Editor's Note:

Good evening. Wow, virtually all estimates for Friday's employment numbers were far too ambitious and way off the mark. This sent the pre-market futures lower causing a significant gap down on Friday morning. So much for letting the firms and analysts on Wall Street influence my view on economic data. I mentioned in the Intraday Market Update on Thursday that there were mixed signals coming out of the economic reports, citing that no improvement in jobless claims and continuing claims were signaling that firings and lay offs remain elevated. That was obviously the right call. In hind sight we should have been exiting positions on Thursday's strength ahead of these numbers, but hind sight is not a luxury we have in trading so we must be quick to adapt.

However, in Thursday's newsletter I wrote about a possible "sell the news" event and I suggested to readers to be quick to tighten stops on Friday on any strength with "the anticipation that your long positions will be closed or stopped out, regardless of whether listed targets are achieved." What I didn't expect was the large gap down so we were forced to adjust. Nonetheless, in early trading the S&P 500 bounced +8 points from its opening low print and that was all she wrote. Selling into the bounce with either tight stops or simply taking profits was the right course of action considering the extreme bearish tone in the market. As a result, I have outlined in the play updates how our closed positions were executed and the reasoning and strategy behind each move.

This leads me to share with you one of the biggest challenges I have had to overcome as a professional trader, and that is figuring out when to exit positions. I believe too many traders, especially less experienced ones, put too much focus on the entry point as opposed to developing sound rules for exit strategies and being able to adapt to whatever the market gives us. Since April 16th, or the past 8 weeks, volatility has exploded and it appears there is no end in sight. This has made it difficult to manage swing trades and we have had many winning trades turn into losers. Many times it has been a result of targets nearly being missed or stops being taken out by a few cents, only to watch the position reverse creating frustration. The fact of the matter is that traders need to constantly adjust stops and targets and not be afraid to pull the trigger to exit positions. One of my general rules is to "trade to trade well, not to make money." That may sound odd because obviously we trade to make money. A better term to describe it is probably a "state of mind." Having this state of mind takes the emotion out of taking losses or hoping for big gains, rather it allows me book small gains consistently and accept small losses which keeps my account growing. The fact is that nobody can be perfect and coming up with rules and strategies focused on exiting positions, such as using trailing stops if a position is moving in the right direction, will help you become a better trader.

Onward to my view on the near term market direction and my intentions for the model portfolio. I have been writing that we are in no man's land without a convincing close above 1,110 or below 1,070 in the S&P 500. Was Friday a convincing close below 1,070? I would like to think so but I am not convinced just yet. Markets have a knack for faking out traders and many times overshoot a trend line or support/resistance area prior to reversing. With the heavy selling and distribution on Friday it didn't surprise me to see the SPX close below 1,070. The fact is that the index closed right at the flash crash lows of May 6th and there are some support areas just below. For example, the low in the ES futures on May 26th was 1,059. Friday's low in the ES futures was 1,059.25. This could be considered a logical bounce point in the market, or do we go all the way down to test the May 25 lows near 1,040 first?

A test of the May 25 lows would complete an "M" type pattern on the longer term intraday charts (i.e. 1, 2, or 4 hour chart). Opening a short position now thinking we will test lows near 1,040 may not be the best strategy considering the price action on May 25th when we hit those lows. The SPX proceeded to tack on +50 points in a day and a half, then retraced -30 of those points, and finally added on another +40 points. All of this happened in 3 trading days and the SPX ultimately gained +63 points off of those lows.

Add in the geopolitical news driven market and anyone's guess is as valid as the next. Good or bad news may catapult the market in either direction. I believe the best strategy going forward is to sell (or initiate short positions) into strength and buy (or close short positions) into weakness. We will also have a balanced portfolio of long and short positions. For now, we remain in a difficult price range and I expect the volatility and choppy price action to continue, maybe for the remainder of June. I am more bearish than bullish but believe there are opportunities for bounce plays to the long side. However, my longer term view of things isn't so rosy and in the end I believe we will have a double dip recession and may even test March 2009 lows. The overall geopolitical events will most likely determine how severe things ultimately get or whether there will be more stimulus and government support to save the market yet again. Lastly, we need to stay nimble and focus on shorter term bullish and bearish moves that can generate winning trades.

NOTE: I've had some technical difficulties with my charts so I've had to use a back-up charting package on some of the play updates. I have also provided 30 minute intraday charts to explain the exits rather than the normal daily charts. Feel free to email me with any questions.

Current Portfolio:


BULLISH Play Updates

Quest Software - QSFT - close 20.02 change +0.76 stop 18.40

Target(s): $19.60, 20.50, 21.00
Key Support/Resistance Areas: 18.60, 19.36
Time Frame: Several weeks

Comments:
QSFT gapped higher this morning and never looked back. I would not be chasing the stock up at this level unless it is an intraday trade or you are using a tight stop and monitoring the position. I suggest patiently waiting for a throwback to our trigger near $19.00. This level is above the recent breakout of resistance at $18.70 and the highs from 5/20, 5/21, and 5/26. If QSFT trades down near $19.00 I am confident the prior resistance will hold as support. The stock traded up to $18.87 in 12/2007 which adds to the thesis as this level holding. My comments remain valid from the play release last night. QSFT is relative strength play that is involved in virtualization software and cloud computing, among other things. These stocks have done extremely well as the market has been under pressure over the past month. QSFT has recently broken out of a resistance level near $18.60 to $18.70 which has acted as support the last couple of days. The stock made new all time highs on 5/19 and if the market can continue its bounce from today I expect QSFT to make new highs again. I have also noticed unusual option activity picking up in the July strike prices and above average volume, both bullish signals. I would like to see QSFT pullback near the $19.00 level which we will use as a trigger to enter long positions. With all of that said I want to keep a tight leash on the trade with a stop at $18.60 to protect capital if things reverse lower. I am also choosing a $20.00 out of the money call option to limit capital at risk.

Suggested Position: Long QSFT stock if it trades down near $19.00

Option Traders:
Suggested Position: Buy July $20.00 CALL, current ask $1.10, estimated ask at entry $1.00

Annotated chart:

Entry on June xx
Earnings Date 8/10/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on 6/2/10


CLOSED BULLISH PLAYS

Cypress Semiconductor - CY - close 11.05 change -0.49 stop 11.02 *NEW*

Target(s): 11.70, 11.95, 12.25, 12.95
Key Support/Resistance Areas: 12.40, 12.00, 11.75, 11.40, 11.00, 10.75
Current Gain/Loss: +1.79%
Time Frame: 1 to 2 weeks
New Positions: Only on a pullback

Comments:
CY gapped lower but then immediately reverse closing the gap from Thursday. Since we were looking to sell into strength and exit long positions the proper stop should have been placed just below the low of the 3rd 30 minute bar. This enabled us to protect a small profit and prevent the trade from turning into a loser. For readers who may still have positions I would suggest placing a new protective stop at $10.95 which is below Friday's low. The stock has support at current levels and if the market can bounce CY should do well.

Closed Position: Long CY stock at $11.40, entry was at $11.20

Annotated chart:

Entry on 6/1/2010
Earnings Date 7/22/10 (unconfirmed)
Average Daily Volume: 4.7 million
Listed on 5/29/10


Diana Shipping, Inc - DSX - close 12.75 change -0.69 stop 12.90

Target(s): 14.00, 14.35, 14.75
Key Support/Resistance Areas: 14.40, 14.15, 13.50, 13.25, 13.00, 12.20
Current Gain/Loss: -3.11%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
DSX made a double top near $13.20 in early trading near prior support of the past few days. When this happens it is imperative to think about placing a tight stop to protect gains or limit losses, especially with the bearish tone in the market. Since we were looking to sell into strength and exit long positions the proper stop should have been placed just below the low of the 2nd 30 minute bar. This enabled us to exit at a better price than our original stop loss. For readers who still may have positions I would expect DSX to bounce from here but the overall market direction this week will be the determining factor. The stock looks like it wants to make a higher low on the daily chart and may be starting to form an upward trend. A new stop could be place below Friday's low. The last area of support is $12.20.

Closed Position: Long DSX stock $13.08, entry was at $13.50

Annotated chart:

Entry on 5/28/10
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 1.4 million
Listed on 5/27/10, 2010


K12 Inc - LRN - close 25.15 change -1.70 stop 23.45

Target(s): $24.50, $25.00, $25.50, $26.25, $27.25
Key Support/Resistance Areas: 25.35, 24.50, 23.75
Current Gain/Loss: -2.35%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
LRN gapped lower Friday and never looked back. Since we were looking to close the position on strength but didn't get much, we turned to the opening range and the prior support level of the past few days just under $25. This was the proper place to place the stop at $24.90. The sellers showed up taking profits and our relative strength play no longer looks that promising. For readers who may still have positions there is support near $23.75 to $23.50. A new protective stop can be placed under these areas and watch the overall strength or weakness in the market for clues. This stock could easily snap back higher but if not I would suggest getting out of the way and cutting your losses. Regardless, if LRN does continue higher from here I urge readers to trail stops up to protect capital. *NOTE: LRN's average volume is about 200,000 shares. Therefore I consider this an aggressive trade so please use proper position size to manage risk.*

Closed Position: Long LRN stock at $24.90, entry was at $25.50

Annotated chart:

Entry on June 3, 2010
Earnings Date 9/9/10 (unconfirmed)
Average Daily Volume: 200,000
Listed on 5/29/10


Rino International - RINO - close 12.52 change -0.71 stop 12.55

Target(s): 13.25 (hit), 13.65 (hit), 14.00, 14.50, 15.95, 16.90
Key Support/Resistance Areas: 15.00, 14.50, 13.75, 12.75, 11.75
Current Gain/Loss: +2.52%
Time Frame: One week
New Positions: Closed

Comments:
RINO made a double top near $13.12 which was also near an intraday downtrend line and the 20 and 200-period SMA's. Since we were looking to sell into strength and exit long positions the proper stop should have been placed at $13.02 which was just below the prior day's intraday support. This enabled us to protect a small profit on the trade and not let the position turn into a loser. As mentioned in last night's updates the best course of action for this trade was to take profits when RINO hit our 2nd target at $13.65 on Thursday. But we didn't so it forced us to adjust to the weak market on Friday. For readers who may still have positions RINO is holding an upward trend line that started on May 25th. A new stop could be placed below Friday's low.

Closed Position: Long RINO stock $13.02, entry was at $12.70

Annotated chart:

Entry on May 27, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 926,000
Listed on 5/25/10, 2010


ProShares Ultra Crude Oil - UCO - close 8.99 change -0.87 stop 8.90

Target(s): 10.00, 10.50, 10.95
Key Support/Resistance Areas: 9.00, 9.25, 9.70, 10.05, 10.30, 10.80
Current Gain/Loss: -2.11%
Time Frame: 1 week
New Positions: Yes

Comments:
UCO bounced early Friday and made a double top with the 2nd and 3rd 30 minutes bars. The weakness was apparent and per Thursday's updates we were looking for an exit early to protect against the sell the news event. $9.30 was used as the stop which was below the prior day's support level. For readers who may still have positions there is support at $8.90 and $8.50. *NOTE: UCO is a leveraged fund and with it comes volatility. Using a small position size to limit risk is recommended. I also view this as an aggressive and quick trade that may only last a few days.

Closed Position: Long UCO at $9.30, entry was at $9.50.

Annotated chart:

Entry on June 3, 2010
Earnings Date 7/22/10 (unconfirmed)
Average Daily Volume: 7.8 million
Listed on 6/2/10