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Which Way Wednesday - Russell 1,050 or DOOM!!! Again

The Huffington Post The Huffington Post 2/03/2016 Phil Davis

3-1-2016 2-48-11 PM REUTERS 1 © Provided by The Huffington Post 3-1-2016 2-48-11 PM REUTERS 1 Here we are again.

Back on Jan 11th, we pegged 1,050 on the Russell as the most critical line in the markets and failing that turned us bearish and turning bearish made us a ton of money last month.  That was also a Beige Book week and we were concerned about upcoming reports for the week which were: "Retail Sales, PPI, Industrial Production, Empire State Manufacturing, Consumer Sentiment and Business Inventories."  Sound Familiar?  Yep, it's the same stuff that was lousy this week but it has less impact now because we already had our shock.  

On Thursday, Jan 14th, although we predicted DOOM!, we also predicted the Dow would bottom around 16,000 (off by 250) and that we'd bounce back to 16,700, which was pretty much the right price as we analyzed and evaluated each Dow component.  In that post, I laid out the game plan we would follow for the next 6 weeks, which led us to a $200,000+ gain (33%) in our two main tracking portfolios.

We flipped bullish right at the bottom and now we're back to being uncertain at Russell 1,050, S&P 1,978, Dow 16,865 and Nasdaq 4,335 vs 1,046, 1,922, 16,346 and 4,271 back on 1/11.  So clearly, all the other indexes have recovered much stronger than the Russell so either we see the Russell begin to catch up or, once again, it will become a drag that likely signals an overall pullback.

Today's big data point will be Oil Inventories at 10:30 but expectations are already low after the API showed a 9Mb build last night.  Any net under 5Mb will be bullish for oil (now $33.75) but $35 has been a good shorting line for us so far (/CL).  This afternoon we get a look at the Fed's Beige Book and it's hard to imagine that won't be depressing after our PMI and ISM numbers (auto sales were light too) and, this morning there was a 4.8% drop in Mortgage Applications - also a bad sign.

We will be doing a Live Trading Webinar for our Members at 1pm so we'll be live when the Beige Book is released at 2pm so get ready for some fun with the Futures.  Last week, we make $320 in 30 minutes trading the Russell (of course) and the Nikkei (replay available here).  

© Provided by The Huffington Post With Apple (AAPL) back over $100, we'll be watching the Nasdaq closely for signs of strength.  The Nasdaq doesn't have any of those nasty oil companies so hopefully they can break a bit higher but we're very skeptical of the rally as it's one of those "bad news is good news" rallies with all the bulls praying for more stimulus to goose the markets.  

We made a big bet in our Options Opportunity Portfolio that the Nasdaq Ultra-Short ETF (SQQQ) would be under $27 into June.  It was a part of a bearish spread but we cashed in the longs (big profit) and left the short calls, which flipped us very bullish on the Nasdaq on 2/8.  So far, so good as we're up $18,100 as of yesterday's close but we'll have to keep a close eye on that position and use it to flip more bearish (by buying them back to close) if AAPL fails to hold $100 or the Russell fails to hold 1,050.

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At this point, we have to re-evaluate the potential risk of losing our $18,100 gain vs the reward of collecting that last $7,300 we'll win if the Nasdaq doesn't fall back to it's recent lows (3,900, down 10%).  So now the question is:  How certain are we the Nasdaq won't fall 10%.  Unless we're about 70% certain - it's not worth risking $18,100 to make $7,300, is it?  Not only that but we didn't intend for the OOP to have such wild bets in it - we just couldn't resist the opportunity when we were so sure the Nasdaq was oversold. 

Another OOP trade that went wrong but we stuck with was the 20-year Treasury ETF (TLT), which topped out at $135 and is finally calming down.  We were too early with our March $122 put and lost our $785 (mostly) on that one but that's why we went small with our first bet and we followed up at the top (2/12) with the June $135/128 bear put spread at $4.03, which will pay $7 back if TLT stays under $128:

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© Provided by The Huffington Post If we're lucky, TLT will continue to drop over the next two weeks and our March put will make a bit of a comeback, then the projected $1,485 profit on the spread will all be gravy.  On the whole, we're playing for an odd set of circumstances where the Fed does not ease policy BUT the markets continue to chug along at about these levels.  

Meanwhile, we're going to be pressing our index hedges if our levels don't hold up.  In our OOP and our Short-Term Portfolio, all we have to do is take our profits on SQQQ to turn ourselves much more bearish (because we have other, aggressive hedges, like Friday's Russell hedge (TZA) trade) and we REALLY want to lock in these profits and again we discussed going to cash as our 3 main Members' Virtual Portfolios are up over 100% now and way ahead of schedule. 

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Mostly we've been lucky to have had great market timing calls in a very choppy market for the past year but only a fool thinks his luck will never run out while a wise trader prepares for any contingency.  Let's be wise traders and let's be careful out there!  


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