Play Editor's Note: The play list is looking pretty light these days. The markets remain very volatile and if you're actually trying to trade these markets it's like playing tag on a multi-lane freeway. Sooner or later you're going to get crushed by a passing truck. We should be taking our cues from market veterans who have been trading the market for decades. Right now the pros are cutting back. They are trading less often, they're trading smaller positions, and the best advice has been to just sit out this market until we see something that resembles normalcy.
If you forced me to pick a short-term direction for this market I'd pick down. The Friday bounce followed by Monday's drop is a classic bearish reversal pattern. Nothing is likely to happen on the government's bailout plan until next week. That means that financials could lead the market lower until next week. After the bell it was announced that Capital One Financial (COF) was going to sell another large chunk of stock to raise capital. Individual traders can't short COF but the company can dilute their own stock price. This could start a huge run by other financial companies trying to raise capital by selling more stock while their shares can't be shorted. Currently the short-sale ban is set to end in early October unless the SEC extends it.
I was about to add bearish plays in the financials but then news crossed the wire that Warren Buffett's Berkshire was investing $5 billion into Goldman Sachs and shares of GS and the financial sector in general were spiking higher after hours. I decided against new plays tonight.
FYI: Potential trading ideas...
XLF: Look for the morning bounce on Wednesday to fade and then open bearish positions.
IYF: Same idea as the XLF just with a higher-price equity. Watch your option spreads! Another idea would be to consider some sort of straddle or strangle if the IFY trades near $70.00 again. However, this is a rough time to consider straddle or strangle plays with option premiums so expensive.
AAPL: Keep an eye on AAPL. I would consider buying calls on a dip near $120 or $118, which should be support. The challenge is where do you place your stop loss. Do you place it under $117.00 or $115.00?
RIMM: This stock might rebound if it trades near $90.00 again. The September 18th low was near $88.
Some of the ultra-longs and ultra-short ETFs and ProShares might be trades. Unfortunately, many of them don't have a lot of option volume and the option spreads are terrible. We remain in a bear market and the path of least resistance is down at least until next week when we might get another bounce when further news and details on the government's bailout plan comes available. Of course we're going to be subject to headline risk everyday as some sound byte could spark another short-covering rally. Remember, the best trade may be no trade at all at this time.