Don’t Buy Put Options – Too Late and You Have No Staying Power – Day Trade and Wait

Posted 9:40 AM ET - It's déjà vu all over again. I turn on my computer and witness a sea of red. The market is down 5% in the first few trading days this year. Panic selling in China is the culprit. I hear a lot of analysts talking about weak economic conditions in China, but I'm not buying it. Official PMI's were decent. I believe Chinese investors weathered a nasty decline last year and they planned on selling stocks the first day this year so that they did not have to pay capital gains taxes in 2015. Everyone hit the exit at the same time and trading limits were hit. That resulted in panic and the bottom is falling out. The PBOC has not intervened and the Yuan is getting crushed. I believe that they will take action next week and it will be very close to option expiration. Central banks love to screw with shorts. The wealth destruction in China could hurt consumption. That in turn would lead to slower growth. If economic activity sours quickly, there could be shadow banking credit concerns. This will take time to play out and we will know in the next few months. Until then, this is an over-reaction. Our market is selling of in sympathy. ADP was strong (257K) and ISM services was above 55. Both were good numbers. The S&P 500 is below all major support levels. It is possible that we will fall to SPY $182 before we capitulate. I did not catch this decline. I forecasted a bounce this week on strong economic data and I expected us to reach the 100-day moving average (SPY $202.50). That is where we were going to start getting short. Unfortunately, we did not get back to that level even though domestic economic results were strong. This train left the station. The absolute worst thing you can do is to buy puts. I speak from personal experience. There is no worse feeling than having the S&P 500 rally 40 points instantly on the snap-back rally. Option implied volatilities get crushed and the losses are huge. You have very little staying power and you bailout. Starting the year off on a strong note is critical. Once you have profits, you can increase your risk throughout the year. You do not want to be trading out of a hole. That is why I started the year off dead flat. I did get caught with a few long positions that I held over from Tuesday. I spent Wednesday taking my losses and day trading off-set them. My longs held up fairly well because I traded a pattern, but I had work to do. I shorted LEA and I bought VRX. There were many other trades, but I managed to get profitable for the week. I will be looking for longs and shorts today, but I will focus on the long side. I trade one specific pattern and I trade it extremely well. From the short side, I will be looking for stocks that are near the upper end of the range and have plenty of room to fall. I want to see a compression and a recent breakdown through horizontal support. The move needs to be starting right now. I also don't want to see a big gap lower. If you bring up a chart of LEA, that is what I posted to my subscribers before the open yesterday. That is the pattern I'm looking for. On the long side, I am looking for stocks that have formed a solid base and that have weathered the storm. I want to see price compression and a rally through horizontal resistance. GNC and VRX are two examples. In both cases, I need to also have a signal from my trading system. The stocks I referenced performed well yesterday, but that doesn't mean they will perform well today. My trading community is constantly looking for these patterns and my trading platform has a very specific series of searches. Once we spot a candidate, we share the idea in the chat room. I plan to day trade and to grind out profits. This big decline is going to set up an excellent buying opportunity. The first few rallies will only last a couple of days, but they have the potential to be violent. If you are a swing trader, be flat and stay sidelined until we see a capitulation low. Once that pattern emerges, it will be time to sell out of the money put spreads (a.k.a. bullish put spreads). January is typically a good month and I believe many traders got caught long. They are taking a lot of heat and that is adding to the selling pressure. If you are an active trader, take my one-week free trial. You are going to see a ton of great trades and you're going to see us make lemonade out of lemons. I’m sorry I was not able to post yesterday. I was too busy trading. . .

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