Falling Thursday - Futures Down and Our Hedges are UP $7,300

This is what hedging is all about! 

In yesterday's morning post, we listed our shorting line for the Futures saying: "Meanwhile, we're STILL shorting at those same lines we laid out Monday and this morning they are working yet again but, so far, it's been nickels and dimes against quick reversals.  I still think a major sell-off is a lot more likely than a major rally but so far, so wrong."  In our Live Trading Webinar at 1pm, we made our Members another $400 playing the bounce (more this morning as Silver is flying higher) while our short lines were:

  • Dow (/YM) Futures short at 17,500, now 17,350 - up $750 per contract 
  • S&P (/ES) Futures short at 2,042.50, now 2,017.50 - up $1,250 per contract 
  • Nasdaq (/NQ) Futures short at 4,435, now 4,375 - up $1,200 per contract 
  • Russell (/TF) Futures short at 1,091, now 1,065 - up $2,600 per contract 
  • Nikkei (/NKD) Futures short at 17,000, now 16,700 - up $1,500 per contract 
The Nikkei is not a great short as the Dollar will rise when our markets fall and, if oil fails to hold $40, it will likely take the Dow with it – so we'll keep an eye on that.  Our trading rules are very simple, we look for 3 of our 5 indexes to be below and then we short the laggards (the last ones to cross under) on the theory that they'll catch up a bit.  If ANY of the indexes pop back over their line (including the ones we short), then we GET OUT!  That limits our downside but lets our upside run.  

Remember - I can only tell you what is going to happen and how to make money trading it - the rest is up to you!  Oil did indeed fail $40 into the NYMEX close at 4:35 (you have to know your timing if you are playing this stuff!) and did indeed take the Dow with it (because XOM and CVX are heavy components), which in turn spooked the rest of the indexes which, as we well know, were overbought in the first place.

What's causing the market sell-off?  Just all the stuff we've been warning about since last week:  China, Earnings, Debt, Europe, Terrorism, etc. - there's only so long you can ignore reality before it comes back and bites you in the ass!  We have a technical term for reality, we call it FUNDAMENTALS!  They are what drive our investing decisions - not the squiggly lines on a chart.  That doesn't mean we can't illustrate the Fundamentals on a chart - like we did on Monday with oil:

And what has oil done since Monday?  

All this was detailed in Monday Morning's Alert to our Members and I even tweeted that one out at 6:30 am that morning in which I said:

So, in retrospect, it's easy to see how oil went higher, the barrel-count of FAKE!!! demand went up 100,000 last month and is back to dangerously high levels that put a ton of downward pressure on oil, should there be even a hint of bad news.  On the other hand, it's almost summer so I wouldn't count on the downside too much.  Remember, we're riding out our CVX short calls on the premise that they would pull back this week.

Craigs asked me if I think the bias is up or down from $41 but there's really no evidence to suggest $41 is support and we haven't really tested $40 from above so I'd look for that today and $37.50 shouldn't be surprising on a good sell-off and that's PROBABLY the range that will form up into Easter/Spring Break – $37.50-$42.50, which means $41 is right in the middle and not a good place to make (upside) bets. 

Of course, it's not all Futures trading for our hedges - it just gets the most attention as it's the most volatile.  If Friday's post, we discussed that we added 50 S&P Ultra-Short (SDS) June $20 calls to our Short-Term Portfolio for 0.95 ($4,750) to the 50 we already had and those should begin to get interesting this morning, with every penny gained being $100 with our 10,000 options (100 per contract).

SDS is a good example of the stark difference between Fundamental and Technical trading (something we discussed in yesterday's Live Webinar as well).  That was one UGLY chart on Friday for SDS but we saw it as a buy point because we KNEW the S&P was toppy at 2,040 and  we are students of the market so we understand the relationships of the ETFs to the indexes and the options to the ETFs and we were able to make an intelligent trade with low risk and high reward.  SDS topped out at $25 in the last pullback (2/11) and 100 SDS June $20 calls at $25 would pay us back $50,000 - that's a nice hedge!  

Hedging is how we balance our portfolios and you MUST have balance in order to have a happy life.  

The markets are closed tomorrow but those of us who are BALANCED are going to be able to enjoy a nice 3-day weekend without worrying about where things will be on Monday.  If you are constantly stressed out by the markets, I urge you to look into a system like ours which, when it's going well, can actually do BETTER in a downturn than an up market.  Sure, it's not as exciting as having those huge highs and lows as the market gyrates up and down - but it's exciting to have a life outside the markets as well!  

Have a great weekend, 

- Phil