NEWSLETTERS & RECOMMENDATIONS - January 30, 2011

Dear Friends and Fellow Traders,

Calling market tops is a notorious fool’s game and large market corrections are usually catalyzed by unexpected events or so-called black swans, i.e. the financial crisis of 2007 comes to mind as one of the biggest. A black swan is by definition a completely unexpected nature. Are the Egyptian/Tunisian revolutions a new black swan? No! Egypt is just a domino in a chain of events. Egypt is not the issue - the viral nature of the unrest could be. This last uprising will probably pass but the next time, or some other time after that, it may succeed and it may spread in such a way that our supply or cost of oil to be quite adversely impact. This is the impact the market may be trying to price in now.

Today, the best course of action is for U.S. officials to keep their intentions focused on the process of political and civil reform. Our stake in Egypt or for that matter any other Middle Eastern country is not in any one ruler but a transition from dictatorship to a more stable and hopefully democratic government that can better meet the needs and aspirations of all Middle Eastern countrymen.

One never knows exactly how a major market selloff begins but we can certainly analyze the technical conditions that existed preceding the selloff. Here are the links to Friday's daily chart of the S&P 500 (NET Weekly Money Chart 2011-01-28), as well as my 30 minute and 5 minute charts for you to study as well.

The NET S&P E-mini Daily Chart shows a very strong "trend in force" since mid-September. The "Oscillator", our proprietary indicator, traded between 107 Jammed (Oscillator reading between 98 and 107) and 44 Oversold (between 44 and 35) these last 4 months. This week the indicator only returned from 44 to Overbought (80-89) and not jammed (a NET term meaning a possible price weakness). Price of the S&P 500 at this time was nearing 1300 or major resistance for the March E-mini contract. The Oscillator was overbought with a crossover to the down side – a pretty clear technical sell signal.

The NET S&P E-mini 30 minute chart was exhibiting "Leading Divergence". My book defines 5 types of divergence and Leading Divergence occurs when price returns to the high or makes new highs but the Oscillator only returns to a 62-71 Oscillator reading as had been occurring last week. Leading "D", as we often call it, works almost 80% of the time on the 30 minute chart as evidenced over the last 15 years. This week over 75% of my trade recommendations in the Chat Room were short ideas as last week’s NET Weekly Money Trade 2011-01-21 to buy puts.

After I finished my morning pre-market comments in the Chat Room at 9:28, I immediately sent a brief Alert Email to buy the OEX 585W puts under $1.00. The puts opened between $0.65 and $0.75. We were long puts looking to scale-in. Twenty minutes later the E-mini reached a new multi-year high of 1299.50 while the S&P cash hit 1302. This placed the S&P cash in the middle of resistance between 1300 and 1304. The puts traded in size down to the day’s low at $0.45. The market seemed to be ignoring all the bad news: bad numbers from AMZN, F and SNDX, a weaker GDP and the Egypt riots. When the S&P dropped seven points into support we started to hedge with S&Ps. The market rallied 2 points back to a 40% sell. Meanwhile Egypt was all over CNBC and the crowds were out of control. The police force I heard were nowhere to be found. Needless to say, for the next 2 hours hedge trading was difficult and not very profitable if at all.

At 10:45 I send another Alert Email stating we were starting to scale out of the puts. The 585W puts hit $3.45 and hold some as this could be a huge down day. I sent a final Alert Email after 3:20 stating that the market wasn’t making no lower lows so the remaining puts worth over $9.00 should be sold. The puts traded as low as $9.50. Anyone lucky enough to hold on for the ride could've earned 20X from the $0.45 low long purchase! That’s leverage, low risk and maximum return NET style!

I personally left a few put profit $s on the table. I got stuck with 20 long E-minis and long 25 puts because I didn't sell my last E-mini hedge into the shallow rally. All together the day was very profitable for NET traders. This one trade just paid for a lifetime of NET services!

In Conclusion:
The Daily Chart setup the sale, confirmed with the Leading "D" on the 30" and was completed off the exact high on the 5 minute chart with another massive "D". I like it when a plan comes together and after that signal we were just plain lucky. But remember NET traders are putting themselves in front of getting lucky every week. This week was just much better than most.

So far the bears have been unable to put any defense on the field these last 5 months so it's going to take a lot more of what we've seen these last few days or even future weakness on Monday and Tuesday to panic me although last week’s huge outside trading week looks pretty scary, technically speaking.

Maybe if Obama can get it together and create an effective national energy policy from this crisis we can become less energy dependent on that part of the world. All I know is if they didn't have oil no one would care what happens over there now.

New Hedging Video
Thought you might enjoy my latest training video on hedging, an in-depth study of last week’s NET Money Chart.

There is very little I can add to our stock ideas for now except to say there may be more weakness ahead but we should be looking to add to our names on weakness. This is why I recommended such aggressive sales of BTX our largest holding while adding cheap options in its place.

Given our economic outlook and the Fed's QE2 program I see the market much higher over the next 3-6 months. There is a ton of cash sitting on the side lines looking for investment opportunities. Right now cash has been leaving the emerging markets for weeks looking to the U.S. stock market as the most attractive arena to invest.

As always keep those cards and letters coming. I enjoy your comments.

Good trading,

Stan Moore
Ph 702.558.1814