It was another unbelievable session on Friday. Unfortunately, it turned out to be a painful one for one of our put spreads......by just a hair. While the start to the session was exactly what we needed, the selling quickly took over and the early afternoon tumble gave us plenty of heartburn. But as soon as the damage was done to one of our put spreads, the whole Market reversed and headed higher.....adding insult to injury for us.  

The pain that we encountered on Friday wasn't that obvious at the beginning of the session. The unexpected drop in the unemployment rate helped lift pre-Market trading on Friday morning. Ahead of the release, futures were trading quite a bit lower from Thursday's close. But the surprising drop in the unemployment rate really took traders by surprise. The Street was expecting a slight uptick from December's 10.0%. But instead of coming in at 10.1%, which analysts had predicted, the unemployment rate for January dropped to a five-month low of 9.7%. The positive news from the Labor Department turns the trend upward on the chart and leaves many wondering if we've seen the unemployment rate top out.

Graphic from Briefing.com

Usually it's the non-farm payroll that's the big report, but that wasn't the case Friday. However, the data still is very important to the Street. Friday's release was slightly worse than traders were hoping for. It showed a loss of 20,000 jobs in January compared to expectations of a flat reading, where the economy might have added some jobs last month. While it wasn't as good as we would have like to have seen, it was much better than the loss of 150,000 jobs that we saw in December. There also was a bright spot in the release when the government revised November's number to show an actual gain of 64,000 jobs. This was much better than the increase of 4,000 jobs that was reported previously.

Graphic from Briefing.com

Crude appeared to be leading the way lower on Friday with the commodity continuing its slide for 2010. It was able to pare some of its loss on the day, but still finished the session off $1.95 a barrel at $71.19 a barrel on the New York Mercantile Exchange. The interesting thing is that trading volume was nearly double what is usually traded, which is not a good sign when the commodity is falling. It was a tough day for commodities in general, with gold declining $10.20 at $1,052.20 a troy ounce.

A lot of the doomsday experts were pointing to the problems in Europe on Friday, saying that defaults by European nations are ever so close to happening. We've known about the problems in Greece for a while now and haven't heard anything new on Friday. However, the talking heads were bringing this scenario up on Friday, as well as, old news out of China about the government attempting to cool down the economic growth.

While we're certainly concerned about all of the economic events that have been unfolding as of late, we find it annoying that the media will pump up certain issues on a day that we actually received plenty of good economic data. Now if the unemployment rate would have jumped and the job loss was significant, then we wouldn't have had an issue with all of the doom and gloom on Friday. But there's nothing we can do about things that are out of our control, so let's not complain about them, but rather, take a look at how the daily charts look for the indices after that wicked session.

Friday's Economic Reports

What a session for the Dow Jones Industrial Average! After dropping right through the 10,000 point mark, it looked like the large-cap index was falling off a cliff with a loss of 167 points at one time on Friday. But the last hour of trading was like a moon-shot for the index, not only erasing that hole but actually finishing the session up 10 points at 10,012. Talk about needing some Dramamine after that rollercoaster ride of a trading day. On the chart, we drew another line below the reversal point on Friday, but it's really a fools' game to try to pick the turnaround levels for this type of a trading environment. It's even funnier that the index closed back above our old support level at 10,000 points. At the same time, the daily candle is usually known for signaling a reversal for downtrends. But once again, it's hard to put any faith in technicals when so many outside variables are involved.

The S&P 500 gave us an equally nasty trading pattern on Friday when it tumbled and then recovered in the last hour of the session. The index finished the day up 3.08 points, remarkably enough at 1,066 points. It's just simply unbelievable unless we lived through a year and a half ago when this type of trading was the norm. On the chart, we wouldn't be surprised to see the index eventually fall to its 200-day moving average (black line). Hopefully it's not very soon, but this would be the logical resting point before we get a reversal.   

The Nasdaq Composite was the strongest index all day long, but that still didn't stop it from falling hard early in the afternoon. However, it was the one to lead us out of the hole on Friday on its way to a 15.69 point advance. This 0.74% gain on Friday helped the index finish the week at 2,141 points.   

The wild swings of the session are evident when we look at Friday's candle for the VIX (CBOE VOLATILITY INDEX). The massive upper shadow shows just how rampant fear ran on Friday, only to see it dissipate during the final hour of the session. While it moved up only 0.03 of a point on the session, it remains up over 20% since Tuesday with its closing price of 26.11 on Friday. The "fear" index is back above its 200-day moving average (black line), which is never a good sign. Let's see if it holds above this barrier or falls back below it when trading starts this week.

During our impressive run of 12 straight profitable months, we were able to keep any loss small while putting together some very nice profits. Has the Market changed since this time? Not really. We had some very bumpy months, the VIX alone shows this. However, the last couple of months have just given us some very unlucky sets of events. On Friday for example, the OEX bottomed out right at our "stop" before it reversed and headed higher. The intraday five-minute chart shows this below.

This is what makes trading so hard on us mentally. Trading like this has just killed us during the last few months. We went to a more conservative approach of using stops about a year and a half ago and it has worked extremely well. But when we do this, there're going to be events like this that just drive us nuts.

It's always a trade-off between placing our stops higher to reduce the potential loss to leaving them lower to give us more opportunities to make it to the finish line, without getting stopped out of trades like we were on Friday.

Of course, we had another issue on Friday with the VIX skyrocketing and pumping up the premiums in the strike prices. This increases the loss anytime we need to close out a spread. But this move on Friday certainly exaggerated the loss that anyone would expect to take. Of course, if we could have made it to next week, we would have had some more time decay tick away in our premiums. But the huge spike in the VIX is what really killed us on closing out this spread. Talk about artificial sweetening....this was artificial inflating. Even during our winning streak we would take on a loss similar to this, but would still be able to walk away with a profit for the month. But Friday's rampant VIX wiped away that profit potential this month.

There's nothing we can do about that now. It's just a matter of getting the rest of our positions home free and then making back that loss next month. Certainly any loss is more than we ever like to see, but let's keep things in perspective. We can easily make this one back, but let's get the rest of our spreads to expiration before we get started on next month.

PCLN 170-165 BULL PUT SPREAD (15 Contracts entered on 01/19/10)

PCLN CLOSED AT $196.96 Today (26.96 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $172.50

The noon hour was devastating for PCLN on Friday, along with the rest of the Market. The stock hit a 20 minute time frame that took it from nearly $197 a share down to $193 and some change. Now that was a heavy stretch of selling. While it did recover some of that loss late in the session, it still wasn't able to make it back to positive territory. It finished the week at $196.96. On the chart we wanted to see the stock start making its way back up towards its 20-day moving average (light blue line). While we still have plenty of time left and a big cushion in this spread, it looks like we might have plenty of excitement left in this one with the company moving its earnings up to next week. Let's not get too concerned just yet because we still have a very large cushion in this spread and want to sit tight for now to see how things unfold this week.  

RUT 560-550 BULL PUT SPREAD (15 Contracts entered on 01/20/10)

RUT CLOSED AT $592.98 Today (42.98 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $565.00

RUT 530-520 BULL PUT SPREAD (10 Contracts entered on 01/25/10)

RUT CLOSED AT $592.98 Today (62.98 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $535.00

The RUT also made a nice U-turn at the end of the day on Friday. By the time the closing bell rang, it was actually up 3 points at 592.98. However, it still shed 1.5% for the week and now sits at a negative 5.2% for 2010. Heading into the new week, both of our spreads remain in fairly good shape for the time being. As long as we avoid several more sessions like last Thursday, we like our chances in both of these positions. Let's see how the trading looks at the beginning of this week.

OEX 480-470 BULL PUT SPREAD (15 Contracts entered on 01/20/10)

OEX CLOSED AT $491.34 Today

Original Credit of $45.00 per contract

Close-out Debit of $365.00 per contract

Final Loss on Spread of $320 per contract

OEX 460-450 BULL PUT SPREAD (10 Contracts entered on 01/28/10)

OEX CLOSED AT $491.34 Today (31 points away from our put spread)

Profit potential of $45.00 per contract

Contingent Stop Order set at $427.50

As we mentioned earlier, it's always tougher when we get filled at the bottom and that's exactly what appeared to happen on Friday. In our previous newsletter, we incorrectly listed our second put spread, but the correct put spreads were both shown on the chart. We hope this didn't cause too much confusion. For our remaining put spread (460-450), we're sitting much better thanks to the late-day rally. We also have tons of support levels on the chart, as well as, its rising 200-day moving average (black line). Even if the index still tumbles, the 200-day should hold it up long enough to help us get to expiration in this one.

As always, Trade Happy and Trade Smart