Prepare for Shock & Awe

I will be the first one to admit that the selloff that we have seen in the past 3 weeks had completely caught me off guard.  Trying to call this market has been very trying; the volatility has been obscene and almost untradeable.  It is my belief that the market is putting a bottom in here that will be held for at least a few months.  I also believe that the rally out of here will surprise most; it could be a slingshot higher which could eventually find its way into the 11000 to 12000 region on the Dow.

We are in the midst of a nine month cycle bottom, we have witnessed records in the VIX, record volume, record price swings (up and down), extreme readings in the McClellan Oscillator and Summation Index, etc.  You get my point; if history serves as any guide, there is a major indication that this market is at multi-month lows, if not more.  October is a bear killer and has ended many major bear markets in the past. 

There are alot of you who believe that "this time is different".  Well, yes that is possible, but not likely.  Markets are controlled by fear and greed and fear is extreme out there.  This is how major market bottoms are made, lots of pain.

In my last post, I mentioned the possibility of a retest in an expeditious fashion and it appears today was it.  The market filled its gap from that record 900 point plus up day on the Dow and staged an 800 point reversal to close 400 points higher today.  7800 continues to remain as support and if that is broken, 7417 is the next support level.  On the upside, 9800 remains as key resistance, 10300 to 10500 is next if that level is broken. 

I am starting to look to buy into sectors that have been hammered for no good reason.  Look at oil, natural gas, and coal stocks; they have been crushed due to our hedge fund buddies selling everything at any price.  The fact of the matter is that natural gas is at the same price it was last year and these stocks are worth half as much.  Here is how I am going to play it.  Buy some stock, and buy some put protection to protect me against the unforseen.  Once I see a slingshot out of this bottom, I will sell calls to cover my put premiums.  Basically run with a no risk trade.  Some options:  MOS, CHK, STP, CEDC, CETV, POT, GDX, and the list goes on.

I am looking for a strong close going into the end of the week.  The bottom line is that this will not be easy, volatility will continue to be very high for some time but the trend should remain higher.