equity in all markets so its movements are important.
As we often say over at PSW: "We don't care IF the market is rigged, as long as we understand HOW it is rigged and can make our bets accordingly!"
