Volatility has definitely returned in 2016. The Dow fell -566 points this morning and rebounded +448 points in the afternoon to be down "only" -118. Sellers appeared again just before the close and the Dow ended the day down -250. Time to buy the dip!

However, there is a good chance we may have just seen the bottom. The internals at 30:1 decliners over advancers and the S&P retesting the October 2014 Ebola lows at 1,820 could have been just what the doctor ordered for a sick market.

We were stopped out of our QQQ and SPY long positions by the big drop, which should not be a surprise to anyone. I am launching two new index ETF long positions today. We are going naked on them to start with no stop losses just in case there is some more volatility lurking around the corner. The premiums are small in the high $2 range so even if the market goes south and stays there we will not lose much. Sometimes you have to risk a little to make a lot.


NEW DIRECTIONAL CALL PLAYS

IWM - Russell 2000 ETF

The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.

Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.

Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.

Buy March $102 call, currently $2.83, no initial stop loss.



QQQ - Nasdaq 100 ETF

The Nasdaq fell -163 points intraday and rebounded to positive territory just before the close. Some late selling in the last few minutes knocked it back to -5 for the day. From -163 to -5 is a monster rebound. The biotech stocks led the way but solar stocks, semiconductors and even Apple and Netflix got into the act and rebounded strongly.

Netflix declined from its afterhours high of $123 to a low of $97 intraday before rebounding to close at $108. I would have loved to buy Netflix at $97. What a bargain.

Obviously, a lot of that rebound was short covering and we do not know if it will last. However, the intraday low on the Nasdaq Composite was 4,319 and very close to the flash crash low of 4,292 from August. While it was not a perfect retest, it was close enough that a lot of traders closed shorts and bought stocks.

The Nasdaq 100 ($NDX) and the index the QQQ tracks, failed to decline anywhere close to the same distance as the Composite. The NDX dropped to 3,992 with major support at 4,000. The rebound there was very strong and from the right support level.


After the bell FireEye (FEYE) raised guidance and F5 networks (FFIV) beat on earnings. That could help with sentiment on Thursday. Nasdaq futures are up +6 in afterhours.

I am recommending the March $104 call with no entry trigger. If the market is going to open up I want to be there on the opening bell. These short squeezes can run for days and most lasting rallies begin with short squeezes.

Buy March $104 call, currently $2.58, no initial stop loss.



NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays


If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.

Jim Brown

Send Jim an email