"THE DAILY" -- by InvestmentHouse.com Editor Jon Johnson

The Investment House Daily delivers to you the day's market analysis as described by Chief Market Strategist Jon Johnson. Mr. Johnson will have you understanding the market's movements and will have you positioned to capitalize in the days ahead.

Here's a Trade from "The Daily" and our current analysis.

Chart by StockCharts.com

SDS (ProShares UltraShort S&P500)
Company Profile
While we like playing individual stocks over indices because we get better returns overall, when the market sets up in trading ranges or in powerful rallies, it is hard to beat the indices given the wide range of options you have to play any particular index.

Take SP500. You can play futures, the SPY, or other ETF’s designed to rally in sync with the index or inversely with the index. Thus when SP500 hit the top of its range back in the second week of August, we were looking to play the downside if SP500 could not break through its June peak and the bottom of the January range. Sure enough it could not, and when it started to fall we opted to play an inverse ETF, the SDS, a 2x inverse derivative. Specifically when the SP500 falls, SDS rises, and it does so with a 2:1 leverage factor.

We put the play on the report on 8-4 when SP500 started to bump at resistance. Then we waited to see if it broke down or broke out. On 8-10 it broke lower, sending SDS higher. As SP500 fell we picked up some December SDS $31 strike call options for $3.90 when SDS was trading $31.27.

Good timing. The next session SP500 gapped lower as anticipated given the fade from key resistance the prior session. It gapped lower the next session as well and continued downside to end the week at $33.63. SP500 bounced in relief the next week but it ran out of gas and started to fall once more, culminating a week later with the gap down to key support at the May and June lows. That was our initial target, and SP500 held at that level. Given that we banked part of our options for $6.20, almost a 59% gain.

SP500 bumped at the May and June lows for the next three sessions, but late in the week when it tested lower and reversed we closed out the rest of the position, banking more nice gain. What did we do? We switched into some SSO, a 2x leveraged upside play for the SP500, i.e. when SP500 rises so does SSO. As I noted, the gains are not as huge as when we play individual stocks, but when the indices are range-bound they are great, easy, methodical ways to rake in easy money.

TLT: While we maybe didn’t believe bonds should be rallying if the US economy was supposedly strengthening and more importantly Europe was not as bad as originally thought, nonetheless bonds were setting up to move higher once more. Given what we saw technically we were not going to second guess the market: take what it gives. Don’t try to take something the market does not want to give.

So when TLT (a bond ETF) bounced up off support after a breakout, we were ready to move in, never mind what our feelings about the situation. On 7-15 we bought some September $99 strike call options at $2.63, looking for a quick move upside we could take advantage of. A nice rally ensued, but when TLT reached the June peak it sold off abruptly. It did manage, however, to hold support once more and slowly, steadily over a week got its feet back under it.

Then starting August it caught a serious bid, rallying back up to the June and July peaks that stalled prior moves. On 8-16 TLT gapped sharply higher and that move took TLT to our initial target. We readily banked some of our options at $5.50, a solid 109% gain. With such a powerful move, however, we left more on the table to work for us. Over the next week and one-half TLT posted an impressive run, gapping higher last Tuesday. Wednesday it gapped sharply higher, but then stalled, starting to roll over intraday. After a three week upside surge it was time to bank some more gain. We sold some options for $9.40, a 257% gain. We still kept just a few positions but we had a feeling the Wednesday move marked the top of this run. Sure enough on Friday TLT started to test further and the market took out our few remaining positions.

This is a classic case of letting your winners run, i.e. why you don’t get all in a hurry to bank all of your gain on the first good move. If you know where your stock or index is in the life cycle of its run you can gauge when it has gone too far and needs to correct. A bit of Fibonacci analysis doesn’t hurt one bit. TLT finished down 2.83% on Friday, but we were long gone from the position, having secured the gain we were looking for and moving on to other plays better in position to make us money.
Watch Market Overview Video
Watch Technical Summary Video
Watch Next Session Video