All is Not as it Appears

May 665 calls bought at opening on Friday hit fast profit goals of 20% up on Friday. Meanwhile our buys on the May655P remain at loss, and we continue to hold for our 4 day stop loss. No matter what occurs in the next few days, it's time again for Floyd's key lesson of stock trading:

All is NOT as it appears. Only when you truly know this key rule, and can focus away from the talking heads, from the news articles, and from the TV, can you begin to truly understand how the market breathes.

"Floyd, regardless of whether you profit for us on this put, as a long term subscriber I smile when I read the "urgent" messages from your subscribers on Friday...I remember these days well, where I over invested in a trade, and did not manage my risk. Only when I began truly studying your work, and following the rules, did I begin to truly make money. in 2007 I earned 176,000 trading OEX options. In 2006 I lose 27,000. The only difference: I studied, and took the emotions out of the trade."-BCE, Ontario

The amount of FEAR I saw with our traders Friday, and why I simply "closed up shop", indicates the amount of irrational euphoria in the market. As the talking heads said:
"The worst seems behind us, and the market is now fully in a break out mode". (We have not even begun to reach a break out mode, yet).
I could see it in the emails.....28 of 29 of the last trades we've recommended have been profitable, a record for Floyd and OEX, and discussion points I've provided over the past week, that I'm fearful of being right so often that traders would begin to believe this is "easy". I provided a bit of evidence in our second alert Friday, showing that many traders couldn't believe they might lose money, and "what do I do"....a few more comments from subscribers Friday:
"I am sure you are getting bombarded with questions so I am going to be keep mine simple:
"Since the market moved bullish a little more than I anticipated, should I be thinking about selling a higher strike put to maybe offset the puts that I currently own (8 puts at 13.85).

I am trying to think of ways to hedge myself and prevent taking a big loss.

Any thoughts?"

Floyd- Follow the rules. Take two buys, hold for the # of days stop loss, and wait it out.

"Thank you for your excellent market/trader perspective. I especially appreciate your "rantings" and recent dialog.

I am in on the May655p @ $11.50. This is my first buy. For future reference, do you think I should have bought a second buy at around $7.60 today?

Also, since the market stayed "afloat" does it give you more or less reason to look for a large move down, I think I am asking about difference between accumulation and distribution...but I am not sure...Could you elaborate?

Have a peaceful weekend!"

Thank you, D

Floyd - The market accumulates during upside, and distributes during real correction. Friday we saw a run up to 13,150 area, but an immediate correction, and a "hold" just above 13,000. Nothing has yet shown us that we have a strong upside, only that is May, institutional traders are accumulating, and that a false unemployment report (5% is crap...it's closer to 12%) provided a bit of false optimism.

"Thanks for the information on the Harpers magazine article, about how the Government has manipulated the economic numbers for their own benefit. Truly scary...

I was at the bank yesterday and the manager was ranting to the customers in line...."Gas is so expensive...we need to drill more holes in Alaska". I thought to myself....No you need to sell your SUV.

also....

Earlier I was talking with my friend's daughter who is attending a 4 year university in Southern California. Apparently her Economics teacher is telling her class that "We're not in a recession".

Later I thought to myself...man people are stupid. No wonder as a nation we're in so much trouble. I didn't always think this way, in fact I probably would have thought the same, before you started teaching me.

Thank you for your rants and teaching. My families life will be better because of it.” - M

From Mike Gibbons:
"Both the NASDAQ Composite and S&P 500 broke out from their double-bottom bases this week and simultaneously broke the medium term downward trend line. Both indexes gained for the third week in succession and have gained in four out of the last six weeks. The NASDAQ is approaching its 200 day moving average,
Why are the markets rising while the economic fundamentals continue to deteriorate and will the trend continue?
Firstly, we think the economic fundamentals are deteriorating despite the loss of fewer jobs than expected and the supposed fall in unemployment. The Fed's statement on Tuesday confirmed that further weakening can be expected and their move on Friday to increase the Term Auction Facility funds by 50% and relax standards for the Term Securities Lending Facility (TSLF) to include AAA/Aaa-rated asset-backed securities shows they expect the liquidity situation to get worse before it gets better. We have long held that the Administration and Fed would do everything in their power to support the markets this year and Bernanke seems to have found the silver bullet with the combination of interest rate and discount window rate cuts together with the TAF and TSLF loans. Loans under these facilities mounted to $413 billion by April 30 and will clearly go higher. Acknowledged writedowns on mortgage losses amount to at most $250 billion so there is a comfortable surplus of capital that can be put to work. It was intended that these loans be used to relieve the credit crunch but there is little evidence that is happening (in fact it seems to be getting worse so it's reasonable to assume that this excess is being invested in the equity markets rather than to expand credit. If this reasoning is correct, then we can expect markets to move higher until the perceived risk of lending money is lower than the perceived risk of equity investments."

From veteran trader, Bill, who did NOT panic on upturn Friday, some good lessons in Point and Figure, with Floyd comments returned to him in bold.
We educate the trader.

"A couple questions, looking at the info on the OEX, the weekly distribution indicates overbought by 45% and the midrange of 623.65 and the 50 dma is 623.90.
This is correct. Good work.


Same goes with the DJIA, overbought by 48%, midrange of 12462.
Yes, this would be the deepest bottom.


Is this a level that the index is likely to trade back too?
Yes, the OEX tracks the Dow perfectly.


I understand the overbought/oversold concept and as the level moves up the curve the potential for reversal is greater, my question is, what level of overbought/oversold are indicators of a potential reversal?
This is where I use the "count" method. When the moves get to 8 in my bell curve work, the market is showing signs.


Also looks like the indexes are very extended from the bullish support line another indicator of a potential reversal?
Yes


The fact that the X and O ranges are getting tigher an indication of anything?
Yes, we are approaching "trade range" where something could happen again. Note the market is trying to establish new upside above 13,100, so far has not held.


BTW, I enjoy your political and economic commentary.
Thanks.

As far as the 655 put trade is going, I have made multiple buys and sells already. On thursday, as I indicated earlier, I purchased at market tops 13,050. I did not buy at best buy, but @ 11.20 had partial sells at different levels had my @ 12 sell order filled. Option backed up, I bought again and made another sell of partials. My net position right now is 100 @ $9.889. I've already booked $5,300 in profits on the trade. The 640 Put trade earlier in the week netted $11,600.
Proof of how to trade:)


Plan the trade and trade the plan......
This is the key!