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:


CALL Play Updates

Qualcomm Inc - QCOM - close 35.30 change -1.16 stop 34.20 *NEW*

Target(s): 20-day SMA, 36.45 (hit), $36.75, 38.00, 38.95
Key Support/Resistance Areas: 37.50, 37.00, 36.25, 35.25, 34.50
Current Gain/Loss: +0.00%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
QCOM is the lone position we kept open on Friday as this stock has long term support near $35.25 dating back to 2007. We are currently breakeven in the trade and are looking for another bounce from here, possibly to new recent highs. QCOM hit our target of $36.45 on Thursday but the move was stopped probably because of its 20-day SMA. This is still a valid target but I suggest readers watch the 20-day SMA and tighten stops if QCOM trades up this level this week. I've also listed $36.75 as a target which is just below Thursday's highs. If the markets bounce QCOM should do well as it is a quality name in a good industry. I'm going to move the stop up to $34.20 which is below the stock's recent lows to protect capital if things proceed lower.

Current Position: July $36.00 CALL, entry at $1.30

Annotated chart:

Entry on 6/1/2010
Earnings Date 7/21/2010 (unconfirmed)
Average Daily Volume: 26 million
Listed on 5/29/10


Quest Software - QSFT - close 19.89 change -0.13 stop 18.10 *NEW*

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

Comments:
QSFT remains a relative strength play but I would not be chasing the stock up at these levels 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. Conservative traders may want to stay away from this position due to the market conditions, or use a lower entry (like $18.80) and a tighter stop. 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. I'm going to lower the stop to just below the 20-day and 50-day SMA's. I am also choosing a $20.00 out of the money call option to limit capital at risk.

Suggested Position: July $20.00 CALL if QSFT trades down near $19.00

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

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: -19.4%
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: July $12.50 CALL @ $1.25, entry was at $1.55

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


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: +3.2%
Time Frame: One week
New Positions: Closed

Comments:
RINO made double a 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: July $12.50 CALL at $1.55, entry was at $1.50

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


Trina Solar - TSL - close 16.49 change -1.03 stop 16.45

Target(s): 17.45 (hit), 17.95, 18.20, 19.00
Key Support/Resistance Areas: 16.55, 17.25, 18.50, 19.00, 20.00, 21.00
Current Gain/Loss: +0.00%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
TSL gapped lower and then rose sharply up to our target of $17.45 which was hit on Thursday as well. As such the position was closed into the morning strength as indicated in Thursday's updates. For readers who may still have positions TSL really needs to get above $17.80 to have the best shot at bouncing higher. Over the last few trading sessions it appeared the stock was going to make a run at it but after Friday's tape that seems like tall order to ask of the stock. There is some support at current levels so a stop just below here is the prudent action to take.

Closed Position: July $18.00 CALL @ $1.50, entry was at $1.50

Annotated chart:

Entry on 6/1/2010
Earnings Date 7/21/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on 5/29/10