NEWSLETTERS & RECOMMENDATIONS - October 23, 2011

Dear Friends & Fellow Traders,

I believe anyone who thinks there will be a simple and defining answer to Europe's sovereign-debt problems these next few weeks will surely be disappointed for months if not years. I believe, at best, Germany and France will buy a little time and kick the can further down the road. However, for now, at least the risk trade may be back. Bond yields have risen from near record lows of 1.70% to 2.22% while US equity markets have broken through the top a 3-month trading range.

Presently, we have an absence of bad news and at least 64% of S&P 500 companies reporting have beaten EPS and sales expectations. The earnings numbers are the best of the last 3 quarters. Even the CPI inflation is slowing giving the Fed some breathing room but it's not all good as European GDP numbers continued to get lowered looking ahead into 2012.

There are two other events out there that have me worried just a bit. First, we have the "Super Committee" expecting to cut $1.5T out of the deficit. If that fails for any reason we may have to think another rating cut or two for the good old USA may be forth coming. Next, in case no one noticed the Chinese equity markets last week hit a new low since March 2009. Their economic growth has slowed materially but is still better than most in the world. There are a number of analysts telling us that a credit bubble is about to burst over there. We can assume none of that is good news for our markets or anyone else's for that matter. I'd hate to think what that would mean for commodities especially our gold trade.

Trades of the Week in Review
Right now the market is in a trading sweet spot having just broken out the top of a three-month trading range. European finance officials have let it be known there will be no ultimate crisis solution this weekend or by Wednesday. However, a deal could come in time for the Nov 3-4 Group Summit of 20 in Cannes. Talk about kicking the can a little further down the road. Markets will now continue to trade news release to news release.

Zero Hedge writes Sunday "European Finance Ministers Driven to Despair as Reality Returns." It sounds ugly and it is. I'll quote the final thoughts from editor Tyler Durden, "For those expecting any solution that is more than a simple kick-the-can hold-your-breath for the final solution, we suggest hedges ASAP on Sunday night as it is crystal clear that nothing of substance will be created soon and furthermore, we wonder whether this is some elaborate global game to force the Fed to rescue everyone by flooding it with greenbacks." I'm wondering the same thing. Just suck us in too.

With the above understood, I Personally, I've been a greedy coward lately. I been buying and recommending puts aggressively in case people like Durden are right and traders stop drinking the "Kool Aide" and then buying the E-minis to get long. My strategy has turned out to be just right - I get to have my cake and eat it too.

Tuesday the 18th on the 3:45 "C" chart I recommended buying the 123 ATM SPY W puts near $1.00 at the largest resistance near 1229-30 level. The market sold off a little but rallied back to that level near 4:00. The puts hit a low of $0.98. I send an Alert Email confirming this further Wednesday before the opening. I reminded everyone to hedge aggressively in case I was wrong. We got lucky Thursday morning when Sarkozy mentioned that nothing would get done this weekend. I Alert Emailed to close out the puts. The 123s hit $3.27 for a possible 3X return plus huge hedging profits! See Thursday 4:00 "D" chart, NET Weekly Chart 2011-10-20D.

I also wrote after the correction we may get a rally into the weekend in hopes of a deal. I never really felt comfortable recommending calls. I'm biased that trying to get 17 countries to come to some deal would take many years and votes to conclude so expect a number of fits and starts to this process. My strategy was simple: favor puts with the market near tops of the trading ranges and calls near 1100 or the bottom of the range and hedge your brains out.

I have to say if you have even part of a working brain and can understand what's happening just a little bit then fade the news with the hedging techniques I teach. You can make a small fortune in this market and you don't have to start with a big fortune either.

This week most professionals believed as I did and got short. They too thought no deal this weekend. This strategy worked early but if one didn't hedge or take profits all was for nothing. Europe pulled a rabbit out of the hat and put the deal off and the shorts were forced to cover. Hence the nice breakout rally we got Friday morning after I sent an early pre-opening Alert Email to get long puts and to buy the E-minis. See attached Friday 4:00 C Chart, NET Chart 2011-10-21C.

This trade had at least 7 potential hedges and a possible double in the puts themselves. If you bought say 70 123 SPY puts and you bought 10 options on the opening near $0.50 after my pre-opening buy put Alert Email. Then you bought another 20 at $0.35 then a final 40 at $0.20. The low was $0.13. You're now long 70 puts for $2,000 or less with a $0.30 average cost. Hedging started right after the second put purchase.

The trade gave you hedging profits of more than $3,500 with only 3 long E-minis (4 max) per 10 puts purchased for only $300. The 70 puts expired worthless could have earned over $22,000 on a total risk of only $2,000. That's a 10 bagger in my book. However, I Alert Emailed to sell the puts into weakness. These could have sold for a high of $0.53 adding to your overall profits. Go NET trading!

Please keep all your cards and letters coming.

Good trading,

Stan Moore
702.558.1814