Market Update Email 4-12-09

To: Friends and Family
Subject: Market Update 4-12-2009

It has been awhile since I have sent out an update. I apologize I have been busy moving and wrapping up my current job. This summer I will be focusing entirely on the markets, which I eagerly look forward to. I am also working on a market neutral trading strategy which I intend to take to B school with me and use as my focus for my entreprenuership concentration and see where that takes me. Still very early in that process though. I am living with my parents until July at which point I will move downtown to start Ga Tech.

Another reason I haven't sent out an update lately is because frankly I am not sure what to do next. The market hasn't exactly behaved as I expected. This rally up has gone farther and longer than I anticipated and a lot of the traditional indicators I use are not helping. I currently have some trapped April puts that I will no doubt lose some money on, but I am not too worried as that was the house's money I was playing with. That is what I get for trying to pick a top, though. The smart money management thing to do is to wait until a trend has formed, know at what price you will be proven wrong so you have your stop loss, and then get on board to ride that trend and get out if proven wrong. The key is to know at what point you are wrong and currently for me that point is $875 which we have not hit yet. The moves that we are currently dealing with are huge by historical standards at 20%+ each, so there will be plenty of time to jump on board something for the ride rather than trying to pick a top or bottom. I have spoken over the last month of the bounce I expected and then the sell off that will occur afterward. Currently we are still in that bounce and still awaiting the sell off. That expectation remains albeit now with a different outcome until the market takes out $875...I will show you why in the chart.

This continues to be a traders market and I don't expect that to change anytime soon. There is nothing wrong with holding cash and waiting this thing out. Most people wish they'd done that over the past 10 years; it would have returned you more! You don't have to be in stocks and Im not convinced the risk is worth being in stocks.

Now to the charts. You may have to tweak the zoom or sizing of the chart. I apologize-I added some other indicators to the bottom. I mentioned that I am going to take a hit on my April puts, but the reason will most likely be because they are options instead of stocks, and they have an expiry. This market will fall again, and most likely to the mid 700s at least, but when? I do not know at this point. Everytime I think this thing is getting long in the tooth, something happens. A good wave analyst I follow has coined this rally, the "upside surprise" rally. It sure appears that way. There are some counts that have this thing just about topped out though, but I will not try to pick this top.

The last chart I sent out expected a bounce, which we got. The bounce I expected was supposed to be a lot smaller though and end in the "red zone". Attached is what the primary count now looks like it wants to be. That 5 wave decline I had in Green on the last update, was correct. Only it seems it might be of one degree higher, and the triangle I had on a previous chart topped out in February as I now have updated again on the attached chart instead of January. That satisfies the wave structure. What this implies is that if that five wave move down in February was of one degree higher, then we currently COULD be in that "Big Summer" rally I have spoken of before (Our primary Wave 2 up).

I emphasize COULD because until $875 is taken out no rules have been broken and we could also still be in wave 2 of a 5 wave move down still. If you scroll down on the chart you will see this scenario in the 2nd section. That is why I cannot get long yet. It is looking more and more unlikely, but nevertheless, cannot be ruled out. Most likely we have started that big summer rally, and if so, we should still get a very good opportunity to get long on this next move down to below $800 (whenever it occurs). The way I will be playing this is if we break north of $875 soon then I will put a few slugs north knowing that a correction will be due sometime soon at which point I will add more longs for the next leg up knowing that when that is complete I will be shorting again for another huge move down to new lows (at Blue 2.). That next move north should reach at least $950.

Other thoughts: Remember we are in a bear market until proven otherwise. Even with this 25%+ rally we still have not made higher highs and lower lows. I do not think chasing this rally is the right thing to do, not yet anyways. On the contrary the VIX has finally confirmed the move up. It finally broke down on Thursday which typically means the market will rally, but I wouldn't be surprised to see this as a false move sucking in the bulls one last time since this indicator has been screwy for the last 6 months. I will need to wait a few days to see if it holds. The put call ratio also continues to give no signal, which is disappointing, as it was one of the great indicators of the last 2 years. The nasdaq continues to lead which is bullish.

And, finally, weekly volume has been slowly declining over the last 4 weeks which is bearish. And finally of interesting note, Goldman Sachs has announced they will be making a multi-billion $ share offering in the next few weeks. This will dilute the heck out of their shares. In theory companies should issue shares at price highs and buy back shares at price lows, so this could be a way that Goldman is kind of "calling the top" in the market. Conspiracy theorists are suggesting the banks have built this false rally in order to prop up their prices so they can get the maximum amount of $s for their offering (ripping off the share holders and retail investors). It wouldn't surprise me, and it will be interesting to see how this is spun in the news. Is it positive because GS wants to get out of bed with the govt and pay off its cheap govt. loan or is it negative because it will dilute the heck out of their shares and cost way more than the govt. debt? Who knows but it will move the market.

Good luck to everyone and shoot me any questions you may have. Remember, you know best about your current financial situation and I only use money I can lose to trade with. This is not advice, just letting you all know what I am up to since you have expressed an interest in the past.

I may be turning slightly bullish but not until a good pullback.
Chad