Keep it simple

The market rallied back on Friday, but I think the down turn is still intact, if we have a follow through next week. S&P, Dow and Nasdaq have not broken the long term up trend, but they're just not the same as before. Check any one of these charts, you think it's more likely we'll have a down follow through than a rally back to up trend.

1. Even for the long term bulls, some "venting" is good for them. Like I said during the Feb. mini correction, 10% correction is normal, now the S&P was down maybe 2.5% from its all time high. So even this is a correction, we have 8%-13% left to go.
   
2. Even the Feb. correction is about 8-10% for most of the indices, so we're not there.
3. Then, there is a possibility this is just a small dip during the bull run, but if you check the charts since March, this is the first time we have three down days in a row.
   
4. And we continue to have bearish MACD for major US indices; and higher price on lower volume; and higher volume on down days, etc.
   
5. And we enter summer, the slowest time for stock. M&A activities have run its course, now we're near the end of the deals. And of course we have still have a few large deal coming on Monday, which is what bulls hoping for.
6. But just like in 2000, some large deals came at the end of the run, not the beginning of the run.
   
7. Like I mentioned a few week's ago, year 2007, we'll likely to have worse than average weather patterns cross the global, and that will not do well for the stock markets in general.

My action on Friday and Thursday:

1. On Thursday, even I think the chance that we'll have a bounce on Friday was pretty good, I didn't sell most of the shorts and puts and reenter at a better price. I want to keep it simple, once you're moving to catch small bounces, you'll get burned.
   
2. Use recent pattern (rally after each dip), I should sell existing shorts after first big drop; then after 2nd big drop. But this time we have three days in a row. If I sell the short, what if there is another big drop on Friday? Then I can't reenter shorts.
3. But on Thursday, I sold IWM's puts, and on Friday, I bought it back at 15% lower, and that's not even the best price of the day.
4. So the point is, keep overall idea as bearish, and if I have three day down in a row, at least took some positions off the table, and can add back if there is a rally, and if there is another down day, then I still have some positions left.
   
5. I added IWM and QQQQ puts again on Friday, not even at the best entry price since I added them too early. But spread the positions over time will reduce the cost for sure.
6. Also added SDD on Friday, it's the ultra shorts on S&P600 small caps. I think it will perform worse than Dow and S&P500 during the down turn, so switch to small caps short is more rewarding if we indeed have a correction.
   

Next week:

1. It's option expiration week, so we may have some ups and downs, and I hope it will be another down week just like last week.
2. And I will add small puts on rally, and reduce puts on sharp falls. This is the idea, very difficult to time the entry and exit. But as a rule, three down days, you got to sell some puts to protect profit; and three up days, you got to buy some puts to get better entry.
3. Of course, real time trading will be far more different than what I discuss here, and all these are based on the idea that the market will turn lower in the this month, and summer. If this is wrong, then the whole idea is wrong, so still keep it simple an keep watching the market.

Last week is different than Feb drop:

1. It started small, and we have three down days with larger than normal volume.
2. On Feb.27th, we had a big drop and huge volume.
3. I think this time, it's more likely a real turn for the market than Feb.27th. Usually the market top for a slow and long lasting bull market like this one (Oct.2002 to June.2007) should be a slow and small drop first, not a volatile one like in 2000. In that sense, last week is more a sign of topping than Feb.27th.
4. ^VIX certain pick up last week, and if bond continues to drop and push the yield higher, then we'll have a big fundamental factor that's not price in the market.
   
5. The possibility of another great rally now is very small, and possibility of a real correction is higher than 50%, I think.

Market prediction:

1. A down market early next week, I think the selling will resume in force.
2. Depends on the economic news and market reaction, we may have a selloff (2% or more) during next week, and then we'll have another rally after the selloff, towards the end of week.
3. In general OE week will expand the previous trend in a volatile way, so let's see if this hold true or not. Either it will enforce the main trend, which is up since March; or it will enforce the short term trend, which is set last week on the down side. I think it will enforce the latter.