I Am Beginning To See How It Works!

New subscriber NTJ writes: "I am beginning to see how it works. I bought the July420P last week, and made a second buy just as the Manual teaches, and I watched it for several days "do nothing."

It lost money, it broke even, it lost money. My patience was wearing thin, as I was worrying about a loss, even though I had 5 successful trades before this in a row. I wrote you, and your comment was "Sit on your hands, and allow the market to breathe. This option is not yet through its cycle. Follow the rules :)". Of course, you were right, and I traded the July 420P Monday from a 9.50 buy to 12.90 , a 3.90 per contract profit."

Most of the world is now thinking of the stock market in a V formation. This means we were at a top, went to the bottom of the V, and are now moving back up. In actuality, we believe the market will see many more elongated W's over the next few years, and we are in the early stage of the first part of a W.

What that means: the euphoria MAY continue, there will be increasing upside, but also dramatic hesitancies and tests of the market. This has now just occurred with a 200 point drop Monday as the "real news" about our economic condition, and the state of the Global economy is now in the optimism phase, and reality began to set in. This optimism began to fade Monday as those "pressured profits, high unemployment,weaker labor wages and weakened demand" became more of a reality, after the World Bank predicted the global economy will now shrink 2.9% this year.

For the past several months the direction of stocks, commodities, and other risky assets has been driven at least partly by whether economic reports have surprised to the upside or downside. In other words, we have been "news" and "trigger" driven. What appears to have happened is that any news that was "less bad than we could expect" became good news, a reviving economy, and fodder for "it's all good." The DJIA is still down 25% from before the Lehman collapse, and before the house of cards fell.

So, now we have many chartists and stock gurus predicting a potential sell off over a short time to under 8000 again, when a week ago we had few even mentioning downside.

From Bloomberg:

“We see some positive signals pointing toward a stabilization but a V-shaped recovery is not realistic,” said Marco Huwiler, a strategist at Clariden Leu in Zurich, which manages about $88 billion. “The growth potential will be lower than before the recession.

The World Bank forecast the global economy will contract 2.9 percent this year in a report today. That compares with a prior estimate of a 1.7 percent decline. Growth is expected to return next year with a 2 percent expansion, lower than the 2.3 percent prediction about three months ago.

Federal Reserve officials on June 24, at the conclusion of their two- day meeting, may say the U.S. is showing signs of emerging from the worst recession in a half century. Following their last meeting in April, policy makers said the economy will 'remain weak for a time.' The central bankers will also keep the benchmark interest rate in the range of zero to 0.25 percent, economists said."

Floydian Rule # 456- Never trust optimists.

Floydian Rule #851-Never trust stupid people. As an example, Harpers Magazine index verifies: " 1 in 4 Americans thinks 'the Jews' were moderately or very much to blame for the financial crisis. "

"Floydian rules" may amuse you, but should be taken seriously. After years studying the market my various "Floydian rules" are what helped me create a successful trader from, and first got people "asking me for a copy of what I wrote up each day," the beginning of what is now OEX Options.

Here's an interesting fact, as we listen and read our "talking heads" on the market: 27% of all Americans have made premature withdrawals from their retirement or college savings since 2008.

Yesterday we saw a true consolidation beginning. Traders already had entry to the July420P and all made money, and no traders would have bought new calls yesterday on futures down as dramatically as they were.

The FOMC announcement is at 2.15 p.m. EST on Wednesday. Typically, there is whipsaw around the FOMC, and many believe interest rates will not be raised, and that this has already been priced into the market.

Downward moves to become what we see a beginning of true bias shift should conclude the day at least 230 points down, on increasing volume. Many pieces of data and economic reports are out this week.

Two way trades are possible, and the trader must have buy/sells in at all times.