• If you're looking for a huge drop, the odds are against you.

One retest of the opening lows one hour into the day, and that was about all the threat bears could muster. I still get the feeling that too many people operate with a bomb-shelter mentality -- the fear of getting hit by a "crash." Could it happen? Absolutely, but in my trading, the "flash crash" was as close as I'm come to experiencing a crash.

It is interesting though to look at the single worst days in the history of the Dow Jones, courtesy of The Wall Street Journal. Since the crash of 1987, in which the Dow dropped more than 22% in a single day, there has not been a single-day drop exceeding 8%. In fact, there have been five down days of 7%-8% since 2000, which means there is about a 0.15% chance it will happen. Since 1987, a drop of 7% or more has occurred seven times, or about a 0.10% it will happen. 

The Market's Worst Days

Wall Street Journal

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Well, that's about once every 3.5 years, so I should stay vigilant, right? Well, that's the kicker -- these drops appear in clusters. Furthermore, when you factor in three up moves since 2008 of 6.84%, 10.88% and 11.08%, along with a double-digit move in October 1987, you find that the big up moves often shadow the big down moves. The big move in 1987 offset one of the big drops the same month. Two of the big moves in 2009 offset two of the big drops in 2009. In other words, the big moves up happened within a week of the big moves down.

In the end, when we factor out the big moves higher against the big moves lower, we really only find about three times since 1987 a substantial single day move lower is the kind of move keeping some folks out of the markets in any manner. We are talking about a .045% probability. And the move down in 1987 was last seen 58 years earlier.

All this means is that if you are avoiding the market or staying short looking for the big 10% or 20% drop, then the odds are stacked against you. In fact, if a big drop is coming, it is more likely to happen over a matter of days and weeks, giving folks time to hedge, adjust positions, exit longs or get shorts in order to play the move. Furthermore, many of the big initial drops were met with big snapbacks, which also provide the aforementioned opportunities of adjusting portfolios.

The simple fact is you can't live in fear of 1929 or 1987, regardless of what charts someone posts in their similarities. Even if you hate this market, stay flexible to taking some short-term long-side plays while waiting for the bearish catalyst to finally show some teeth and find some footing.

I appreciate the opportunity to share some thoughts and get some insight and feedback from folks today. I hope everyone has a wonderful weekend.

• IBM has challenging fundamentals and a deteriorating technical setup.

By Tim Collins

"Failure? There's no such thing as failure, only early attempts at success."

-- Guru Pitka

"Hey, son, I've got a brand new toy over here just waiting to be purchased."

"No thank you sir. I'd rather have this one here."

"Well, this new toy only costs $79.99"

"No thanks, I'll take this one."

"But son, that one is broken. It doesn't even work anymore."

"Yeah, maybe so, but it's cheap!"

In a world without selling, IBM (IBM) has somehow bucked the trend. Even today, as everything tech rallies, IBM continues to flutter.

IBM has become the definition of the corporate world and management promotion but in stock form. In the corporate world, employees who excel often are promoted. As long as they continue to excel at their job, they are continually promoted. At some point, these employees will reach a level where they no longer excel. In fact, they become incapable of doing their jobs. They become incompetent. Upper management, though, does not wish to recognize its mistake, so the incompetent employees stay in their positions, at least for a while. In the end, most individuals are promoted to a level of incompetency. It is the value trap of management. That's where IBM sits. It is the value trap of tech.

The stock looks cheap, but it fits the definition of a value trap: a stock whose price is depressed for fundamental reasons, making it look cheap. What is the definition of cheap? Something Warren Buffett owns? Something with a low P/E? A stock that has fallen over 10% since early 2012 while PowerShares QQQ (QQQ) has risen 37%? Buying something because it is down doesn't define it as cheap. A low P/E doesn't necessarily make a stock cheap. Worse yet, though, not only are IBM longs fighting challenging fundamentals and deteriorating positions of traditional strength but also the technical setup. This is ugly, so I'll be brief to protect the women and children.

The daily chart has now triggered a bearish head-and-shoulders pattern that targets $162 on the downside.

IBM Daily

Source: StockCharts.com

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IBM is spending so much time below -100 on the commodity channel index (very bearish) that I believe it now includes land down there as an asset on the balance sheet.

The weekly chart has a huge rounding-top pattern.

IBM Weekly

Source: StockCharts.com

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The target here is in the low $150s, which might have Warren drooling, but then again, he has all the time in the world, so what would it bother him to buy shares down there. Unfortunately, most investors and traders don't have that kind of patience. A move to the $150s after a buy in the $170s or 180s would likely be too painful for most to take.

The monthly chart is actually very clean.

IBM Monthly

Source: StockCharts.com

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There is a clear bearish channel. IBM has given not one but two very clear technical exits from the stock at higher prices -- one being just this past summer in the $190s. Even worse for long-term IBM bulls, May 2012 was a textbook exit as IBM lost a long-term bullish trend line. While fundamentals might have argued stay, the technicals said to leave. Not only has IBM fallen over 10% since then but by staying in IBM, longs have missed an epic run in the markets, putting their dollars almost 50% behind what an investment in the QQQ would be worth today. That's a huge opportunity cost.

And what's the catalyst for IBM going forward? Cheap is not a catalyst. If anything, it is ironic, but the catalyst for the stock will likely be something technical in nature rather than fundamental, which means cheap still doesn't matter.

• Where to now?

By Tim Collins

Would you believe $113.50 on the iShares Russell 2000 Index Fund (IWM)?

That was the target the daily chart gave me last night. It doesn't mean we'll turn around and march lower from there, but a move to there certainly shouldn't be shocking looking at the daily chart of IWM. Price is breaking out from resistance today, along with an expanding bollinger band. There is confirmation in the form of a strong MACD plus we see a breakout on the CCI right along with price.

Lastly, the TRIX is crossing over today in a bullish breakout fashion. I can't even start thinking short IWM until we are under $107 and even then, it is probably a buy the dip until support, currently at $105, is broken.

IWM -- Daily

Source: StockCharts.com

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On a weekly basis, the Flock of Seagulls pattern (repetitive arcs) is giving way to a test of the channel top resistance.  We've multiple tests fail since mid-May, so this is probably the bears best hope at a slow down in the recent run. But if I really want to get bearish, I need to see a break of support on both price and CCI. That means, I won't catch the top before I become bearish, but trying to call the top has been like walking on a mile of hot coals.

Eventually, you'll get relief when you get off the coals, but the path has been so long, you may not have any skin left to walk upon.  Stay tight and focus so you can keep your skin in the game.

IWM -- Weekly

Source: StockCharts.com

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• Overall, I would tend to only focus on the shorter-term charts.

By Tim Collins

I don't know anything fundamental about Ultrapetrol (ULTR), but with only a $500 million market cap, it is one of the smaller names in the shipping sector. Based on a quick glance, out of the 40 or so names in the sector, it doesn't sit in the top quartile in any of the following valuation catergories: debt to equity, ROI, ROA, ROE, operating margins, profit margins, price to sales, price to book, price to cash or yield. Its current strengths lie in forward P/E, gross margins and technical setup along with its last two earnings reports.

Overall, I would tend to only focus on the charts in the shorter term.

Ultrapetrol (ULTR) -- Daily

Source: StockCharts.com

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The price is breaking out from a previous price, which served as a stopping point last time around. Note the huge volume day (circled) with the last big push higher in very late September. Ultrapetrol immediately retraced. Now, we are getting through today with authority. There is confirmation in the moving averages, moving average convergence/divergence and commodity channel index. From a technical standpoint these are things I like to see.

Zooming out a bit to the weekly chart shows a very simple but solid bullish channel.

Ultrapetrol (ULTR) -- Weekly

Source: StockCharts.com

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Every few months the stock seems to give the buyers who missed earlier a chance to buy at the bottom of the channel. For longer-term investors, I believe this is the way you need to play any entry. Set an alert on the eight-week simple moving average and start watching the stock closely on a close under that level, as it may signal a test of the bottom part of the channel is coming soon.

• TLT is coming back to life.

By Tim Collins

I have to say I was impressed by the Bobs this week ("Burn Baby" Byrne and "Clubber" Lang). Clubber hit a huge home run in SolarCity (SCTY), and Byrne has spent the better part of three days patiently waiting out what is a huge move in Treasuries via the iShares 20+ Year Treasury Bond ETF (TLT).

Looking at the daily chart of TLT, I think Byrne may still be in the early part of this move.

TLT

Source: StockCharts.com

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Left for dead, TLT is coming back to life as the government tries to get its act together but, in doing so, has made the trading public realize that we may not be anywhere near a taper. A close today over $107 and TLT clears some major price resistance. The moving average convergence/divergence has already crossed over in a bullish fashion, and the push in the commodity channel index indicates a higher likelihood of either a bullish trend developing or a quick but extreme push higher.

Whether it gets there in a quick fashion or in a slower but orderly fashion, TLT looks ready to push to around $109.50 here. An overshoot of momentum could carry it as high as $111. A close under $104.50 would definitely have me on the sidelines if I were long.

• Here's a quick walk through the math.

By Tim Collins

There is a chance Google (GOOG) does find a way to get pinned at $1,000, so I want to make an adjustment to my remaining position. My new position is now a 1 x 2 x 1 Oct. 18 $1005-990-985 put butterfly. I'll take a quick walk through the math (using nice round numbers for simplicity's sake).

Let's say I was a buyer of 20 $1,000-$990 put spreads for $3.20 that expire today, so I have $6,400 in the trade.

Previously I sold half at $4.10 or 10 total for $4,100 which means I still have $2,300 in the trade.

I now sell all 10 of my remaining $1,000 puts and buy five $1,005 puts and five $985 puts and receive a net credit of $700.

I am then left with the aforementioned skip strike put butterfly but only have $1,600 in the trade. So, what are the tradeoffs?

Well, the first trade had a max remaining value of $10,000 if Google finished the day at $990 or below. In other words, I could make $7,700, or 335%, on the trade. There is a lot of risk, though, as a close over $1,000 kills the value.

The new position has a capital risk remaining of $1,600. The trade has a breakeven of $1,001.80 vs. $997.70, which would exist on my original trade with what I have left. The upside is capped at a $7,500 value at a $990 closing price today, which would be a gain of $5,900, or 369%. Obviously, the additional rate of return and higher breakeven price are a plus. However, if Google falls to $985 or below, then the maximum value would be $5,000, or a gain of $3,400, which is only 212.5% (obviously much less than the original trade).

Still, I like the higher probability after the adjustment. I have a higher breakeven, less capital at risk and the potential for a higher rate of return, and even if we end up with Google under $985, I'll still be happy with the trade.

Trades should be measured on their risk and reward, and sometimes adjusting the risk much lower in exchange for giving up unrealized or potential reward is the right move. I find it to almost always be the better move.

• Namely, Pioneer and CVR.

By Tim Collins

Pioneer Natural Resources (PXD), which I own from a recent basket trade a few days ago, and CVR Refining (CVRR) comprise a tale of two different energy plays. Pioneer is up over 100% year-to-date and making new highs almost daily, while CVR is green for the year but was recently down over 30% from the May highs. CVR is starting to bounce, but I'll look at Pioneer first.

Pioneer has been absolutely amazing lately. In the past week alone the stock is up 12%, but there are some signs of concern here.

Pioneer Natural Resources (PXD)

Source: StockCharts.com

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First off, I am long and would not be looking to short this, but as a long, I am concerned about the current commodity channel index. Pioneer has shown it can become overheated (CCI > 250) and when it does, it often needs a period of consolidation or pullback. We are hitting those levels right now.

I am encouraged by the volume surge we saw on the push this week, but even with that, there have been big pushes on volume right around this 250 CCI in the past.

The simplest approach to playing this is to place a stop on a break of the prior day's low. If that is too large of a move for your comfort, then I would consider placing a stop at the prior day's opening price.

As far as CVR goes, it was a name that recently showed up on many short scans I run, but right now, I am much more interested from the long side.

There is a possible inverse head-and-shoulders pattern developing on the daily chart.

CVR Refining (CVRR) -- Daily

Source: StockCharts.com

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Ideally, we would see this push today fade or not move much higher followed by another two to three days of consolidating in this price range. I do love the big push in the CCI today along with a strong moving average convergence/divergence and wouldn't blame anyone for taking a shot long on CVR right now.

The recent big push lower did come on big washout type of volume as well, so if I am buying here, I am placing a stop on two closes in a row below $24.50. The upside targets are $27.20 and $29.50.

The weekly chart is rather new but does spell out a very nice support level of $23.50, not too far off the daily chart.

CVR Refining (CVRR) -- Weekly

Source: StockCharts.com

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We are pushing the 10-week average here, which has mattered, so a close over that level would be big and opens the door to the upside target of $29, which also coincides with the daily chart.

Nice and neat, huh? I do really like when daily and weekly target and support levels line up rather well.

Unfortunately, due to the short trading time frame, there isn't much more to glean from the weekly chart.

Pioneer is the thoroughbred, and CVR the pony at the moment. But, hey, pony rides can be fun, too, at times.

• Given that my Google put spread expires today, I don't want to leave too much capital at risk.

By Tim Collins

I cashed out on half of the Google (GOOG) puts spreads a few pennies over $4.00. Given that these expire today, I don't want to leave too much capital at risk.

• I'm betting on a retracement.

By Tim Collins

Google (GOOG) is flying high today, pushing over $1,000 on an EPS beat that benefited hugely from a lower tax rate.

As a day trade, I've bought the Oct. 18 $1,000-$990 put spread for $3.20, looking for a little retracement here.

• Earnings reactions are lifting the entire market. 

By Tim Collins

When I was a young boy

My father took me into the city

To see a marching band.

He said, "Son when you grow up

Would you be the saviour of the broken

The beaten and the damned?"

He said "Will you defeat them

Your demons, and all the non-believers

The plans that they have made?"

-- My Chemical Romance, "Welcome to the Black Parade"

And so the earnings parade is well under way with many bottom lines in the black pushing stocks into the green. Google (GOOG), Las Vegas Sands (LVS), Capital One Financial (COF), Chipotle Mexican Grill (CMG), General Electric (GE) and Schlumberger (SLB) are just some of the names encouraging investors to jump into the fray.

Advanced Micro Devices (AMD) continues to disappoint while medical devices makers continue to struggle with Intuitive Surgical (ISRG) being their poster child, although Stryker Medical (SYK) is doing its best to keep Intuitive Surgical company.

This morning is a stark contrast to the earlier reactions on earnings. At first, we were met with disappointment, although the results were limited to having a negative impact on the stocks that were reporting. Today, however, earnings reactions are lifting the entire market.

This creates a paradox for many investors. It is extremely difficult to chase a market constantly pushing new highs. As a trader, I find myself buying a market I hate -- and I really do hate it. I trade during the day with guys such as Bob Byrne and Prop Desk Junkie (who you will see posting gems of knowledge in the comments section from time to time), and there are days when we are long and literally disgusted with the idea of being long. However, and this is a big point, it is what the market is giving right now. Hailing pennies on your shorts and raining dollars bills on the long side when you are correct.

It is absolute necessary right now to separate any political beliefs or contempt and focus on what is in front of you. When you hear all your friends, who aren't traders or investors talking about how the government shutdown is going to impact the economy and the markets, then you know to keep the politics at the dinner table and just trade what is in front of you. There are still opportunities on both sides, but selling weakness has been incredibly painful. My focus isn't on only going long by any means but just to recognize the risk vs. reward right now that comes with being long or short.

• There is a misunderstanding out there about what it really means and how to trade around it.

By Bob Lang

Many believe that the VIX is the end all, be all to explain sentiment. Yet, there is a misunderstanding out there about what it really means and how to trade around it. A misconception exists: A low VIX cash reading shows complacency while a high reading reflects fear. Well, this is only partially right -- taken in the right context.

Now, I don't trade the VIX, but it's never a bad thing to have protection. My preferred vehicle is SPDR S&P 500 ETF Trust (SPY) or iShares Russell 2000 Index Fund (IWM) puts but lately only as short-term insurance. The tide has been strong this year, so why fight the trend? The VIX clearly has been in a downtrend all year long and has stayed low; we saw something similar in 1995.

I will look for extremes on VIX readings and other sentiment indicators, and how I do this is measuring vs. volatility bands, or in this case Bollinger bands. A spike through an upper or lower band tells us there is extreme activity or exhaustion and a reversal may be at hand. Further, a range-bound VIX that lies stable and within the bands may reflect a rest period before a big move is to occur. I generally like to play moves off the bands, where the volatility is really starting to heat up.

But there is another element: the futures. VIX futures are really much more important than VIX cash, because we really only care what the market believes movements will be in the future. The cash VIX represents the sentiment at the moment, so that cash often shoots higher and even surpasses the futures (called backwardation). We've had that a few times this year, and that condition of high fear threatens the bull market severely. Recently it happened again (fear of the debt ceiling crisis), but fortunately the excess fear receded. Currently, the futures are in an upward sloping curve, in contango, and have been for 98% of 2013, reflecting a bullish condition. When it changes, we'll know it here.

• Focusing on something too far in the distance causes missed opportunitities.

By Tim Collins

A few weeks ago, my wife and I took the kids on a little hike. One of the great things about the area where we live is that there are several nature preserves with small caves scattered throughout. You can't go into the caves, but you can walk around the preserves and look closely at them --perhaps not terribly exciting for adults but the kids love it. While there are paths throughout the preserves, some trails are clearer than others. If you take the wrong path, you can miss a cave. If you take the most used paths, then you can miss out on some of the hidden beauties of the preserve, but you won't miss a cave.

And even then, it isn't that simple. If you spend the whole time looking in the wrong place, the trip can be very disappointing or even painful. Whether you follow the clear path or that less-traveled, if you are constantly looking too far ahead, you are bound to miss something right in front of you. Worse yet, you could easily hurt yourself.

The same can be said about the market. Those too focused on what could happen three years from now or 18 months from now or even six months from now seem to be stuck in a macro coma. I'll admit it can be hard to be optimistic about the future. We are stuck in a never-ending cycle of quantitative easing with a government that can't get out of its own way. Perhaps equities suffer from QE bloat, not accurately reflecting the domestic or global economy. But so what? Many folks have become a bear in the headlights.

So while we all walk the market preserve together, there are still too many folks looking for the caves off in the distance hoping to find a big, growling, fearsome bear. Unfortunately, that search and focus on something still far in the distance causes missed opportunitities. It is difficult to make money on the short side at the moment. It won't always be like this. Eventually, we will stumble upon the caves, and there will be a bear inside just waiting for us. But how far off in the distance is the cave? Even when we get there, what's going to get the bear out of its cave? And by only focusing on finding that bear, how many other things are we going to miss?

Whether you want to stick with indices and big names (the path more traveled) or seek out smaller, lesser-known breakout names (the path right in front of us), right now is still higher. It isn't easy to say that either. I hate chasing the butterflies on the path. I'm looking for that bear, but for the past month, I've resigned myself to going long baskets of stocks, discussed here and in the chat room, almost on a daily basis. Dare I say it is where the easy money is being made. It won't last forever, and we have to be vigilant, as each day we get nearer the bear's cave, but every growl has turned out to be nothing more than a squirrel's purr (and they do, look it up).

It is impossible to say just buy with both hands. That's just tossing risk management out the window, but the macro picture and the long-term focus has simply not mattered. Right now, that focus is costing folks more than just the hidden beauty; it's a walk in the sticker bushes and it hurts. At the very least, keep a balanced view until there is some catalyst more than a squirrel's purr.