Buying the Dip

So today we saw a pretty big down day, Dow down 200 points. I was down about 1%, inline with the nasdaq. The sell off apparently due to inflation worries and higher oil. These are a concern because I think the market is entirely fixed on these two items. With the credit crunch arguably and mostly behind us the new focus are these issues. Hence, I think if oil keeps going up, the market goes down. Wholesale inflation rose twice as fast as forecast at .4 percent, that was core PPI, oddly it was only .2 percent with food and oil included.

If the added oil and commodity costs get passed on to consumers this is not good for the economy or market. In general I think this sell off was necessary, but is concerning because it seems like a perpetual cycle, where once we start to see inflation it will encourage companies to pass along costs and just add to the problem until significant change happens.

I ended up not buying into DRYS for a contract on monday. 1 contract would have been about 1k, and with volatility decay and only a modest expectation of a move up I could at most have made 500 dollars, not a bad ROI however if I am wrong I could have easily lost 500. Even though I am playing with all profit a 1:1 risk to reward is not something to take so I passed. Rightfully so, as it traded down to 96 today. I decided to get back in as it is sitting at horizontal support. If I am wrong I get out with my loss, but I could see it getting back to 110 again if we bounce here, so the R:R is excellent in my opinion. Heavy down volume is a concern but as we can see the trend is still in tact.

I heavily bought this dip to the long side and I am slightly concerned because I did not get any put plays yesterday, CMG was already too far gone and none of the others had broken, they rallied. If we see another heavy sell off I could be caught with my pants down so I am looking for bearish plays. I bought DRYS, AAPL and GS today. AAPL was strong in this down day and has the supposed announcement of the new iphone coming out which should send the stock up, if it breaks 190 I think 200 is the next stop which is my target. GS is close to 180 which has been a very significant level so I should know I am wrong if it violates that line. Even though people seem to be generally bearish on financials GS is a good stock and could see a big move next time we rally. On monday I bought into RIG and ACH as well. FSLR bounced off its diagonal uptrend but finished below 300, although it was also strong today in a down market.

One position I am eyeing is PENN, it sits at 43 with a supposed buyout happening june 15th at 67, logic would dictate that if the deal was going to happen the stock would be sitting right at 67 because there are more people in the know than I am. However, in the odd case it happens I am going to buy some calls. Even if the deal ends up being for only 50 dollars I should make some money and I'll risk the entire premium as 2% of my account so it is just like any other trade. Again the R:R is very attractive and I will take that trade everytime.

The S&P looks like it could pull back to the 1400 level before moving higher. That seems likely unless something happens to drop oil significantly, which is almost a zero probability. Some index puts could help even out my account a bit but is not the most ideal scenario.