Dow and SPX Break Below the Wedge

Pre-market futures are down after more grumblings in the Financial sector about tough conditions in the mortgage market and continued writedowns. The news is not new, but it's convenient for a market that is having a technical rollover.

HD posted less than catastrophic earnings results, but as with the Financials news, traders are focused on the glass being half full because it fits the model for profit taking after a big run-up in the market the past several weeks.

There are more earnings and economic reports set to be reported this morning, but unless Housing Starts and Building Permits has a big "wow" factor, the futures will probably stay down. Oil is also a factor, but it's probably going to take a sharp drop through $110 to get traders attention away from the technical rollover. It will be noteworthy to see if the market can hold important support levels throughout the day today.

6:40 am MT: Just hitting the wires: PPI came in much higher than expected (although traders are looking forward to lower inflation for August because of the drop in oil prices). More importantly (because it dovetails with the Financial sector grumblings this morning), Building Permits missed consensus, although Housing Starts were pretty much in line with estimates. TGT beat earnings, but once again, traders are more focused on the Financial sector and the Housing Market this morning, probably because it fits the focus on the glass being half full and the technical rollover. Futures took another dip on the news.

8:00 am MT: I sold part of the MS and STI puts for a solid gain on those trades so far.

8:15 am MT: I nibbled some puts on LVS, SPY, DIA, and HIG. I’m going to stay focused on the six puts that I have for now, I may add another one later in the day. I’ll also add to the puts I bought if we get a nice wiggle back intra-day.

8:25 am MT: I sold a little more of the MS puts. If the market and stocks bounce back intra-day, then I will add some of the puts back.

8:30 am MT: I sold the LVS puts because I got one of those insane swings in about 15m. The cult traders are pushing the Casinos like the building is on fire…..I pulled in a 1.00 profit, or 15% gain in just a few minutes. I will look to get back in the stock in the next 30m or so.

8:45 am MT: I nibbled back some LVS and MS puts.

9:00 am MT: The market looks like it will rally a bit intra-day right here. I will look to add to the LVS and STI puts, and possibly the DIA and SPY puts. The key questions for the market right now are: Will the beginnings of the technical breakdown from yesterday, and the gap down today, lead to a clear breakdown of the Wedge on the Dow and SPX? Or will the market repair itself today and tomorrow, and reacquire the IT uptrend? I’m positioned for a technical breakdown, because that’s what the charts are showing. However, like I have been doing all year, I will be scaling out of some of the profits early, and I will still be playing for short swings of 1-3 days.

9:25 am MT: I sold a little more of the MS and STI puts.

9:50 am MT: I sold a little more of the MS and STI puts.

10:00 am MT: Energy and Commodity stocks are working counter to the market as usual. Here is a list of the bullish movers in various sectors that I like (remember that for many of these stocks the IT trend is still bearish, but some are changing trend a bit, like DVN):

Chemicals: AGU, POT, CF, TRA

Coal: BTU, ACI

Gold: AEM

Energy: HES, DVN

I started nibbling on DVN calls. I may pick up calls on 1-2 Chemical stocks and add to the DVN calls before the close today. I’ll keep an eye on the Coals and Gold, but I don’t like them as much as the other stuff yet.

1:00 pm MT: I took a little profit on the MS, HIG, and STI puts. I am looking to take some profits on the LVS, DIA and SPY puts as well.

1:30 pm MT: I nibbled on some PRU puts. I’m loaded about as far as I want to go with my put positions for now. The market has broken support, but I’m keeping a sharp memory of how choppy much of this year has been, so as usual, I’m locking profits early as I go along.

1:59 pm MT: I sold a little more HIG just before the close. I’m sitting on DIA, SPY, MS, STI, HIG, PRU, and LVS puts. I also have a nice call position on DVN. I have a very small call position on AMZN that I’m sitting with for the next bounce because the most I can lose on it is $600, and I would really rather add to the position on a bounce and then sell it. There are still some Retail, Healthcare/Biotech and other sectors that intrigue me for calls if the market bounces. So I’ve got that idea dancing around in my head while I watch the puts and the mini-rotation to Energy and Commodity stocks. I will look to sell most of the puts into any type of early drop tomorrow morning, if the market gaps or drops out of the gate. It still looks like some of the puts have quite a bit of room to drop, and normally I would give it more room over the next 2-3 days, but 2008 is 2008, so I’ll lock earlier on most of the positions.

Volume wasn't very heavy on the drop in the market today, which is all the more reason I probably won't be hanging around with the puts beyond tomorrow.

2:30 pm MT: Market Wrap: Financials, Inflation, and Housing Oh My! Financials, Inflation, and Housing Oh My! Actually it was nothing new…..but the technical move on the indexes was due, so the news became the catalyst for what would have probably happened anyway. The only thing the news did was make it happen faster and sharper. The Dow and SPX clearly broke their Wedges, which I have been warning about since last week. Because I was anticipating the possibility of a Wedge break all the time I was playing calls last week, I was able to not only lock and walk profitably on the calls, but I was all over the puts yesterday and today. That’s the speculator’s game. I’m always looking for the next move while I play the current move.

After the Wedge break, the SPX immediately dropped to the next short term support at 1,262 – 1,263, and is clinging to the 30dma as well. The Dow broke down and is dangling out in no-man’s land, with about 70 - 100 points to the next support area around 11,250 – 11,280. Here’s how I’m playing this tomorrow: If the market drops right out of the gate then I’m selling most of the puts at 11,300, because we haven’t had three long drops in a row without a wiggle since March. We saw something like that in the middle of June, but traders covered the third day half-way through the day. So a drop out of the gate and I’m selling my puts. If we wiggle up out of the gate, then the Dow may test 11,400. If the first move is a test with a rollover, then I may hold more of the puts longer into the end of the day and see if the Dow closes down in the 11,250 – 11,280 area.

I wrote yesterday that a drop below 2,400 on the Naz would probably lead to a move down to 2,365 – 2,385. The Naz broke 2,400 and hit a low today right in the middle of my support target at 2,376 before closing at 2,384.....

I wrote yesterday that a drop below 737 on the RUT would probably lead to a move down to 727. The RUT broke 737 and hit a low of 726.90 before closing at 730.....

Tomorrow we’ll get the Oil Inventory Report 60m after the open, and that’s it from the Economic Calendar.

After the close: HPQ beat earnings expectations and is trading up strongly in after-hours trading. This should give the Naz a little boost out of the gate, and probably lead to scenario #2 from above, which is a test up to 11,400 on the Dow first instead of a drop to 11,250 – 11,300 right out of the open. If the Dow rolls over from 11,400 then I will watch for the 11,300 area to scale out of my puts. If the Dow goes above 11,500 then I’ll be stopping out of all my puts.