Will We Hold It Wednesday?

Yesterday was easy.

We were quickly rejected off the levels I had set on Monday (noted in the Tuesday morning post as well) and the failure of 6,232 on the NYSE was an easy last straw for us, both early in the morning and off the afternoon surge to let us know when we could get in and out of our short plays.  I posted a series of bullish trade ideas around lunchtime and by 1:32 we had hit our break-up levels and I said to members: "By the way, obviously we got our signal to sell or cover the short side!"  Still, we didn't like the "rally," even though it was 275 points off 9,000 and at 2:53 I noted we were: "lacking a catalyst to get us over the lines" and by 3:18 I called the "rally" DOA, saying: "This is very much like last Tuesday so a good time to reestablish some downside plays as this may be as good as it gets for the afternoon and tomorrow could be a big plunge so be careful!"

Sadly we broke out 2.5% lines for the day and we had to maintain our bearish bias for today's open despite our $100 target for our various AAPL plays, which do look like they are going to be right on the money, despite a big scare into yesterday's close.  The upside plays continue to be speculative and we're still in a day-trader's paradise.  Hopefully AAPL will inspire investors to rotate some cash into tech as commodities continue to turmble and we hear from AMZN after the bell today but the morning earnings will be dominated by large-caps like T, BHI, BA, COP, GD, GENZ, GSK, MCD, MRK, NOC, PM, WB, WLP and WYE. 

While we were thrilled with AAPL's earnings, the broader markets seem hell-bent on testing our lows, led down by the commodity sector this time, which is really fine with us as the Roach Motel Theory states there is still a good $2Tn that needs to be pulled out of that sector and oil is failing that critical $70 in pre-market trading while copper fell below the critical $200 mark and gold is barely holding $750.  The dollar is strong everywhere except against the Yen and dollar weakness in Japan sent exporters right over a cliff this morning, leading the Nikkei to a 6.7% (631 point) decline, right back to last week's lows (but saved by the bell).

The rest of Asia was a disaster too with the Hang Seng dropping 5% and the Shanghai falling 2.5% and India tumbling 4%.  In very early trading (6 am in the US), Europe is flirting with the 2.5% rule and they'd better hold that or we've got another 7.5% to a bottom test, which would not be a fun way to wrap up the week!  The Dow Jones World Index, which we talked about in yesterday's morning post, is just 6% off a retest of it's lows and it does look like we are doomed to get there before attempting to mount a recovery.  That means we need to watch our lower levels and, since I'll be out today, let's do a special chart of inflection points of interest for the day (and the week):

Not a pretty picture overall…  We are at critical breakdowns on the SOX and Russell and, if we lose those, it is very likely we'll see a move down that may test 50% off levels aross the board.  During the day, we'll Keep a very close eye on the EU bourses, who need to take back their "Must Hold" levels in order for our markets to have any hope at all.  Only the Nikkei is floating Asia and they don't look so hot – another bad day in the US markets will cost them their  last green box!

We are roughly 5% away from critical failure on the Dow and S&P (see Trader Mike's chart) but it's not likely they'll be able to fight the tide if our other indices confirm a downside move.  All hope rests with the Nasdaq and 32 is a good line to watch on the Qs – without retaking that and getting back over 32.50, there's not going to be a recovery in any of the US indexes.  Commodities will be the main drag today and XOM makes a good play to the downside out of the box as they are being held up by earnings next Thursday but that didn't stop Apple from testing their lows and XOM was at $60 just last week (now $72).  The Jan $65 puts were $11+ last week, now $4.75 and you can put a stop at $3.50 to limit the loss as that would be about $75 for XOM.  Of course we have oil inventories at 10:35 so it could be a wild day for energy stocks.

On the ETF side, of course we are still concentrating on the DIA puts as well as the DXD calls.  The Dow is "only" off 34% and has a LONG way to go before retesting the lows at 7,882.  We added DIA puts into the rally yesterday afternoon and it's easy to take the Dec $96 puts at $10 and simply stop out at $9 (Dow 9,100) or the DXD Jan $75s for about $15 – which are a little riskier but the DXD topped out at $111 on the 10th, which is $35 in the money so not bad disaster protection and, since the $83s (10% away) are still at $11, it's a $4 loss on a 5% gain in the Dow vs. a likely much larger gain if the move goes your way.  As it looks like we may open close to 2.5% down, that's the level to watch before throwing money into more downside plays.  Let the levels be your guide but even a retrace to 1.5% down this morning will not be bullish as we're continuing a 5% down move from yesterday's open so a 20% retrace is expected and anything less than a 1/3 move back towards yesterday's high is going to be meaningless (and maybe a good short entry).

Without more government intervention or some truly spectacular earnings this week (not looking good on either front) there is no reason to think we will reverse this downtrend.  The overriding market mover today is the growing consensus that all of Europe is heading into a severe recession.  We discussed the trouble with the UK in yesterday's post and today BOE Governor Mervyn King said the U.K. economy now appears to be entering a long recession and its currency may fall more sharply than many people expect. "Pretty much everyone is bracing for a recession," said Societe Generale strategist James Montier. "Despite markets being more reasonably priced after the recent declines, earnings risk is still a clear and present danger to investors."

All this is happening DESPITE the Fed deciding to lend $540Bn to the money-market mutual-fund industry, which has been plagued by investor withdrawals.  That's right, yet another $540Bn has been put in play by the Fed today, bringing our international total to close to $2Tn in market aid for the week – and it's only Wednesday!  It's truly baffling how gold can go down under these circumstances and we still like ABX as a covered call play as well as GLD leaps as a "just in case" play. 

This is not a day for bottom fishing, we need to just be happy to hold our levels.  The speculative upside continues to be the QLDs, which we loved back at $30.50 but may not get back there, as well as puts on the QID, which we were hoping to see make a lower high than 85 (75 was yesterday's spike high) today and that makes the puts we looked at a fun play on the way back down.  While many things will look tempting, anything less than a green close today is going to indicate nothing but continued weakness and it's doubful we'll mount much of a rally into the weekend with next week being chock full of data as well as the Fed meeting on Wednesday (where expectations of another cut are rising).

Be very careful out there, it's going to be another wild one.