Jonathan Lawson

I haven't posted much in the past few week's. I have been trading, I have been reviewing acct. And quite honestly I haven't been too excited with this market. Honestly I am still not. Although now that we have tested a bottom a few times, it offers a tested point of reference.

Most people are pointing to the Oct 10, which is actually a false low. The low which really makes sense is the Oct 27th (Monday) low. Why? - because we closed LOWER and greater Negative volume. With that said, we have not made higher highs, or higher lows yet. The previous bearish pattern seems to still be in effect. The bulls hope, the bears are regathering their strength.

Last monday and tuesday, I was picking up some long issues and it paid off. On thursday and friday I was lightening my longs, and moving into some shorts.

I often find that the placement of Fibonacci retracement lines end up in the most obvious places. For example:
24% is at the top of the recent range
38% is at the top of the gap
50% is a the bottom of the gap
62% is at the previous supporting low

We seem to be in a base building area. Are we ready to breakout? Perhaps. Here is my socio-economic guess:
With tuesday's election we will have 1 uncertainty out of the market.
Everyone knows about it, we could see a sell the news reaction.
And then, people who missed the recent run up would have a solid entry point with a defined stop (10/27 lows).

We are certainly in bear market, and this bounce only a counter-trend bounce. I have been working with my father to help him exit some of his long portfolio. We are exiting as we move through these fibonacci levels. And you can bet, if we get to SPY 121 and we break an uptrend line, I will be decidedly short. I don't doubt we can get to SPY 113, but there seems to be a long time between now and then.

Here is one I started nibbling on last week. This looks good as a short to me:
double topping w4, into the 50day MA. Weakening Oscillator. I will add more if I we see substantial weakening via a trendline break.

And finally a political message: Beware the strawmen the political spinners are creating. It sickens me to hear friends whom I once thought were intelligent falling for this crap. Basing their decision on emotionally charged labels. Socialism, abortion, gay promotion, Muslim, freedom, Cut and run, same as Bush, Joe the Plumber (ave Joe Schmoe), etc It is important to know what you stand for, and wade through the junk, and see which candidate truly resonates with you. For me it is Mr. Barack Obama.

Capitalism is the best economic system devised, however it is running amok at this time. Energy technologies are being suppressed, Financial companies have come under the illusion that they are entitled to the huge salaries and bonuses, even if they DON'T make money. We are in an 80 yr Grand Cycle. (I will take some liberty on the exact dates, but you should get the idea).

1776 - Revolution (power from the "King" back to the citizen/local and regional governmental power) read: The Federalist Papers
1860 - Slavery ("property rights" /Civil War) read: Team of Rivals: The political Genius of Abraham Lincoln
1929 - Peak of the Roaring 20s. Soon thereafter, massive social changes... New Deal, Keynesian economics read: The Great Depression and the New Deal
2008 - Peak of Financial Engineering (fake prosperity/credit bubble/large disparity of wealth) read: Hot, Flat, and Crowded

Something needs to change, it always does. Those who want it to remain the same, need to see what it takes to achieve the next level of prosperity. There are many moving parts.

Global challenges/opportunities:
Energy and Food Technologies, rebuilding of economic foundation of the US, climate consciousness, global emerging prosperity

Enough said, now back to the business of making money.

The market without question has been very intense of late. There are a number of people making money, however most are a bit shell shocked. I have been reading a Yahoo CGMFX board. Some have been riding that fund down from 61 to a friday low of 38.74. They are not alone. I feel pretty fortunate to have been scraping out a few percent a week to the plus side. I think we have a very exciting monday. Probably downward pressure with many redemptions. The panic is palpable.

I think Fuel expresses what people are thinking of this market.

I would have loved to be more bearish from the Gov't intervention. Unfortunately, I just got small with a slight upside bias. Fortunately, my downside hedges have worked out a little. As I mentioned then, it is one thing to fight the Fed, and another to fight the ill-informed law makers, SEC, and Treasury.

Two weeks ago, I spoke of a scenario of a rally above SPY 118 with upside bets off on a break below 118. Well, the catalyst of a poorly executed passing of HR 1424 (aka. The Failout) scrapped chances for that plan to succeed. Investor's of US securities feel anything but secure at this point. Upon the break of 118, I started putting on some downside hedges, albeit not enough in retrospect.

We are approaching a point I have put on my radar since January, break of SPY 139.3. SPX - 1080. This is a 61.8% retracement of our move since the previous bottom Oct 10, 2002 (SPY 77.11), to the top on Oct 11, 2007 (SPY 157.53). The dates are eerie, eh?? And here we are... next friday Oct 10. Hmmm. Does it mean anything? Who knows.

S&P 500 (SPY) Monthly- Looking at the SPY level as technical support. Breaks below 106.70 could be very, very dangerous.

An unknown for me is this: Has the Gov't/SEC intervention in limiting short selling short-circuited market functions that could create a melt-up as shorts cover?

SPY Weekly - A bounce from a projected low could lead to a bounce to Fib levels SPY 120 (23.6%), or 127 (38.2%). Both of these level match up with previous consolidation areas. With the large scale selling we have seen, this dog could run with no legs.

IWM - Russell 2000 - Now this is a dog of the indexes. For the longest time I couldn't figure out why small caps could be relatively strong in the deteriorating economic environment. Well, the hen has come home to roost. Using a Elliot Wave Long tool, the target is 61 to 56 on the downside. Retracements from the 2002 lows are 38%- 65.01 (broken on Thursday), 50%- 58.81, 61.8% - 52.62. I believe this to be the weakest of the charts and furthest from support. Pair trade short IWM/long SP.

TRADING IDEA:
While I was driving to my PrePaid Legal event on Saturday I was thinking about Gold (GLD) a chart I reviewed on Wednesday.

Our current economic reality is uncertain and deflationary. Only 1/2 good for gold. Ben Bernanke being an expert in the Great Depression will do everything in his power to re-inflate the economy. My guess is that this weekend he has been on the phone with every Central Bank official to warn of "impending doom". This includes Jean-Claude Triche and the ECB. The ECB is stuck in the same mindset the US had in 1930, "We can't have inflation." And added is the European memory that, "Hyperinflation was terrible for us in the past". So they keep the rates high. If that happens, look out EC you are dead meat.
So what may they do? A coordinated Global effort to lower rates early in the week. In other words, attempt to re-inflate. The intent would be to create inflation to stimulate spending and stabilize prices. And using the "'don't fight the Fed motto", I think we may see a magnificent pop in gold.

GLD Weekly - We have seen a 62% retracement, which is our defined stop. The uptrend is undeniable, however so is the double top. Play this one smart. Know your exits before you enter.

Here are two Podcasts worth putting on your listen list:
Daily - The Real Story w/ Frank Curzio
Weekly - The Disciplined Investor w/ Andrew Horowitz

There is rule for investors/traders. It was created after the dotcom bubble. Many traders lost plenty of money. Unfortunately they only knew how to trade in bull markets. When then mighty bear came, they crashed and burned. Now many traders are arming themselves with knowledge of trading in a variety of markets, as long as the Gov't doesn't intervene with rules which don't allow the market to function properly. i.e. Short selling bans.

Well to protect/govern/legislate/??? traders/investors the SEC/FINRA passed a Pattern Day Trader Rule. I have included in the letter to my Congressmen below the basic definition, and why it should be repealed.

If you agree with me, I would like your support. You can alter the below letter, and send it to your Congressman. Here is the link to find your Congressman's email/fax.

http://www.visi.com/juan/congress/

This is the most ludicrous rule I have ever had to abide by. Other than, "Finish everything on your plate." But I digress. Exchange Rule 431 has caused me so much frustration at times, I can hardly see straight.

*********************************

I have There is a current regulation called the "Pattern Day Trade" Rule. This rule NEEDS to be repealed immediately.

I trade 5 different accts. Brokerage, IRAs, Futures, etc. In 3 accts I have exceed the 25K and I can operate with proper trading discipline and minimize the losses due to recent volatility. Yet the other 2 are less than the regulated amount. And in rapidly changing market conditions I can't make the amount of money I make in my larger accts, and risk much larger losses.

According to this rule, If I: Make 3 day trades in equities or options with a 5 day rolling period. I am labeled a "Pattern Day Trader" for the accts with a less than 25K. Yet, it is perfectly fine for my other 3 larger accts.

It seems absurd. It is a relatively new regulation (3 yrs, I think) and it does absolutely NOTHING to protect me. In fact, it could lead to oversized overnight losses.

There are several issues with the regulations imposed on small traders (not necessarily unsophisticated).

1) Limits execution of good trading discipline. i.e. When buying a stock (or another position), I immediately set a stop loss. Buy for 50, if it goes below 45 I exit with a $5 loss.

If I enter a position, and set a stop target. I may be stopped out on the same day. If this happens 3 times in a rolling 5 day period (easy to do in current market conditions), the trader will not be allowed to exit position 4 (and risk catastrophic losses). And to make matters worse the trader/investor will have his acct locked for 90 days. For a crime against whom??

2) Overly regulated. A maximum security society. We need to stop this over regulation.
Regulators are too concerned with keeping us "safe". I don't want regulated safety, like this. It is ok to provide safety against fraud, and inside information but not to regulate different laws for different financial levels of investors/accts. I have 5 accts which I trade. In 2 brokerage acct over 100K, 1 proprietary futures acct, and 2 others below 25k. In 3 accts I am consider a "sophisticated" investor, yet the other accts I am not. What gives? I feel much more secure in my larger accts, and I am able to grow that acct more quickly because I am able to be more nimble as market conditions change, or move rapidly when mispricings occur.

In the two "average Joe" accts.
If I buy 4 equities on a given day, and Goldman Sachs/Hedge Fund does the same, and later in the day something significant happens (i.e Middle eastern conflict, surprise NO SHORTING regulation), both GS and I decided we don't want to be have that risk in our accouts. Who looses? Me. GS exits their 4 positions and then turns around and pushes the stock down, yet I can only exit 3 positions. If I choose to exit 4, my acct won't let me or I am banned for trading that acct and labeled as a Pattern Day Trader. Who was this law designed to protect, it sure isn't me.

3) Outdated regulation.
Although this regulation is only 3 years old, it is no longer relevant. Perhaps it was created to prevent overtrading and excessive commissions. Commissions are very, very low. They are much less expensive than having to hold overnight positions in the case of a rapidly changing market condition, and a move against my positions.

4) Who does it benefit?
This teaches the average individual that they are not sophisticated enough to handle their own money. And when they try, they are dissuaded from using proper money management practices. It further suggests they should give their money to a large Money Manager who operates with different regulations. My investment disciplines and returns have been superior to the large money managers because I am able to protect myself by moving more nimbly, yet I get handcuffed with these regulations.

I truly hope that the regulating institutions recount their decision, and repeal this Pattern Day Trader regulation.

Please Please consider my request.

Today put me over the edge and caused me to write this letter:

On days like this, I am having gains from a well-timed and well-planned trade. Yet I don't want to get out when some piece of news has hit the wire because I don't want to take away 1 of my 3 weekly intraday trades, and underlying has not reached my target price..

With current market volatility the stock races against me. I take a loss and also lose 1 of my 3 trades. Remind me how the SEC and FINRA are trying to protect me?

Here are my thoughts for the next few months:

We are certainly witnessing unprecedented times in the financial markets. More people than ever will be retiring in the next 10 years, and many are scared/annoyed/clueless about what is happening to their stock accts.

As I was running today, I was playing around with different scenarios. I was anxious to get to the charts and see what I see. I have been so wrapped up in day today 300-500pt moves, I decided to look at a weekly chart.

To take some sweet emotion out of the market:

This is what makes sense to me:

We will be in a sideways (but volatile) environment from now through the rest of the year. The Government has pulled out all the stops, many of which I despise. But for now, the thumb is in the dam and it has bought us some time. Last month had the highest retail exodus from managed accts, I suspect this month will be even greater. Public is great at getting out at the bottom.

I am holding on to my long positions and Mutual funds here, which I bought last wednesday. I expected Monday's selloff, and some lift from Ben and Henry's comments on tuesday. And now I see a medium term (now through December) bottom in @ S&P500 @ the 1190-1200 level. I think we probably move sideways to up and touch the upper downtrend line (Purple). Perhaps moving up to S&P 1290-1310. However, as this is happening we are still in an undeniable downtrend. I won't be complacent! Anything can happen here! IF we see breaks below S&P 1180 it could get pretty intense in the markets again.

I am regaining my composure in this market, and I think there is a bit of upside here. I feel very fortunate to have weathered the market well. My personal accts are mostly in cash at this time, and I am ready to put some money to work here.

Although you may not be able to read this chart, please don't dismiss the information. How many people do we know who say, "I am a long term investor". With those words and subsequent actions, a person's acct is down AT LEAST 20% from the market highs. Here are my thoughts:

We will be in a sideways (but volatile) environment from now through the rest of the year. (Government wants to do anything it can to keep the economy propped up into the election).

If we drop below 1180 on the S&P 500 this week, delay taking action on the below comments.

From now through the middle of January.

The range will be sideways to up. S&P 500 - 1200 to 1310 (possibly as high as 1350 with the uncertainty of the election gone).

Volatility will remain intense.

As we start to move up above the 1265 level, the TV personalities will be telling us how we have bottomed. And time to buy. They have been wrong at least 5 times Since Aug 07. I believe they will be wrong again. But most retail investors will follow their lead and promptly buy the next lower high.

There is an enormous amount of leverage in our markets. Estimates of 5 Trillion of derivatives still need to be unwound. Simply stated, there is a lot more selling that needs to be done.

Using some basic forecasting, I see the next major price resolution down in the S&P 1100 area. I will be looking to play a bounce in that area, probably sometime next spring/summer. That would coincide with a 61.8% retracement, and a Wave 4 low (weekly)

If I had 100% allocated in stocks at this time, I would sell 25% of my holdings @ S&P 1265. Sell the next 25% @ 1300, and the next 25% @ 1350. And start buying back in with 25% increments above 145. But that is just me. By the middle of 2009 I will be scaling back out of stocks, as the US demographic fundamentals start to significantly deteriorate.

I think we may see one more commodities push from now through the middle of 2009. (but, we will see about that one). It's worked once already right ;)

I am also looking to get short the Euro vs. US$. I'd like to find better option alternatives than XDE, but I may just use the DRR.

Euro/US$ daily - 50% retracement and 50 day MA from July highs is 149.65.
61.8% retracement and 200day MA are pretty close as well, 152

This is not designed from someone other than me use as a blueprint. For I am an enthusiastic snowpro, not an investment professional.

I am resting this weekend, practicing some golf with my son. Hiking with the family. All the while thinking wondering about what is next for us this week. The past month has been outstanding. I still have a while to go get to my goals for the month. I want to have a 50% return on the month. So far I have had a high watermark of 40.8% on the month, and 145% on the year.

On Thursday and Friday I added a few positions.

POT - 210/200/190c 2/3/1 BrokenWing Butterfly (BWB) for a credit of 3.20. This is bearish position I bought with the underlying @ 203. The price briefly moved up to 205+ and took out some bearish stops. I am looking at resistance levels of 205, 210, 217, and 227. I believe we are going down, as a pattern of lower highs and lower lows. Also, with extraordinarily good earnings the stock still moved lower (Bearish).

MFE - Sold 1 of the remaining 2 units of the Aug/Sept 35p for .63.

I went into the weekend without much exposure and 83% cash.

Position Greeks are:
Delta (SPX weighted) - 13
Gamma -.66
Theta +155
Vega +582

Here is my "until" the election forecast:
You mentioned forecasts, here is mine: I think we get a summer rally off a double bottom SPY 118.92 or so. Then a call for a successful retest by the bulls around the 118.92 level. (It is really the only chance the Republicans have.) We may see a rally to around 1360 or so. But the Market will be smarter.

Eventual lows down to the 1096 level. Then Obama becomes president somewhere after that (I am not an Obama supporter, but much does need to change). That resolution of uncertainty should be a catalyst for an upward move. I am not sure what his tax and foreign policy stance will do to our American Empire. However, there will be many people in power (real power) who will not like it.

It is many times interesting to me how often coincide with previous levels of support. i.e. 126 level of previous support (38.2%), 119 (50%), and 1100 (61.8% and Wave 4 low). Lastly, many W5s retrace back to W4 lows 1096ish.

SPY Weekly

This week I am looking for a break below SPY 124.90 as a short indication, and above 126 as a short term up. I will be playing the IWM 68p as a slight short, and probably some type of short vertical in the SPY to take a directional short.
There is also bound to be many Micro calendars which will present opportunity shortly.