Fed cuts and stocks run wild. Although the one-half point cut in the federal funds rate was expected, the announcement ignited another round of buying that helped extend yesterday's massive rally. However, unlike yesterday, there was some vicious selling in the last fifteen minutes of the session that wiped out a lot of the gains and some of the optimism from Tuesday.

The intraday chart below shows just how wild it got this afternoon. The strong rally that started during the last hour of trading was completely wiped out for the Dow during the last fifteen minutes of the session. The chart below shows just how fast and furious the selling got. In the two large red candles, the index shed 440 points!

For the second time this month, the Central Bank dropped the key interest rate by a half-point, taking the federal funds rate down to 1-percent. The last time it was this low was in 2004. Any further cuts from this point would take the benchmark rate down to a level that we haven't seen since the 1950's. The move by the government is intended to help unfreeze the credit markets while helping businesses and consumers with lower borrowing costs. Reduced rates should also increase the banks' willingness to make new loans.

Similar to the coordinated worldwide cuts that we saw earlier this month, the same countries are once again lining up with cuts of their own. The countries of China and Norway also cut rates while the ECB (European Central Bank) is expected to cut rates next week. There's also talk that Japan will follow suit in the near future.

On the economic front, there was a surprisingly strong durable goods report this morning. According to the Commerce Department, large-ticket factory orders jumped by the biggest number in three months in September, which was to the dismay of analysts. The strong demand for airplanes and autos led to an increase of 0.8-percent in durable goods orders last month, much better than the decline of 1.0-percent that the Street was expecting. It was also drastically improved from the 5.5-percent drop in August.

Oil got a boost this morning from a weaker than expected inventory report. The Energy Information Administration's weekly data showed a mere 500,000-barrel increase in U.S. supplies, much less than the 1.5-million barrel increase that the Street was expecting. At the same time, gasoline inventories also set a bullish tone when it was announced that last week's supplies declined by 1.5 million barrels. Coming into this morning, traders were expecting a build of 900,000 barrels. Crude finished the session up $4.77 at $67.50 a barrel on the New York Mercantile Exchange.

Today's Economic Reports

There was continued improvement in the interbank lending last night when the overnight Libor rate fell to 1.14-percent, which was below the federal funds rate. At the same time, the three month dollar Libor dropped to 3.42-percent. These are both very good signs of some easing in the credit markets.

After posting the second largest point gain in yesterday's session, the Dow Jones Industrial Average gave back 0.82-percent today. The 74-point loss takes the index down to 8,990. The index ran into resistance today from its 20-day moving average (light blue line).

The S&P 500 also ran into trouble after hitting its 20-day moving average (light blue line). The end result of today's session was a 10-point loss for the index. The 1.11-percent decline takes the index down to 930.

While the Nasdaq Composite came close to its 20-day moving average (light blue line) at its high of the session, the index couldn't hold onto all of its gains. However, it still finished the day in the green with a 7-point advance. The 0.47-percent move takes the Nasdaq up to 1,657.

The VIX (Chicago Board Options Exchange Volatility Index) was falling nicely until the last few minutes of the trading day when the indices all sold off hard. This pushed the VIX up 3 points at the closing bell where it closed at 69.96. Although it's definitely off the levels we saw just a few sessions ago, it's still extremely elevated and signals that volatility isn't going away anytime soon.

With the finality in the FOMC decision now taken care of, all eyes will focus on tomorrow's huge GDP report. With all the pessimism surrounding the recent financial crisis, analysts are expecting a decline in the third quarter. While the GDP has held up remarkably well during the first two quarter this year, analysts are forecasting a negative 0.5-percent in tomorrow's release.

Over the last several weeks, it's been obvious in the newsletters that we've been somewhat optimistic about this report coming in with an actual positive number. But after being bombarded on the news and in newspapers with pessimism, it seems almost impossible that it won't be a negative number. However, if the number does come in with a minute gain, we'll need to buckle our seatbelts because stocks will take off like a rocket. If the report gives us a worse number than expected, it'll probably ignite selling that takes a big chunk out of our gains from yesterday. The only gray area is if it comes in around expectations. In this scenario, the reaction is really a coin toss with the edge going to a sell-off.

After this week's trading, we feel very good about where we're sitting across the board. The only position that gives us a little caution is the Monsanto call spread. It got a big push upward today with the grain markets going lock-limit up, pushing all the agricultural related stocks higher. Due to this, we are getting slightly nervous about this spread.

To cope with this anxiety, we are going to add a put spread to this position, making our current one into an iron condor. Our thought is to bring in credits from both sides in order to help us if the stock blows through one of our spreads. With our new strategy of placing a contingent stop order above/below our "short" strike price, we shouldn't get beat up on closing out the spread. When we combine that with taking in credits from both spreads, we aren't going to lose any sleep over the stock finding a direction.

At the same time, we are also going to make our RUT call spread into an iron condor. With the VIX remaining at an elevated level, we are able to way out of the money and still pick up a decent credit. We are going to be very conservative in our strike prices by placing a new put spread at a level that the index hasn't seen since 2001. Of course, this doesn't mean as much as it used to. However, it does translate into a cushion of 140 points on the downside. This sounds very conservative to us and gives us a good opportunity to bring in a little more premium this month.

Please Note: These are both new trade alerts and are both limit orders and day orders. These apply to all members.

NEW TRADE ALERT (2)

Monsanto Co. (MON)

OPENING 65-60 NOVEMBER BULL PUT SPREAD (15 contracts)

Sell 15 November Puts at 65 strike price

Buy 15 November Puts at 60 strike price

Total Credit 0.50 per contract

Potential Profit $750.00

Once Filled, Use a Conditional Order: Stop or Buy Market if Touched Order if it reaches $67.50 (close out spread)

RUSSELL 2000 INDEX (RUT)

OPENING 350-340 NOVEMBER BULL PUT SPREAD (10 contracts)

Sell 10 November Puts at 350 strike price

Buy 10 November Puts at 340 strike price

Total Credit 0.50 per contract

Potential Profit $500.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if index reaches $355.00 (close out spread)

CURRENT NOVEMBER SPREADS

RUT 640-650 November Bear Call Spread (10 contracts entered on 10/20/08)

Potential Profit $100 per contract

Contingent Stop Order set at $635.00

The RUT was able to hold onto some of its gains today when it finished the day up 8 points at 490. The strong performance is definitely related to the rate cut, which usually is much more meaningful to small-cap stocks. These companies are smaller and their bottom lines are much correlated to changes in interest rates. Due to this, lower rates usually are much more meaningful to stocks in the RUT. With two moves to the upside in this index, we have lost some of our breathing room. However, we're still in great shape because the RUT is still sitting 150 points below our call spread.

AZO 90-85 November Bear Call Spread (15 contracts entered on 10/222/08)

Potential Profit $70 per contract

Contingent Stop Order set at $92.50

AZO has been on fire the last two sessions. Yesterday's massive move to the upside took the stock right through an old resistance level and then today's action pressured two more levels and its 50-day moving average (red line). But the end of day selling brought AZO back below both barriers. On the session, it gained $5.55 and finished the day at $119.75. This gives us nearly 30 points of breathing room in this spread with less than four weeks to go. However, it will likely face some selling pressure tomorrow because its rival reported some disappointing earnings tonight after the closing bell. Even with this possibility, we're still sitting in great shape in this spread.

OIH 60-55 November Bull Put Spread (15 contracts entered on 10/23/08)

Potential Profit $60 per contract

Contingent Stop Order set at $62.50

OIH gapped higher on this morning's open due to rumors circulating that there would be a very bullish inventory report. This turned out to be true when the EIA data came out midmorning. This propelled the ETF to a $5.96 gain on the session, taking it to $91.31. While this was a nice gain for OIH, it was up much higher during the day when it ran up to its 20-day moving average (light blue line) before pulling back around 5 points just before the closing bell. After today's action, we are left with over a 30-point safety net in this spread.

MON 100-105 November Bear Call Spread (15 contracts entered on 10/23/08)

Potential Profit $55 per contract

Contingent Stop Order set at $97.50

Monsanto got a big boost this morning when most of the grain markets when lock-limit up. This momentum helped the stock get started moving and then the rate cut put some more fuel on the fire. Similar to the rest of the Market, the last 15 minutes of the day took away a big chunk of its gains. On the day, MON moved up $4.78 and finished the day at $87.93. The pullback at the end of the day was a bit of relief for our call spread, which was losing its cushion extremely fast this afternoon. After today's trading, we are left with a little over a 12-point cushion. We also have several good resistance levels working on our side, including the falling 50-day moving average (red line).

As always, Trade Happy and Trade Smart

There's only one thing that seems to be consistent these days.....volatility. Friday's trading was certainly no exception. The pre-market trading was something that we weren't used to, limit down. The selling started overnight in Asia with indices hitting record lows with fear of an extended global recession. With U.S. futures stuck at the limit of a negative 550 points (Dow) before the opening bell, traders were bracing for massive selling once the bell rang. Due to this mindset heading into the day, it almost came as a relief when the indices finished the session with only a mere 3-percent loss. Not very often we'll walk away after a day that deep in the red and feel not too bad heading into the weekend.

The pre-market fear certainly had its justification from earnings reports that showed a serious pullback in consumer spending. Both in the U.S. and abroad, companies were reporting declining sales along with very pessimistic forecasts. Then there was another round of layoffs and job cuts that added to the current economic turmoil.

The Treasury was back in the news on Friday when there was talk spreading that it would start taking stakes in insurance companies. The move is seen as a way to help stabilize failing companies, similar to the steps the government has taken in banks.

Despite the wicked selling, there was some very positive economic news when the existing home sales numbers came in much better than expected. The September sales hit a one-year high due to price reductions of homes in foreclosures. Regardless of the reason, it was certainly a good sign for the troubled housing market. But with that said, many fear that with home loan applications falling to a seven year low, we will probably return to very slow numbers in October.

The deflation watch stayed in effect on Friday with oil falling another $3.69 a barrel. This happened in the face of a massive production cut by OPEC, which decided to curb production by 1.5 million barrels a day. This action is intended to stop the free-fall in the price of crude. But traders dismissed this move on Friday. Instead, they worried about the global weakening and slowing demand. The result was the 5.4-percent decline that took oil down to $64.15 a barrel on the New York Mercantile Exchange.

The LIBOR (London Interbank Offered Rate) continued to fall, but at a slower pace over the last two sessions. Meanwhile, the dollar continued to rise against European currencies last week. However, the yen also gained strength last week and hit a 13-year high against the dollar and 6-year high against the euro.

The worsening of the economy has futures traders increasing the odds that the Federal Reserve will cut the federal funds rate at its FOMC meeting next week. Friday's trading point to another half-point cut on Wednesday. With the current rate set at 1.5-percent, any cut would take us to a level that we haven't seen in several years. But that won't be the only big news this week. After the policy statement on Wednesday, the focus will turn to the third quarter GDP number that will be released on Thursday. Traders are looking for a negative 0.5-percent for the quarter. While any decline in GDP is not considered optimistic, economists are bracing for a much worse fourth quarter of around a negative 4-percent showing in the final three months of the year. Needless to say, there's plenty of pessimism that has been priced into the Market. The question is: have we priced in a recession or a depression?

Today's Economic Reports

The Dow Jones Industrial Average certainly headed south on Friday, taking out the previous week's low on the chart. However, it was able to hold above its October 10th low. On the day, the Dow finished down 312 points at 8,378. The 473-point loss last week leaves the index down 36.8-percent on the year.

We're going to do something a little different in this newsletter and take a look at the indexes on a monthly chart. In last week's professional trader newsletter, we looked at the indices on the monthly time frame and anticipated a bottom in the Dow at the 7,500-point level. On the chart below, this level has been strong support for the index back in 1998, 2002, and 2003. In that newsletter we found it very interesting that around every five years we seem to find ourselves near the same support. The other fascinating aspect of this chart is that the Dow is currently sitting at its 200-month moving average (black line). While this could certainly provide nice support for the index, we believe that the key levels to watch below this level are 8,000 and 7,500. If we were to bet, we would expect 7,500 to mark the bottom. However, any solid reversal off the 8,000 mark would be fine with us.

The S&P 500 also took out last week's low on Friday, but held above its October 10th low. On the session, the index fell 31 points and finished the day at 876. Over the last five sessions, the S&P has given up 63 points and remains off 40.3-percent for 2008.

On the S&P 500 monthly chart, the index has already fallen below its 200-month moving average (black line) on the chart. Last week in the professional trader newsletter we were looking at the monthly chart and anticipating a possible bottom at either the 850-point level or 800. Both of these levels were very important support for the S&P 500 back in 2002 and 2003. The 800-point mark was also very solid back in 1997 for the index. If the 850-point is the reversal area, then it's possible that we've put in that bottom. But just like our analysis of the Dow, it's probably more likely that we're headed to lower support level near 800.

Unlike the other two indexes, the Nasdaq Composite took out the previous low from October 10th on Thursday and then closed below it when it tumbled 51 points and finished the week at 1,552. For the week, the index fell 159 points, which takes the index down 41.5-percent for the year.

Like the S&P 500, the Nasdaq's monthly chart has the index well below its 200-month moving average (black line) on the chart. Last week, we felt that the index would hold above its 2002 low on the chart and were anticipating a bounce of 1,500 or its support level above 1,300. But after last week's move, it could easily make it down to the 1,200-point level. We still remain more optimistic about this index not falling that far, but we need it to show us some strength sometime soon. Until this happens, these levels remain our focus areas.

Just when we think the VIX (Chicago Board Options Exchange Volatility Index) can't possibly go any higher.....it does. The fear gauge nearly hit 90 points on Friday, which was nearly unthinkable. It pulled back in the afternoon, but still finished the session up 11.33 points at 79.13.

On the VIX monthly chart, it really puts the current fear level in perspective. According to the VIX, today's fear makes the internet bubble period seem like a walk in the park. It's also hard to believe that a couple years ago we were constantly complaining about the low volatility taking away the premium in options. Too bad we couldn't be just somewhere in between the two.

After looking at the amazing set of circumstances that we find ourselves in, it kind of puts the last couple of months in perspective. Although we took on substantial losses that still feel painful today, the charts show that these periods are extremely, extremely rare in history. The important thing is to learn from these times and improve the trading for the future. We believe that our adjustment of using contingent orders to close out the spreads before the stock hits our strike price is the cure for substantially reducing the risk in our positions. Obviously, we were hesitant about doing this because of the success we've had over the years by not doing so. But we also realize that we need to adapt to the current trading environment and prevent future months like the last two.

With that said, we feel very good about where we're sitting in all of our current positions. Although we lost a little bit of our cushions in AZO and OIH, we are still in very good shape. Especially when we consider how far south the indices went last week. Meanwhile, our call spreads in the RUT and MON were helped by the continued sell-off last week. Both of these spreads increased their breathing room dramatically and leave us in very good positions heading into the final four weeks of the November options cycle. We certainly know that we have plenty of hurdles left in this cycle, but let's just take it week to week and session to session. We have another spread ready to go this month, but want to see how some things unfold first. For now, let's go ahead and take a look at our current positions in more detail.

CURRENT NOVEMBER SPREADS

RUT 640-650 November Bear Call Spread (10 contracts entered on 10/20/08)

Potential Profit $100 per contract

Contingent Stop Order set at $635.00

The RUT continued its descent down the chart on Friday when it lost another $18.80 and finished the week at $471.12. Over the last five sessions, the index has lost 55 points, or 10.5-percent. This leaves the small-cap RUT down 38.5-percent on the year. While this sounds pretty dismal, last week's move lower was good news for our call spread. We currently have nearly 170 points worth of breathing room in this spread.

AZO 90-85 November Bear Call Spread (15 contracts entered on 10/222/08)

Potential Profit $70 per contract

Contingent Stop Order set at $92.50

AZO opened the session on Friday just like the rest of the stocks, sharply lower. But the good news was that it was able to actually move up during the session and cut a big chunk of its losses on the day. However, it was still down $2.79 when the closing bell rang. The other positive note is that our support level at $100 appears to still be in very good shape. But with the stock sitting at $102.70, we'll continue to monitor the position very closely. Keep in mind that AZO is trading just over 10 points above our close-out price.

OIH 60-55 November Bull Put Spread (15 contracts entered on 10/23/08)

Potential Profit $60 per contract

Contingent Stop Order set at $62.50

With OPEC cutting output on the futures trading limit-down Friday morning, we knew it was going to be a rough session. Oil turned in another weak performance on the day, which took OIH down with it. The oil service holders finished the session down $5.41 at $83.74. We certainly knew there would be some more selling pressure in OIH, but we still feel very good about this spread. Keep in mind that OPEC seems to be working overtime trying to find a way to keep the price of oil propped up. If they aren't successful and OIH continues to fall, don't be surprised to see us making this position into an iron condor. For now, let's sit tight and see what unfolds this week.

MON 100-105 November Bear Call Spread (15 contracts entered on 10/23/08)

Potential Profit $55 per contract

Contingent Stop Order set at $97.50

The continued selling pressure on commodities has played right into our call spread in Monsanto. The stock shed another $2.96 on Friday and finished the week at $71.95. So far, this position has worked out perfectly for us. We got the initial move up in the stock that allowed us to get filled, since then, MON has taken a nosedive. With four weeks left to go in this one, we are sitting with a cushion of nearly 30 points.

As always, Trade Happy and Trade Smart

The credit markets continue to thaw, but deep recession fears send stocks into another free-fall. With the improvement in the global credit market, the Street turned its attention to earnings and didn't like what it heard. The troubling corporate forecasts weighed down stocks, causing another barrage of heavy selling this afternoon.

There has continued to be some easing in the credit markets this week with the fear in bank-to-bank lending starting to subside. For the past month, the focus has been on the LIBOR (London Interbank Offered Rate) in order to gauge the willingness of banks to lend to each other. The three-month rate the last few weeks was topping 5-percent, but as of today, the rate had pulled back to 3.54-percent. Certainly a much improved barometer.

At the same time, traders have been closely monitoring the Treasury bills. During the Market turmoil, investors have flocked to safety, which brought down the yields dramatically. However, like the LIBOR, there has been some improvement in these areas as well. The benchmark 10-year note moved up again to a yield of 3.624-percent. Meanwhile, the 30-year bond increased to a yield of 4.088-percent. We will continue monitoring these indicators closely on an intraday basis.

But even with these improvements, traders have been inclined to hit the sell button. That's because now the focus has returned to the economy and the third quarter earnings announcements. As a matter of fact, nearly one-third of the S&P 500 is releasing earnings this week alone. While there has been some good upside surprises, traders have focused on gloomy forecasts, deep recession worries, and slowing global economies.

There were more predictions from the International Monetary fund today when it issued a very pessimistic outlook for the next year. In its new report, the IMF predicts the rest of this year to have very little, if any economic growth. It also doesn't see the U.S. recovering until the second half of next year. It also sees a major downturn for the global economy. Keep in mind that the IMF is always late to the party and has a knack for stating the obvious.

Oil continued to slide today thanks to the reduction in demand. It hit a 16-month low on Wednesday after the Energy Information Administration reported that inventories spiked by 3.2 million barrels last week. This was more than the 2.9 million that analysts had forecasted. At the same time, gasoline stockpiles increased by 2.7 million barrels while demand was down 4.3-percent from last year's number. On the session, oil shed $5.43 a barrel and settled at $66.75 on the New York Mercantile Exchange. Today's 7.5-percent decline helped crude fall to its lowest level in over a year.

Today's Economic Reports

The dollar continued its historic rise this week against other currencies. With European countries contemplating more interest rate cuts, the dollar has been the benefactor. This week the dollar hit a two year high against the euro. The only currency that has been able to maintain strength is the yen, due to some unwinding of the yen-carry trade.

The Dow Jones Industrial Average went south for the second straight session, but this time the downward move resembled the selling we saw exactly one week ago. The index tumbled 514 points and finished the day at 8,519. The Dow closed just above a support level that was formed two weeks ago. If the blue-chip index falls below this level, next stop will likely be 8,000.

The S&P 500 also made it back to the lows from last week and the week prior. When the closing bell rang today, the index was down 58 points. The 6.10-percent decline took the S&P 500 below the 900 point level to 896. It closed right at a decent support level for the index, but with the downward pressure, it's likely headed farther south. Next stop on the chart appears to be at 850. This is the level we'll be watching the rest of the week.

The Nasdaq Composite gapped lower on this morning's open and then continued heading down. Despite good news in the tech sector last night, the index shed 80 points in today's trading and closed at 1,615. The 4.77-percent decline took the index down to another decent support level on the chart. But, like the other indices, it will probably head lower to test an older support level at 1,500.

About as fast as the VIX (Chicago Board Options Exchange Volatility Index) had fallen, it bounced back with renewed strength today. It shot up 16.54 points and closed back near record highs at 69.65.

We didn't have any trouble getting filled in our RUT spread on Monday, but it took us three sessions to finally get into our AZO position. Despite some wild swings in the Market, we feel very good about how we're sitting in both of these spreads.

As far as the indices, today's selling was reminiscent of last Wednesday's heavy selling. We had the big downward moves this afternoon combined with a huge spike in the VIX. As with any bottom in the Market, it's almost guaranteed that we're going to test the low before we're able to reverse the trend. This is what appears to be happening. Due to this, we're going to be closely watching to see how the indexes handle the prior lows on the chart.

If we're able to bounce, that's good news for the bulls heading forward. Of course, we'd be expecting more of an upward but sideways trend over the next few months. On the other hand, if we take out those prior lows, it's likely to get real ugly real fast....again. Let's keep an open mind and watch these levels over the next two sessions.

 For now, we're ready to enter two new spreads on tomorrow's open. The first new spread is going to be on an old favorite Oil Services HOLDRs (OIH). Oil certainly has been in a downward spiral with the U.S. demand falling like a rock. However, OPEC is attempting to fight this deflation through massive production cuts. While the cartel is notorious for not following the mandate by not cutting production, we do believe that there are huge ramifications for several of these countries for the dropping price of crude. With starters, Venezuela, Russia, and Iran all are three heavily dependant on the price of oil staying above $80 a barrel. Any drop below this level will cause massive problems for these countries to fund their regimes. Due to this, we believe that one way or another, oil will stabilize in price. Also working to our advantage, the OIH has not dropped to $60 since 2003 (see monthly chart below). These are just a few of the factors that we have working on our side in a put spread.

Our second spread for tomorrow is on Monsanto Co. (MON). With commodities rolling over hard, MON has been hit equally as hard. The stock has followed its 20-day moving average (light blue line) sharply down the chart. With crop prices taking a big hit, MON has been suffering also. We want to take advantage of this downturn by coming in with a call spread above several new resistance levels on the chart. Besides the 20-day moving average, we also have the falling 50-day moving average (red line) that is drifting lower and should be below our "short" strike price in a few days. We feel very confident coming in with a call spread on tomorrow's open.

Please Note: These are both limit orders and day orders.

NEW TRADE ALERT (2)

Oil Services HOLDRs (OIH)

OPENING 60-55 NOVEMBER BULL PUT SPREAD (15 contracts)

Sell 15 November Puts at 60 strike price

Buy 15 November Puts at 55 strike price

Total Credit 0.60 per contract

Potential Profit $900.00

Once Filled, Use a Conditional Order: Stop or Buy Market if Touched Order if it reaches $62.50 (close out spread)

Monsanto Co. (MON)

OPENING 100-105 NOVEMBER BEAR CALL SPREAD (15 contracts)

Sell 15 November Calls at 100 strike price

Buy 15 November Calls at 105 strike price

Total Credit 0.55 per contract

Potential Profit $825.00

Once Filled, Use a Conditional Order: Stop or Buy Market if Touched Order if it reaches $97.50

OIH DAILY CHART

OIH MONTHLY CHART

MON DAILY CHART

CURRENT NOVEMBER SPREADS

RUT 640-650 November Bear Call Spread (10 contracts entered on 10/20/08)

Potential Profit $100 per contract

Contingent Stop Order set at $635.00

Monday seemed to be the perfect timing to get filled in our call spread on the RUT. After it ran up nicely on the first day of the week, it spent the next two sessions heading lower. In today's trading, the RUT fell 28 points and finished just above a support level at $501.97. If the index falls below this support, it's likely to test the low from a few weeks ago on the chart. The next support level is from 2003 at $450.

AZO 90-85 November Bear Call Spread (15 contracts entered on 10/222/08)

Potential Profit $70 per contract

Contingent Stop Order set at $92.50

It took three attempts, but we finally got filled in the AZO put spread. The stock was able to overcome the selling yesterday, but today's wicked selling was too much for it to overcome. AZO traded in a wide range on Wednesday, but finished the day down $2.98 at $105.96. The stock has continued to struggle with resistance on the upside from both its 20-day moving average (light blue line) and another barrier at $110. However, it has been able to remain relatively strong over the last five sessions. Even with today's move, we're still sitting very comfortably with over 15 points of breathing room in this spread.

As always, Trade Happy and Trade Smart

The Market dropped, but AZO didn't. Its remarkable strength today just reaffirmed our analysis that this is a very good put spread. However, we don't want to chase it all the way up the chart. Instead, we are going to sit tight and send in the same exact order as yesterday and see if we can get filled tomorrow.

Please Note: This is a limit order and day order.

NEW TRADE ALERT (1)

AutoZone Inc. (AZO)

OPENING 90-85 NOVEMBER BULL PUT SPREAD (15 contracts)

Sell 15 November Puts at 90 strike price

Buy 15 November Puts at 85 strike price

Total Credit 0.70 per contract

Potential Profit $1,050.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $92.50

AZO DAILY CHART

As always, Trade Happy and Trade Smart

We were able to get filled in the RUT spread this morning, but the strong rally prevented us from getting filled in the new AZO spread. Due to this, we are going to raise our spread one set of strike prices (along with our exit strategy) and send it back to the auto trade brokers for tomorrow morning.

Please Note: This is a limit order and day order.

NEW TRADE ALERT (1)

AutoZone Inc. (AZO)

OPENING 90-85 NOVEMBER BULL PUT SPREAD (15 contracts)

Sell 15 November Puts at 90 strike price

Buy 15 November Puts at 85 strike price

Total Credit 0.70 per contract

Potential Profit $1,050.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $92.50

AZO DAILY CHART

As always, Trade Happy and Trade Smart

Stocks finish the tumultuous week with "shocking" gains on the week. Of course, that didn't mean there were any green indices on Friday when the major indices battled late-day selling. However, there were signs of thawing in the previously frozen credit market on Friday. Unfortunately, that didn't translate to positive news for stocks. Over the last several weeks the credit market has been the dog wagging the tail (stock market), which makes the positive revelations extremely meaningful for the Street.

A key gauge for the credit market problems has been the soaring LIBOR (London Interbank Offered Rate). On Friday, the three-month rate dropped eight basis points to 4.42-percent, taking the key rate down over 40 basis points for the week. This shows us that the recent moves by central banks worldwide are starting to remove some of the fear in the banking system with banks beginning to lend to each other. At the same time, the overnight LIBOR hit a four-year low on Friday with the rate declining to 1.67-percent. Typically, LIBOR should be around 0.1-percent above the federal funds rate, which currently is at 1.5-percent. Friday was the first time that it has come even close to this rate in quite some time. A lower LIBOR will result in lower interest rates on corporate loans and improve the availability for companies to gain access to business funding.

This unfreezing also showed up in the three-month Treasury bills, which nearly doubled on Friday to a yield of 0.8-percent. This is a very important fear gauge because investors flock to safety in times of great fear. This brought the yield down sharply and kept it down over the last several weeks. As this fear dissipates, investors pull their money out of Treasury bills and put them back to work in securities and other assets.

However, the economic reports were not that rosy on Friday. New home construction fell by 6.3-percent in September, which puts the annual rate at 817,000 units. This was the slowest pace since the early 1990's and much slower than the 870,000 that the Street was expecting.

There wasn't much better news in building permits data on Friday. The Department of Commerce report showed that permits declined 8.3-percent last month, which also is the slowest pace since the early 90's. Just like the new home construction, building permits of 786,000 was lower than expected and shows a big slowdown in future construction.

Not to be outdone by the other two pessimistic reports, the University of Michigan/Reuters consumer sentiment had its biggest drop in the history of the index. After shooting up to 70.3 in September, sentiment tanked to a reading of 57.5 in October. With investors now receiving their quarterly statements and staring down a tumultuous stock market, it wasn't too surprising to see this report come in so bearish.

The price of crude jumped back above $70 a barrel on Friday when it rose 2.9-percent. The $2 advance took oil up $71.85 a barrel on the New York Mercantile Exchange. The price of crude is now down over 50-percent from its record high in July. However, gold wasn't as lucky on the session when it dropped $16.40 an ounce and settled at $785.10. Meanwhile, the dollar rose and continued to strengthen against both the euro and the yen on Friday.

Today's Economic Reports

The Dow Jones Industrial Average moved higher during the session on Friday, but couldn't hold on to those gains and finished down 127 points. The 1.41-percent loss takes the index down to 8,852. Despite this loss, the Dow was able to finish the week up 4.8-percent. This was the Dow's biggest percentage gain since the spring of 2003.

The S&P 500 traded in another wild range on Friday but finished the session down 5.88 points at 940. However, the index gained 4.6-percent on the week and is off the low from last week.

The Nasdaq Composite was headed a lot higher on Friday before the late selling took the index down 6 points when the closing bell rang. The index was helped by Google's excellent earnings release Thursday night. But even that surprise wasn't good enough to help the index finish in the green. The 0.37-percent loss left the index sitting at 1,711, which also is off its low from last week. Even with Friday's loss, the Nasdaq still was able to rise 3.7-percent over the last five sessions.

The strong buying during the day had the VIX (Chicago Board Options Exchange Volatility Index) dropping nicely. But the late selling once again brought the VIX higher and helped it close up 2.72 points. This leaves the fear index at the extreme level of 70.33.

Friday's expiration brought an end to the second horrific options cycle in a row. We took a beating last month, but then this month turned out even worse. There's absolutely no way to sugar coat that pain pill that we had to swallow this month. The lack of a recovery this week left all three of our positions taking maximum loss this cycle. On Friday, we sent out an alert to close out the Apple spread so that we wouldn't need to worry about dealing with the exercise/assignment of this position.

For some of the auto traders, they were closed out of the position. However, for others (especially with more contracts) the market price was considerably higher for the close-out, which made it more economical for them to go ahead and get assigned stock positions.

In these cases, the broker will probably assign you 100 shares of stock per contract that you were trading of Apple at the price of $125 per share. At the same time, the broker will probably exercise your "long" puts at the price of $120 per share price. Depending on your broker, you might end up being flat (meaning no shares of stock in your account) or you might end up only being long shares at the $125 strike price but having a profit from the exercising of your $120 puts.

If your account is showing this position flat (no shares of Apple stock), then your account would simply show the 5-point loss minus your original credit of $0.60 when you entered the spread. The ending result would be a loss of $440 per contract. If you are showing anything other than this and you are showing shares of Apple stock, you will want to contact your broker to make sure that this position is closed out. It's always important to make sure that you understand your account positions, especially after the expiration like we encountered on Friday.

Unfortunately, the other two positions finished the cycle with the same painful results where the loss would be the points between the two strike prices minus the credit that we took in when we entered the spread. As excruciating as it is, let's go ahead and add up the result for October.

CLOSED OCTOBER SPREADS

MNX 160-155 BULL PUT SPREAD (15 contracts entered on 09/12/08)

$450 loss per contract

AAPL 125-120 OCTOBER BULL PUT SPREAD (15 contracts entered on 09/11/08)

$440 loss per contract

RUT 650-640 BULL PUT SPREAD (10 contracts entered on 09/22/08)

$920 loss per contract

After battling the wicked volatility this cycle and coming up on the losing side, we've spent a lot of time evaluating our strategy this month. Of course, it's always easy to have 20/20 hindsight. After all, who could have predicted a VIX that shot up to a reading over 80? In an environment like this, we feel the need to make an adjustment to our strategy in order to reduce the exposure that we've encountered over the last two cycles. We feel that the best way to do this is to enter conditional stop orders on all of our spreads. Our plan is to have these entered once we are filled in the spreads. We plan on sending these out in all of the alerts and are going to place the stop above our "short" strike price on put spreads and below our "short" strike price on call spreads. This should help mitigate sizable losses if we ever encounter another crash or any difficult trading environment. It should also help keep all of our losses small by closing out a spread before the stock hits either of our strike prices. It's easy to sit here today and say we should have, could have, would have.......last month, but that won't get us anywhere this month. But by making these changes going forward, it should help alleviate some of the risk while helping us all sleep better at night.

As we said above, once we are filled in a new spread, members will then want to set a conditional order. This order will buy the spread (close out position) if the stock hits our stop loss price. Because the stock will be moving fast, we will want to use a market order to close out the spread. With this in mind, we are going to set this stop price a few points above/below both of our strike prices to make sure we don't get hurt very badly when closing out the spreads. By using this new strategy, it probably eliminates the need to have accounts auto traded because members could simply enter these orders themselves at anytime and then leave them GTC. However, if there are members that choose to still auto trade, we will simply send in the orders to close out a spread if a position hits our stop price. Now that we've laid out the new strategy, let's get things started for next month.

Our first spread for the month is going to be on the RUSSELL 2000 INDEX (RUT), however, this time we are going to the call side. The index dropped like a rock and has now formed plenty of decent resistance levels on the chart. When we entered our put spread last month, the RUT was outpacing the major indices and was flirting with a positive return on the year. Since then, it is now sitting down over 30-percent on the year and trailing all three indices with its performance last week. In a recession, small-caps usually get hurt the worst because they are not able to insulate themselves as easily as the large-cap defensive names. Due to this, we feel very good about going with a call spread to get things going. However, if last week was the bottom in the Market, we can always come back with a put spread to make this position into an iron condor in the future.

The second spread that we are going to place tomorrow morning is on our old friend AutoZone Inc. (AZO). We've enjoyed trading this one for quite a while and are very bullish on the fundamentals behind this company. This is especially true during tough economic times when consumers need to repair their vehicles instead of buying new ones. Certainly, this applies to today's economic conditions. Of course, the stock wasn't able to withstand the strong selling over the last month. However, we feel that this is an excellent play for the trading environment that we find ourselves in and believe that the stock has shown signs of strength over the last week.

Please Note: These are both limit orders and day orders.

NEW TRADE ALERT (2)

RUSSELL 2000 INDEX (RUT)

OPENING 640-650 NOVEMBER BEAR CALL SPREAD (10 contracts)

Sell 10 November Calls at 640 strike price

Buy 10 November Calls at 650 strike price

Total Credit 1.00 per contract

Potential Profit $1,000.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if index reaches $635.00 (close out spread)

AutoZone Inc. (AZO)

OPENING 85-80 NOVEMBER BULL PUT SPREAD (15 contracts)

Sell 15 November Puts at 85 strike price

Buy 15 November Puts at 80 strike price

Total Credit 0.70 per contract

Potential Profit $1,050.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $87.50

RUT DAILY CHART

AZO DAILY CHART

As always, Trade Happy and Trade Smart

We did not get the extended rally that we had hoped for this week. Due to this, we are going to close out the current October Apple spread by using a market order to make sure that we get filled.

Please Note: This is a market order.

Apple Inc. (AAPL) TRADE ALERT

CLOSING AAPL 125-120 OCTOBER BULL PUT SPREAD (15 contracts)

Buy 15 October Puts at 125 strike price (puts we previously sold)

Sell 15 October Puts at 120 strike price (puts we previously bought)

We suggest using a Market Order.

Retail sales plummet and take stocks with it. In a rare event, traders turned their attention to the economic reports today, but didn't like what they saw. The problematic consumer showed signs that the threat of a deep recession are still present, no matter what actions the government takes. This sent stocks down early and kept them moving lower throughout the session.

There was some incremental movement in loosening up the credit markets overnight with the Libor falling overnight. But the Treasury bills remain at extremely low yields, which show the flight to safety remains in full effect.

It was worse than the Street was expecting today when the retail sales fell by 1.2-percent last month. The Commerce Department showed the worst drop in three years when the data came in much worse than the 0.7-percent decline that analysts had predicted. Because consumer spending makes up two-thirds of the overall economic activity, the large slowdown increases the likelihood of a recession. September's decline in consumer consumption was the third consecutive month, which was the first time we've seen this since the early 1990's. Many analysts believe that the sharp drop in consumer spending will show up in the third quarter GDP numbers that come out October 30th.

Also on the day, the Labor Department data showed a drop in wholesale prices for the second month in a row. Normally, the PPI figures would have kept traders on the edge of their seats, but with energy and commodity costs in a downward spiral, the report wasn't that meaningful. The Street was already anticipating a pullback and got it with a 0.4-percent decline in September. However, core PPI ticked up 0.4-percent last month. Keep in mind that this figure excludes food and energy, which just recently started to deflate. Analysts expect the recent decline in these categories to show up in future reports.

With inflation no longer an immediate concern, traders expect the Fed to lower its federal funds rate at its next meeting on October 28th-29th. Expectations are for at least a quarter-point cut. The upcoming meeting is not too far away from last week's half-point cut, which took the rate down to 1.50-percent. Federal Reserve Chairman Bernanke nearly reaffirmed this today when he spoke to the Economic Club of New York. He stated that the government will continue to use all the tools at its disposal to improve market functioning and liquidity, to reduce pressures in key credit and funding markets. He also noted that the country will emerge from this period with renewed vigor.

The slowdown in business spending was evident in the Commerce Department's report on business inventories. The data showed that inventories made their smallest advance in five months in August. Some are claiming that this was due to the tightness in the commercial paper market, which is where businesses obtain short-term loans to fund their day-to-day operations.

This afternoon's release of the Fed's Beige Book showed a weakening economy in all 12 of its regional districts. It showed that manufacturing has continued to slowdown.

The anxiety over a slowing economy and lower demand for oil sent the price of crude to a 13-month low on Wednesday. It dropped $4.09 a barrel and settled at $74.54 a barrel.

Today's Economic Reports

It was nothing but red for Dow Jones Industrial Average today. The index tumbled 733 points in today's session and closed near its low at 8,577. Today's performance was the second largest point loss ever for the index. The wicked 7.87-percent loss took back most of Monday's gain and has the Dow headed back towards last week's low.

The S&P 500 also turned in a dismal performance today when it shed 90 points. The 9.03-percent decline left the index near its low of the session at 907.84. Similar to the Dow, it also is moving back towards last week's low on the chart. If it isn't able to bounce off this level, watch out below.

The Nasdaq Composite was headed lower in pre-market trading and kept moving that way once the opening bell rang. The index tumbled 150 points on the day and closed at 1,628. Its 8.47-percent loss took the Nasdaq below last Friday's closing price on the chart. Similar to the other two indices, we'll be watching the Nasdaq's low from Friday for a possible reversal point.

After moving lower at the beginning of the week, the VIX (Chicago Board Options Exchange Volatility Index) reversed that pattern today and shot up 14.12 points while closing at 69.25. The fear index appears to be headed back towards it all-time high on the chart with the renewed pessimism in today's trading.

Today's action not only was tough to swallow, but it also wiped out the sense of optimism that we had after Monday's massive rally. Monday gave all of our positions a very nice jumpstart in the right direction. While we weren't surprised by traders locking in the gains on Tuesday, today's action really hurt. It pushed all of our positions lower and now appears to be slamming the door on a recovery for our spreads. Despite the loss of optimism, we do remember last month where we got a massive rally on the final two sessions of the cycle, only after we already closed out our spreads. This showed us that it can be done, but it's going to take one heck of a surge to the upside. With this in mind, let's take a look at all of our positions in detail.

CURRENT OCTOBER SPREADS

MNX 160-155 BULL PUT SPREAD (15 contracts entered on 09/12/08)

$50.00 per contract profit potential (put spread)

The MNX fizzled over the last two sessions, taking the index back towards last week's low. Today's session was especially damaging when the index lost 12.04 points and closed at $124.42. This leaves the MNX nearly 35 points below our put spread with time running out.

AAPL 125-120 OCTOBER BULL PUT SPREAD (15 contracts entered on 09/11/08)

$60.00 per contract profit potential (put spread)

Once again Apple showed signs of strength during today's session, but the downdraft was just too strong for the stock to overcome. By the time the closing bell rang, it was down $6.13 at $97.95. This is just one day after the stock was trading in between our two strike prices on Tuesday. With only two sessions remaining, we need the exact opposite movement that we encountered today and yesterday. We're going to sit tight and see if we get our luck to turn.

RUT 650-640 BULL PUT SPREAD (10 contracts entered on 09/22/08)

$80.00 per contract profit potential (put spread)

The RUT outperformed the major indices today; unfortunately, it was on the way down with its 9.47-percent loss. This amounted to a $52.54 decline that left the index at $502.11 at the close. With only one full trading day left in this spread, it's going to be very difficult for the RUT to make it back above our strike prices. Regrettably, it appears that this will turn into a very painful loss in this one.

As always, Trade Happy and Trade Smart

It was a week of records on Wall Street; unfortunately, they were the kind that we don't want to break. With volatility hitting mindboggling levels, there might not have ever been a better time for a weekend. Friday turned out to be one of the most volatile sessions ever seen before on the Dow. At the same time, its weakness at the close finished off the worst week of trading ever for the 112-year-old index. It certainly was another week to forget as far as we're concerned, with it hitting record volume last week. We're sure there are plenty of others that would also like to repress those memories.

Friday started just the way Thursday finished, with everyone hitting the sell button hard. Shortly after the opening bell, we saw nearly a 700-point washout in the Dow. The heavy selling on the open was blamed on margin calls that caused traders to liquidate positions in order to increase collateral. But almost as quickly as the index sank to 7,882 we saw a pretty aggressive snap-back with traders wiping out the loss. While this was happening, floor traders were celebrating as if the bottom had finally been put in. But this initial jubilation soon withered away as stocks drifted back into the red. However, unlike previous sessions all week, there were some buyers that showed up in the last hour of trading. This helped the indices recover most of their losses on the session and even helped the Nasdaq finish in the green.

The interesting aspect of the late rally was that it was led by the downtrodden financial stocks. This was probably due to a combination of short sellers covering their positions and bargain hunters speculating on good news from the G-7 nations that are meeting to address the crisis this weekend. Reports on Sunday show that the leaders are working on a guarantee from the European governments that would guarantee future bank debt in order to encourage lending. By doing this, they hope that this action will help ease the tight credit that's been plaguing the markets while also helping businesses and consumers gain access to loans.

Shortly after the bell, Treasury Secretary Paulson discussed the government's plan to take equity stakes in U.S. banks. This is a similar approach to what has already taken place in Europe. Although Paulson didn't outline a specific plan, the Street is expecting a direct injection of federal money that possibly would come from some type of preferred shares in the banks themselves.

It also came out on Friday that General Motors had contacted Ford Motor Co. previously about a possible merger. Evidently, Ford had no interest in the possibility. This sent General Motors in the direction of acquiring or merging with Chrysler. GM attempted to reassure investors last week that it had plenty of funding and that it was not contemplating a possible bankruptcy. But with the company burning through over 1 billion in cash per month and its stock falling below $5 a share, there's no doubt that we might wake up one morning to find that there's no such thing as the big three anymore.

The latest financial rumored to be on death watch last week was Morgan Stanley. The stock was in a freefall with speculation that Mitsubishi might back out of its agreement to invest $9 billion in the company. Although Morgan Stanley has attempted to reassure investors that this will take place this week, the company's stock has continued to plummet. At the same time, the price for credit-default-swaps on the company has soared. Essentially, these are over-the-counter financial contracts that allow parties protection against default on the company's debt. These prices have soared, meaning that people are betting against Morgan Stanley's ability to pay back their creditors.

There was also plenty of disappointment in the auction for the Lehman credit-default swaps on Friday. Keep in mind that credit-default swaps are instruments that investors buy to insure against defaults on corporate and other bonds. In essence, it's the same as buying automobile insurance in case your car gets totaled. The problem with the credit-default swaps is that many of the sellers were previously taking in less than $8 annually to insure every $100 in debt. In essence, these insurers were not collecting enough premiums in the event of substantial payouts. However, most companies would hedge their positions to prevent substantial payouts in the case of something like Lehman Brothers taking place.

Friday's auction showed that the recovery rate on the Lehman's debt came in at 8.625 cents on the dollar, which leaves counterparties with higher than expected payouts on the insurance contracts. This was dramatically lower than the estimate of somewhere in the 80 cents range that was anticipated earlier in the week. Instead of the higher price, the sellers of this insurance will be on the hook for 91.375 cents for every dollar they sold. This easily becomes the most expensive defaults ever in the credit derivatives market.

While there were some that worried on Thursday that this would catch those insurers in a massive payout, this shouldn't have been a surprise to those dealers that wrote the default swaps. Like we mentioned earlier, most firms that write these swaps have their positions hedged or collateralized in case situations like this occur. Of course, maybe it's the financial crisis that had some wondering if firms really were hedged for situations like this.  

The one bright spot on Friday was in the oil market where crude fell sharply again and closed at $77.70 a barrel on the New York Mercantile Exchange. This drop should continue to help the consumer with energy prices that are now 7-percent lower than last year at this time. The recent slide in oil has led to the largest drop ever in the price of gasoline. The average price for unleaded gas fell $0.3503 to a nationwide average of $3.3079 on October 10th.

Today's Economic Reports

It's hard to find a description for last week's 1,874-point drop in the Dow Jones Industrial Average. The 18.2-percent tumble over the past five sessions now puts the index down 36.3-percent for the year and 40-percent from last year's high. There's one thing that support levels cannot do: stop fear. The high anxiety has led to a tumultuous cascading crash and has left the index sitting at 8,451.

The S&P 500 also lost 18.2-percent last week during its 200-point tumble. The only positive action was the late rally Friday afternoon that left the index only 10 points lower than where it opened the session. However, its year-to-date loss of 38-percent leaves the S&P 500 sitting lower than any of the other major indices.

The Nasdaq Composite was the only one out of the three major indices to finish Friday on the upside with its 4-point gain. But this advance did little to help the index with its horrible 297-point loss on the week. The 15.3-percent decline last week was better than the other two indices, but still leaves the Nasdaq off 37.8 percent on the year.

The panic selling on Friday morning led to the VIX (Chicago Board Options Exchange Volatility Index) hitting another all time high of 76.94. Although the index pulled back later in the session, it still advanced 6.93 points on the session, settling at 69.95. The monthly chart below shows how easily the index has topped previous levels.

The pace of the cascading crash sped up last week with investors selling anything and everything at a record pace. The unrelenting selling caused more damage to our put spreads and ate up another week of time left in our October positions. We still feel that there's going to be a very sharp rally one of these sessions because there's so much money on the sidelines that is eventually going to make its way back into the Market. The last thing these investors want to do is miss the massive rally. We started to see a glimmer of this when the Dow fell below 8,000. All of the sudden stocks found a bid and the snap-back was very sharp.

The problem for us is that last week's action did a lot of damage to our positions and now we're down to just a handful of sessions. There's no doubt that we need a massive rebound and we need it fast. Our plan this week is to ride out a few more sessions to see if we can get the rally we've been waiting for. But even if we get the upward momentum, we might not get the moves back above both our strike prices. However, it could allow us to close out some positions with smaller losses. For now, let's take a look at all of our positions in detail.

CURRENT OCTOBER SPREADS

MNX 160-155 BULL PUT SPREAD (15 contracts entered on 09/12/08)

$50.00 per contract profit potential (put spread)

The MNX traded in another wild range on Friday, but by the time the closing bell rang it was only down $0.53. The 0.42-percent drop leaves the index at $126.98. This certainly leaves the MNX dramatically below our October put spread heading into the final week of the cycle. We need a big move up in the index this week to get the MNX close to our put spread. Even a surge that takes the MNX close to our strike prices would be enough for us to close this spread out without taking the full brunt of the current loss in this spread.

AAPL 125-120 OCTOBER BULL PUT SPREAD (15 contracts entered on 09/11/08)

$60.00 per contract profit potential (put spread)

We were closely monitoring the intraday activity of Apple last week and really liked what we saw. For the last half of the week, this stock had very strong relative strength that finally showed up on Friday when it surged $8.06 higher on the session. The 9.08-percent gain on the day happened after the stock bounced sharply off a support level at $95. The company was helped on the day when an Analyst at Oppenheimer upgraded the stock with a price target of $145. However, this is well above its closing price of $96.80 on Friday. Heading into the home stretch, we are going to also need a strong move to the upside in this stock. Let's give it a few days to see if we can get it close.

RUT 650-640 BULL PUT SPREAD (10 contracts entered on 09/22/08)

$80.00 per contract profit potential (put spread)

After the initial spike down on Friday, the Russell 2000 was able to turn in a very good performance on the day. Its recovery led to a $23.28 gain on the day and left the index at $522.48 on the close. As good as this session was, the index is still over a hundred points below our put spread with only four full trading days left in this one. As with our other spreads, we're going to give it a few days at the start of this week to see if we can get that massive bounce back that we've been waiting for.

As always, Trade Happy and Trade Smart

We finally got what we were been waiting for.......right? Traders have been begging for a coordinated rate-cut worldwide, and that's what they got this morning. We saw how excited traders got yesterday morning when CNBC went to breaking news and the pre-market futures shot straight up, only to sell off once the news had nothing to do with a rate cut. Of course, we heard the same thing last week about the bailout/rescue legislation getting through Congress. Undoubtedly, that did anything but live up to expectations. Unfortunately, the rate-cut appeared to have a similar effect as the Market sold off hard in the final thirty minutes of the session. So much for giving the Street what it wants........

Today's unparalleled move by six central banks was designed to relieve the pressure in the credit markets and increase bank lending. The move by the U.S. Fed brought its Federal Funds interest rate target down to 1.5-percent with its one-half basis point cut. The FOMC is set to hold its regularly scheduled meeting October 28th and 29th. As soon as today's rate cut was announced, futures traders were already fully pricing in another quarter-point cut at its meeting in a few weeks. The federal funds rate in the U.S. is far lower than other banks such as the European Central Bank, which just dropped its key rate to 3.75-percent from 4.25-percent.

In a joint statement from all of the central banks, officials mentioned that inflationary pressures have moderated and that the recent financial crisis has augmented the downside risks to growth and has diminished the upside risks to price stability. In a separate statement released by the U.S. Fed, Chairman Bernanke said that the intensification of the financial market turmoil is likely to exert additional restraint on spending due to the reduced ability of households and businesses to obtain credit. At the same time, the U.S. central bank also lowered its discount window by a half percentage point to 1.75-percent.

The International Monetary Fund (IMF) went out on a limb today and said that the world economy will slow sharply in 2008, led by the United States. To us, the IMF has the remarkable ability of being able to state the obvious. The organization cut its growth projections while commenting that the U.S. will continue to lose traction. In its report, the IMF projected that the world economy will grow at 3.9-percent this year, down from 5-percent last year. It sees a slightly better 2009 with 3-percent growth, which would almost signify a worldwide recession.

There was troubling data for retailers today when September sales showed a big decline in sales for many of the nation's top retailers. The same store sales numbers rose to 1.7 percent last month, but came in under the 2.3 percent increase that analysts had expected. Although these figures are preliminary, the disappointment was fairly widespread with many companies cutting their outlooks. However, discounters such as Wal-Mart and Costco both performed strong last month as consumers appear to be looking for a deal.

The Market got about a five minute rally this morning after the National Association of Realtors announced an unexpected spike in pending home sales. According to the association, sales jumped 7.4-percent in August while its index of sales for existing homes climbed to 93.4. This was dramatically higher than the 87.0 reading in July and was the highest reading since the summer of 2007. Both data points were much better than what analysts had forecasted and showed a boost to downtrodden housing market.

Also this morning, the price of oil slid after the Energy Information Administration showed another big spike in crude oil supplies. According to government data, crude inventories jumped 8.1 million barrels last week. At the same time, gasoline supplies rose by 7.2 million barrels. Both of these levels were drastically higher than what analysts had expected, which helped oil drop sharply after the report was released. On the day, oil lost $2.60 and finished the session at $87.46 a barrel on the New York Mercantile Exchange.

Today's Economic Reports

The last thirty minutes of the session was the most painful for us. The indices gave back solid gains on the session when traders decided to sell the rally heading into the close. The intraday chart below shows just how painful that last half-hour was for the Dow.

The ugly finish gave us another red candle on the Dow Jones Industrial Average's daily chart with the index closing on its session low. For the day, the index lost 189 points and closed at 9,258. That tumble amounted to another 2-percent loss for the Dow.

The S&P 500 fared better on the session, but still lost 1.13-percent on the day. The 11-point loss takes the index down to 984 with the S&P closing in the lower half of its trading range.

The Nasdaq Composite was certainly the strongest index during the session, but still finished the day in negative territory with its 0.83-percent loss. That amounted to a 14-point decline, which took the index down to 1,740.

With near panic setting in this week, the VIX (Chicago Board Options Exchange Volatility Index) has continued its run into record territory. It moved up another 3.85 points and is still sitting at an extreme level of 57.53.

We thought it would be interesting to take a look at the VIX on a monthly chart to get more of a historical perspective. We have easily topped levels we saw in 1998 and again in 2002. It's too bad that the index doesn't go back to 1987 so that we could see how it compared with the crash. The one interesting thing about the candles on the chart is that once it does roll over, it rolls hard.

We certainly have a number of indicators that show us that we're closing in a bottom. The extreme reading in the VIX is certainly one of them. Some other signals would be the extreme number of stocks at 52-week lows compared to 52-week highs along with the CBOE put-call ratio. Here's the problem with those indicators, they've been sitting at these levels for the last several sessions. We certainly can't say that it will be a permanent bottom, but it will cause a decent size bounce across the board. That's what we're looking for, just enough to get the positions back near their strike prices.

Heading into today the Market had been down five straight sessions and we appeared to be knee deep in fear. With this kind of environment, it's extremely difficult to sit tight in our put spreads and not just pull the rip cord. The reason why we've continued to sit tight is that we firmly believed that a relief rally was coming. While today's trading left the indexes in the red, some of our positions actually were able to hold on to some of their gains. Although this was a good start for those spreads, we definitely need to see a few more sessions to the upside. With this in mind, we plan on remaining firm in these spreads the remainder of the week to see if we can get a little bit closer to those strikes.

One aspect that does have us slightly concerned tomorrow is the end to the short-sale ban. The ban has been in effect since September 19th and applied to almost 1,000 financial-related stocks. Of course, this has done very little to keep these stock prices propped up over the last several weeks. However, the true test will come tomorrow when the ban is lifted. One thing is for sure, it will be interesting to see what happens. For now, let's take a look at how much further we have to go in each of the spreads.

CURRENT OCTOBER SPREADS

MNX 160-155 BULL PUT SPREAD (15 contracts entered on 09/12/08)

$50.00 per contract profit potential (put spread)

The MNX gave us a sense of optimism for most of the session when it was trading much higher than where it closed. By the time the closing bell rang, the index was only up $0.06 at $133.06. The glass half full description is that it closed well off its low of the session and showed signs of strength during the trading day. We'll have to wait until tomorrow to see if this actually means anything this time.

AAPL 125-120 OCTOBER BULL PUT SPREAD (15 contracts entered on 09/11/08)

$60.00 per contract profit potential (put spread)

Apple was also able to hold on to some of its gains today when it finished the session up $0.63 at $89.79. However, it was up much higher during the day before traders decided to sell the rally. The bad news is that we're down to a week and a half left in this cycle, which places time against us in dealing with this position. We certainly don't like where we're sitting in this position, but Apple's trading intraday gives us signs that it's ready for lift off if we can get a Market bounce. For now, we're going to sit tight and see what unfolds the rest of the week.

RUT 650-640 BULL PUT SPREAD (10 contracts entered on 09/22/08)

$80.00 per contract profit potential (put spread)

The Russell 2000 also suffered a demoralizing last thirty minutes of the session. By the time the Market closed, the RUT had turned its gain into a 12.38-point loss on the day. The 2.21-percent loss took the index down to $546.57 and left the index with another red candle on the chart. This week's losses have certainly caused this position a lot of pain. However, the index can definitely come back even faster if the trend changes. After all, that's exactly what happened at the end of the last cycle.

As always, Trade Happy and Trade Smart