Trading Plan for February 4, 2011

Current Long Positions (stop-losses in parentheses): QID (10.44), TWM (11.75) , SHZ (6.19)

Current Short Positions (stop-losses in parentheses): ZQK (4.77)

BIAS: 21% Short (counts QID & TWM as a short)

Economic Reports Due Out (Times are EST): Employment Situation (8:30am)

My Observations and What to Expect:

• Futures are flat ahead of the Employment report and market open.
• Asian markets were up strong, with gains on average of +1%, while European markets saw gains of 0.3% to 0.5%.
• Employment number will largely define the trading day and direction. 
• Could see a situation where the bulls rally regardless of the news: bad employment number = bulls rally because more Fed intervention will be needed; good employment number = rally because more jobs are being created. On the other hand, the market is over extended and showing a lot of ‘toppiness” over the last few weeks. 
• Early morning sell-off yesterday, saw the market test perfectly the 10-day moving average, and bounce for a 13 point swing and close near its rally-highs.
• Some minor price resistance for the S&P at 1313 dating back to 8/2008
• Looking at the weekly chart on the S&P, the last two candles mirror exactly the price action we saw the two weeks prior to the sell-off in April. 
• Two straight days of bearish candles formed in the S&P: Wednesday completed the bearish harami pattern, and yesterday formed a Hanging-Man pattern. 
• Price on the S&P is within the Bollinger Bands, but closed three points below the upper band.
• S&P and Dow continue to make new highs, but the Russell and Nasdaq continue to lag, and have yet to make new highs off of the 1/18 highs. 
• Volume continues to taper off, particularly in the Dow.
• 1275 represents the new higher-low in this market and the existing trend-line that has held back to 9/1.
• Careful with the market at this stage, with the S&P close outside the upper-bollinger band on Tuesday, and the last six times dating back to August 2009, has resulted in strong selling pressures thereafter, usually within a two-day time frame.
• Similarities abound when comparing the market action of the last two weeks to what we saw back in April when the market topped. Action going forward has a high probability of being very volatile and choppy.
• For the bears – Sell the Employment Number that comes out later this morning, and keep the bulls from rallying off the lows. 
• For the bulls – Obviously want to rally off of the Employment number, but more importantly, rally enough to see the Russell and Nasdaq make new highs. 
• My conclusion: I remain entrenched that the upside for the bulls is limited and while I’d be surprised to see a strong rally today, and in particular a move above 1313 on the S&P. My observations tell me that we are very close to a top in this market and that there is much more opportunity to the downside in the days going forward.

Here Are The Actions I Will Be Taking:

• No new positions added to the portfolio yesterday
• Any pop in the market today, and I will likely add to my DIA Puts. 
• Decided to hold off on closing out ZQK. But will likely close it out today. 
• Closed my position on SHZ at $6.78 for an 11.3% gain. 
• Follow me in the SharePlanner Chat-Room today for all my live trades and ideas.