Monday January 5, 2015 – Weekly Market Update

Well, New Years has come and gone and the market
sells off in a big way.

The DOW is down just over 300 points as I write this
and the S & P is off almost 36 points.

Not the way you want to see the new year start.

But, if you think back to last year, that is exactly
how 2014 began.

The market actually topped out on January 15th last
year at 1,850.84. From that top, it dropped over 100
points to a low of 1,737.92 on February 5th.

So, in about three weeks, the market lost over 6%.

The question you have to ask yourself is this … will
this year be any different?

Because after that bottom, the market went on to make
new highs and have another positive year.

Will this year be any different?

I think these types of moves will be normal this
year. In other words, I am expecting a lot of
volatility.

One of the reasons is that the market is overdue for
a bear market.

On average, bull markets last for five years. This
bull market, which began on March 9, 2009 is now
in it’s six year. So, from a time perspective it is
overdue for a major pullback.

What will be impetus for the next bear market?

Perhaps the free fall in oil? Could it be that the Fed
starts to raise interest rates in 2015?

With the deflation across the board in commodity
prices, it seems that inflation is not an issue.

These are the questions you need to ask yourself.

Don’t be fooled by mainstream pundits who
constantly tought the virtues of staying fully
invested in the markets.

The issue is how do you make money in a volatile
market?

Do you pull out altogether?

That depends upon your risk tolerance and how much
you are willing to accept. But, imagine that you sold out
of the market in 2007 and waited for the bottom
in 2009. Bargains could have been had at that point.

Before I would suggest that, I believe the market needs
more price confirmation before we can say it has
shifted to a bear market.

So, how do you make money in markets like this?

One thing you can do is trade off of shorter timeframes.

I do this using 60 minute charts and combine them
with 10 minute or even 5 minute charts.

I especially like this on Friday using weekly options that
expire that day. This way, you pay very little for
time premium and your loss is capped at the premium
you pay.

Let me give you a quick example from last Friday.

We were looking at BIDU.

BIDU gapped up and opened Friday at $229.46. It moved
up to a high of $230.45. At that point, the $230 put that
expired that day would have cost you about $1 or $100
for one contract.

BIDU dropped to a low of $221.48. At that point, the
$230 put would have been worth around $8.50.

So, a $100 investment would have grown to $850 in a day.
Actually, it made that move by 11:00 EST, so you
would have been in the trade for about an hour and half.

And that was not even the best trade in BIDU last Friday.

At the time that it spiked up just over $230, the $225 put
could have been bought for 10 cents. If went to a high
of $3.30 the same day.

These examples are why I love the leverage of weekly
options on a Friday.

The other strategy I am doing more of are non directional
straddles and strangles.

With this strategy, you do not need to pick a direction. You
anticipate an expansion of volatility.

I have indentified certains sets ups where this trade makes
sense.

It is not without risk. Your risk is if the stock fails to move
more that the cost of your straddle or strangle.

I know it seems odd to bring up issues like thinking about
a shift in market momentum. But, this is precisely the
time to start.

Until next week, trade safely.

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