After taking one big step forward, the market took two steps back on Wednesday as the Dow fell 733 points, or 7.9%, to close at 8,577. Of course, we are not surprised because we have been preparing for it. Yesterday’s downfall was blamed on bad retail sales data as September sales tumbled 1.2% month-over-month. Biggest drop in three years. The news was a shocker for Wall Street as it was a larger than expected drop. Know-it-alls predicted a decline of 0.7%.

As far as the indexes, the Nasdaq took a 8.5% hit and finished lower by 150 points at 1,628. The S&P was hit harder than a Vegas hangover, falling 9%, or 90 points, and closed at 907.

The Dow’s low last Friday was 7,773. For the Nasdaq it was 1,542 and for the S&P it was 839. So far we’ve been right-on in calling this market and we have prepared for a bottom, played the bounce, and now we must get ready for the possibility of testing those lows again. Remember, I keep telling you October will continue to be like this. That is why we are taking half positions over the short-term/ long-term and cashing in on profits by keeping tight stops.

As far as the bounce, it was good for a quick trade in Microsoft (MSFT, $22.66, down $1.44), Google (GOOG, $339.17, down $23.54) and Johnson & Johnson (JNJ, $60.54, down $3.46), Morgan Stanley (MS, $18.13, down $3.81) and Goldman Sachs (GS, $113.15, down $8.75). Keep an eye on the calls I have mentioned. Some of them are still higher but they may get cheaper. So here is the game plan.

First, if you take any positions, only start with a half position. What that means is that if you normally buy 10 option contracts at a time, buy five. The market keeps showing signs of another breakdown and to me, that would be the best thing that could happen.

Of course everybody is going to question the bailout package but the market needed to do its own cleansing and needed to make its own low before Congress jumped in. The truth is that Bush didn’t want a crisis and they wanted to jump start the market because it was at multi-year lows. But the reality is the market has to make a bottom on its own.

I studied charts until I was light-headed last night and here is my best/ worst case synopsis. I’ve already been calling for this decline since August before we hit last Friday’s lows. In fact, in the October 7 blog with the Dow at 9,447, here was what I mentioned:

“I’m not making any predictions on how low the Dow can go because on any given day we could get some kind of “miracle news” that takes the Dow higher by 1,000 points but from my study of the chart for the Dow, it looks like we could test 8,300. That’s another 1,000 points lower. From there it gets real ugly.”

Well, we got that and then some, son. I only repeat myself a thousand times because, again, I want to make you aware of what type of market we are in. You have to have a quick trigger and know what is happening. Having said that, there is support at 7,200 for the Dow but that’s another 1,300 points lower.

Although the talking heads thought last Friday’s 7,700 level was “the” bottom, some research will shed a different light on the subject if you are willing to do a little homework. This market can float like a butterfly and sting like a bee, that’s for sure. But it’s up to you to stay on your feet so that you can beat the Street. Don’t fall in love with any positions (yet). We still have earnings and October options expire next Friday.

Drumroll please…it’s possible we test those lows for the Dow (7,200) by next Friday with the hope of the market rallying afterwards.

Rick Rouse
Rick@OptionsMentoring.com

It was a nasty day for the market as all three major indexes took a major blow by falling an average of 3%. A wave of bad news hit Wall Street like a tsunami as oil topped the $140 level and could ultimately be the straw that breaks the market’s back. The Dow lost a whopping 358 points to finish at 11,453. The Nasdaq fell nearly 80 points and closed at 2,321. The S&P skidded 38 points and ended the session at 1,283.

Three weeks ago I mentioned if the Dow fell below 12,000 it could lead to a test of 11,750 and if that was broken, we could fall even further. Here we are. I said the S&P 500 would need to fall to 1,325 then 1,275 for the bears to start coming out in force. Here they are on the doorstep. For the Nasdaq I mentioned 2,375 was support followed by 2,275. As you can see, the Nasdaq could be a train wreck waiting to happen.

If you are a regular reader of the blog, you will know that I’ve been bearish for quite some time. There are a few stocks and sectors that have done well over the past few months and it has clearly been a task to find stocks that are going up when everything is sinking. However, people are making money by being short the market. There aren’t many stocks or sectors that look good right now to go long now, except maybe gold, but there will be.

A lot of stocks have been punished to the point to where they look not cheap but “dirt” cheap. There will come a time when it will be worthwhile to start thinking about going long and LEAP call options could provide us with an excellent chance of making some big money. But not yet. July will be a pivitol month for the market and you can bet there will be plenty of fireworks.

Rick Rouse
Rick@OptionsMentoring.com

It wasn’t a good week for the market as all three major indicies finished in the red. Before we get to the numbers, the biggest concern remains the FOG (food, oil and gas). We are beginning to see the impact of higher commodity prices spread to other areas that are causing many businesses to come up with ways of cutting back or passing it off to the consumer.

For instance, AMR Corp. (AMR, $6.32, down $0.24) is reducing its capacity 10+% and tacking on a $15 fee charge for your first checked bag on your next flight. Some police departments have stopped allowing their officers to take their patrol cars home because of the cost of gasoline. Speaking of which, have you noticed the big declines in the stock prices of Ford (F, $6.87, down $0.29) and General Motors (GM, $17.60, down $0.83)? GM hasn’t traded this low in 25 years. Wow. These are just a few examples to combat higher oil prices and it doesn’t stop there but you get the picture.

The Dow suffered the biggest decline falling 500 points, or 3.9%, to close at 12,479. The S&P 500 was next with a 3.5% drop, or 50 points and finished at 1,375. The Nasdaq, which had been strong up until late, suffered an 84 point drubbing, or 3.3%, to wind up at 2,444.

I keep mentioning the key resistance levels for the market (1,450 for the S&P 500, 2,600 for the Nasdaq and 13,500 for the Dow) and I might as well outline some support in case we are headed even lower. For the Dow, a break below 12,000 could lead to 11,750. If this level is broken look out below. The S&P 500 would need to fall to 1,325 then 1,275 for the bears to start coming out in force. The Nasdaq has lower level support at 2,375 followed by 2,275. A break below 2,200 could spell trouble.

It looks like that old adage “sell in May and go away”, which was missing earlier in the month, was back in vogue ahead of the long holiday weekend. I have mentioned the lack of catalysts to carry the market higher and although I’m not totally convinced we are setting up for a correction of some sorts it wouldn’t surprise me one bit if we get a small one.

Rick Rouse
Rick@OptionsMentoring.com