Amazing days in the stock market. A relief rally diminished this morning. Are we at the bottom yet? People predicting a doomsday or recession are now stronger. Some even are saying that the US has never left recession. Are we really at the same situation or even worse that we were in 2008? I do not think so. SPY fell below $118 level and bounced back, will this be the beginning of a bounce and the end of this rock-fall? Maybe. Let’s see where the market ends at the end of the trading session.

Even though I also think this market is poisoned to go lower, but not this fast. Most likely on Monday or next week we will see some relief. But do not take it as buying opportunity. Personally I will try to profit on this rally in short term, but then I will be reversing back to bearish positions.

If you are thinking to be bullish these days (start buying stocks) I would postpone it a bit. We may see more on the downturn in this market. Tomorrow we will see some labor data published and they may stop this fall, but do not expect it much. I would say that data will be worse and we will drop further down.

A few days ago I was expecting the market to drop to 126 level (looking at SPY ETF, which tracks S&P 500. S&P 500 will be at 1260 level then). Well, we broke down fast and furious. Yesterday I was expecting a bounce for today’s trading back up to 130-ish level and then continuing down to 123-ish level. Not even close. We erased the hammer candle signal without even blinking an eye. The new support at 123 didn’t hold for long. As far as now (11:48 ET) we can see another very long bearish candle and sloping down.

News and media are now talking about recession. Panic is rising. When taking look at VIX you can once again see a long spike up created by a long bullish candle (currently at 28.13), which is similar to the spike which happened in March 16, 2011. Does that mean that we are doomed? No, not at all. This actually mean that we may be bottoming.

So how does that work with my previous posture stating that we are heading even lower (by breaking $123 level I am expecting to go to $118 level)?

Well, if you take a look at the market, we dropped huge within 7 trading days. The largest drop since October 2008 which erased all year-to-day gains of the market ($1.1 trillion of value in just 7 days!!!). Taking the speed and depth of the drop, this market has to correct and bounce back. When everyone is panicking and speaking about recession, we are close to the bottom of this 7-day slide. I cannot say when that happens. Taking into account tomorrows labor data (I am expecting them to be bad), we may bounce on Monday. If so, it will go up to $126 level or near it. However, we broke down on high volume and I in my opinion we are officially in bear market. So overall, we will go down, but we will see bounces (the same way as in uptrending market we see dips). So the expectation is that we will go back up to 126 level, where we bounce down and continue to 118 level and so forth.

So how to trade in this market?

It is tough question. For swing trading and short term trading this doesn’t matter. Swing or day traders can trade the market both ways. But what about 401k or IRA accounts? I do not know yet, but I am thinking to move some of my allocated money into cash equivalents and stay aside. This ride donw the hill may be long.

When I said “Everything can happen” yesterday, so today it happened. I expected a bounce, which haven’t arrived. Instead the market opened with a gap. It was a bit obvious last night when watching futures where we will be heading at open.

So what am I doing? As I said yesterday, I have my stop loss which wasn’t executed, so I am still riding my puts and making money on this downtrend. I will wait where the market closes today and adjust my stop loss accordingly.

The market is heading to the $123 support level and right now it looks like we are almost there and actually a bit higher than that. We didn’t break through the yesterday’s low, so I guess that this low is our new support. Will we bounce off of there?

Yesterday S&P 500 (represented in my posts by SPY) broke through $126 support level on a high volume. It did exactly what I was expecting a few weeks ago when I was thinking it would go all the way down to this support level. I was wrong on a little bounce circa a week ago, but I am also learning trading with the trend.

Yesterday’s trading was spectacular on one thing. You may have been impressed by media, that all the downtrend was due to the US debt ceiling problems, but when the deal was reached, the market opened with a gap up, but closed deep below 126 level. That proves that it was the economy and not the debt ceiling issues which were more important. And data coming out weren’t really any positive at all.

However, we are once again in oversold territory. Take a look at the market and you will see a huge short term uptrend and immediate short term deep decline. We are due for a bounce, a rally relief.

If we are awaiting a rally relief, what actually does that mean?

Well, the market must correct itself. Nothing goes up or down indefinitely. After a long or strong uptrend, there are typically dips, after a strong downtrend, there are bounces. This time we will see a bounce. Today’s trading, when you take a look at candlestick chart, shows a hammer candle after long downtrend. A candle with a long wick (shadow). It shows, buyers were willing to step in and actually overrode sellers at the end of the day. This should be a typical exhaustion day.

But how long will this rally take?

I think we will go back to 130 level (or 50 day SMA). It may of course continue higher, but it may bounce from that resistance and continue down.

Why down?

Well, everything may happen, but take a look at the overall market. We are still in sideways pattern (since January 2011), but it is evident that we are slowly turning into bearish trend. We are completing head-and-shoulders pattern and creating new lower highs and lower lows. The $130 resistance level will be important. If we bounce down from it, it will be a confirmation that we are reversing in bear market. If we break up and continue to 135 – 136 level, we still may have chance to consider head-and-shoulder pattern as continuation pattern (if we break through 136-ish level) and we may see a new bull trend. But economic data are not that strong so far to have enough power to move the market that high. But everything can happen.

So what can we expect?

As I said, everything is possible, but my expectations are that we are now exhausted (long hammer candle on volume spike) and we will go probably up to 130 level. There we will probably stop and go down again. In the light of this expectation I am going to reverse my positions, sell put options and buy call options to ride this trend up. How long it will take I do not know as well as if it even reaches that level. Time will show. However, I may be wrong and therefore I am adding a stop loss order on my current put positions and I will be waiting for reversal confirmation before I buy calls.

Happy trading

Investing with Lending Club is my another investment vehicle. With Lending club you can become a bank and lend your money to another borrower and you can gain quite a nice interest by doing so. Even though Lending Club screens every applicant (and they deny circa 90% of all submitted applications) time to time you will be facing notes which are late or default. How to avoid defaulting notes?

When I started investing with Lending Club and my portfolio was small I almost had no late notes. When the portfolio grew to a larger amount I was seeing a lot of notes in grace period, late 16-30 days and late 31-120 days. Fortunately none of my notes got into default. I was thinking that my screening filter would eliminate all risky notes, nevertheless I could experience notes graded as A or B getting late. It was quite surprising for me as well as frustrating. I remember, once I was so frustrated that I was even thinking to drop Lending Club investment at all. I didn’t want to deal with irresponsible people, who claimed how great borrowers they were and then they defaulted after the second payment.

Apparently even the best filter ever won’t protect you from such borrowers, so I had to develop a method how to lower the risk even more. I know it won’t protect you 100%, but this system can eliminate those notes, which are showing a sign of troubles and may default in the future.

I took a notebook and started recording all my notes which were in grace period or late. Every week on Friday I open my account, go to “notes” and browse through them. Those which are in Grace period I record the note ID in my notebook. Next week I do the same and check the status of recorded notes and add new notes (if any). If a note slips into “late” status I sell such note on the secondary market (FolioFn). I wait if the note gets into “current” status and then sell it. This ensures I can get as much money back as possible then when selling the note while it is still in “late” status. Mostly by doing so I can get back all what I invested in this note and sometimes a few cents more – better then waiting whether the note defaults or not.

If the note slips into “31-120 late” status during my “waiting period”, I sell it at all cost and I am willing to take the loss (usually 4 – 5 dollars discount, but in overall portfolio it is a very little loss). When selling the note in late status I usually have to discount the price.

Next condition which sends a note to my “black list” is a sudden drop of borrowers credit score. That is a sign of borrowers default with another lender and that may spread to Lending Club quickly. If I see that a borrower’s original score was in 700+ level and it suddenly dropped to 660- level I sell such note even though it is in current status.

Having troubled notes recorded somewhere else besides your portfolio, where you can quickly review what is the status of the note at the end of each week (sometimes when defaulting note gets current, you can easily lose track of such note) and check if it consistently pays late helps me eliminating notes which may potentially, one day slip into default. So far this method works for me and my portfolio is clean and has only current notes. My net return is still around 12.37% and I am no longer nervous seeing some of the notes slipping behind in payments.

How are you eliminating potential troubled notes when investing with Lending Club?