The markets imploded on the first day of October with the Dow down -2.1%, Naz -3.1%, SPX -2.6% and Russell -3.4%.

The market opened the fourth quarter in the red but it was no surprise to anyone reading this newsletter. I have been warning for a couple weeks that October could be rocky. I patiently avoided entering any new plays over the last week on expectations that we could see some declines. Now the big question is WHEN do we buy (sell naked) the dip again?

The S&P broke below the initial support at 1035 and closed at 1029. Unfortunately the next material support level is 995. After a -27 point drop today it does not take a vivid imagination to project a test of that level.

The Dow closed at 9500 after crashing through initial support at 9550. The next levels to watch would be 9410 and the 38% Fib rebound from the March lows followed by 9250 and the support low from early September.

The Nasdaq lost -3% to close at 2057 and just a hair under the 50% rebound level from the March lows at 2063. The Nasdaq has some congestive support around 2000 with real support at 1965. A move under 1965 could get very ugly very quickly.

Even more of interest to us was the -3.4% drop in the Russell 2000 to 584. This is well below the 595-600 support and yet well above the next material support at 550. There is really nothing stopping the Russell from testing that 550 level and with fund managers cashing out on illiquid small caps it could happen quickly.

I told everyone last week that the momentum stocks were going to be hurt the worst. An example today is Walter Energy, which fell -4.41 to $55 despite oil prices being up +3.50 from Tuesday. Fund managers were able to keep the momentum stocks near their highs until the quarter ended and now they are dumping them on high volume. This is exactly what we expected to happen.

The Russell is the key. As long as small caps are under pressure there is no reason to go back into the market. We need to be patient and wait for an entry at support.

The best case for not just us as put writers but the market as a whole is a decent breakdown to material support. This clears the playing field and lets everyone choose up sides again for the end of year rally. The worst case would be a quick rebound on Friday or Monday and no real meaningful dip and no clear signal for a reentry for the bulls. We will try to be patient and hope for the big dip.

For Friday, no change, no new plays.

Jim Brown