The hits just keep coming for the market. Another day, another drop for the Dow. Wow. Tuesday’s 508 point debacle left the index standing at 9,447. In case you’re counting, that makes it five days in a row the market has ended lower. To make matters worse, the Dow tested Monday’s lows and wound up finishing below that level. Remember what I’ve said about higher highs and lower lows? These trends are easy to identify and right now we’re in the midst of a full blown sell-off.

Read somewhere retirement accounts have taken a $2 trillion loss over the past year or so. I just find that amazing. Already I hear chatter of people working longer and putting off retirement because of what the market has done to their retirement accounts.

I know things look bleak right now but trust me, the storm will pass and the market will recover. Of course, the rule book is changing and there will be new players in the market and they we will be the ones to watch and follow. But for now, let the market do its damage and let’s keep looking for opportunities to go both long and short.

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.

In the meantime, I’m serious when I say this. I love the market drop. Everybody thinks nobody is making money, but the ones shorting this market and playing the bounces are making a mint. This morning before the market opened I mentioned how we have been using the PowerShares QQQ Trust (QQQQ, $32.65, down $2.21) to short the market. The October 45 puts (QQQVS, $12.20, up $1.85) were at $3.00 on September 10 and were up another 18% today.

You could feel the “chill in the air” when the market opened and when Bernanake spoke, it just got worse. Want better results than 18% in a day? Check this out.

The October 32 puts (QAVVF, $1.40, up $0.62) saw incredible volume today. I’m talking jaw-dropping. The puts OPENED at $0.64 this morning but you could feel them going higher. I can’t explain iust how great of a tool this one strategy is. It feels good when everyone is running for the hills and you’re in there buying put options. There were nearly 150,000 contracts traded…nearly 3x the open interest. 150,000 for one strike price. Unreal.

Let’s just put it this way. If you had an extra $650 this morning and decided to buy these put options in hopes of the market tanking again, then you would have had $1,400 by the end of the day. That’s $750 in six-an-a-half hours! Times that by two. Now you’ve got $1,500 in a day.

And don’t tell me it’s gambling. I’d rather play this game then the ones in Vegas. Wall Street has better odds right now, thank you. Look, there will be a day when the market is going to give you a clue and you are going to feel like a 500-point rally is in the cards. When you do, go long the quad Q’s for a day.

That’s the difference between a novice investor and a “savvy” one.

Rick Rouse
Rick@OptionsMentoring.com

It looks like the financials are getting close to being “rescued” by the government as both the Democrats and Republicans have made “tremendous progress” in negotiations over the $700 billion rescue for Wall Street. Let the debate begin on whether this is a good idea or not but it looks like it will happen over the weekend. In other words, Monday morning’s open could be huge. I say that with reservation but that is how the market should react.

There is so much riding on this package that many analysts believe that if this thing doesn’t go through then we are in big, big trouble. I’m not so sure of that because I believe there are many other solutions that would work that have not been heard. It’s just a timing issue and for the stock market it needs an infusion.

The market took a huge dive last Wednesday and Thursday as the Dow hit a low of 10,400 and was on the brink of a total collapse. Word of this bailout package helped stabilize the market and as you can see, if it fails, the market fails. Of course, the market still has a number of issues to work through and October is just around the corner. October has been the month where we have had some of the most historic corrections ever.

I’m leaning towards a rally but remain cautious as many investors keep selling into the rallies. If we can get a mini-rally for the market on the news of an approved bailout package then we could go long by buying options on any of the indexes. I prefer to use the PowerShares QQQ Trust (QQQQ, $41.52 up $0.66) when going long or short the market.

The October 43 calls (QQQJQ, $0.81, up $0.12) are up 17% this morning and could be worth a roll of the dice based on the belief the market will rally next week. It is clearly a lottery play.

Rick Rouse
Rick@OptionsMentoring.com

It was a rough day for the market as all three indexes posted huge losses after a flurry of bad economic news. The retail report was lousy although Wal-Mart (WMT, $59.78, down $0.01) held its own. The stock hit a high of $60.89 and was challenging its 52-week high of $61 but faded as the market grew weaker. Jobless claims rose to an adjusted 444,000, up 15,000 from the previous week. Wall Street had expected a drop to 420,000. Add it all up and it spelled disaster for the market.

The Dow finished the session 345 points lower to 11,188, a decline of 3%. The Dow is officially down 328 for the week but is 643 points off its high of 11,831 on Tuesday. I mentioned this level as a brick wall and that it was. The Nasdaq fell even harder on a percentage basis (3.2) dropping 75 points to 2,259. The S&P 500 dropped 38 to 1,237.

The market may be getting ready to call “uncle” if Friday’s monthly unemployment numbers come in higher than expected. Wall Street is expecting an elimination of 75,000 jobs in August which means a higher unemployment rate. This will be the eighth straight month of job cuts if so. The unemployment rate is expected to come in at 5.8%.

This will likely be the biggest impact for tomorrow’s trading and any hurricane news could also sway the market. As far as any option positions, there is a tremendous amount of put buying out there and I would feel safer shorting the market over the weekend than going long.

Note: The PowerShares QQQ Trust (QQQQ, $43.66, down $1.46) mirrors the Nasdaq and the technology sector could be setting up for a major decline. There was plenty of action in the September 45 puts (QQQUS, $1.73, up $0.86) which doubled today with the 3% decline in the Nasdaq. They opened at $1.07. The October 45 puts (QQQVS, $2.27, up $0.74) opened at $1.66. You could feel the tone of the market this morning and these option plays were huge winners for the traders who smelled blood in the streets.

Rick Rouse
Rick@OptionsMentoring.com