The lunatics were out in full force yesterday when the alleged “news” hit concerning the Fed’s latest 25-basis-point cut. The Dow’s initial reaction was to rally 90 points, to a fleeting top at 13010.  But second thoughts came on like a ton of bricks, causing a nearly 200-point selloff in the next 50 minutes.  Fortunately, all of this craziness neither eluded nor confused our Hidden Pivot targets, and we managed to get short in the Diamonds four cents from what turned out to be the intraday high. Here is the actual recommendation that went out a week earlier when the Diamonds were trading more than 2% lower, around 127.00:  “A 129.94 rally target…can serve as our minimum upside projection for the near term. It's also shortable, so we'll plan on doing so by naked-selling some May 130 calls (DAWEZ). You should offer them at whatever "asked" price is reflected if and when the Diamonds first touch 129.89 on the way up. If you want to simply leave a good-till-canceled limit order with your broker, offer the calls for 2.24 (see inset).” 

As it happened, the May at-the-moneys lost quite a bit of juice in the week after the recommendation went out. But we were still able to short May 130 calls for a juicy 1.86 apiece -- a nickel below where they topped yesterday when the Diamonds were spiking to an intraday high at 129.98.  In this respect, the trade worked out exactly as intended, since we sold the calls into a buying panic that had pushed the price of the options significantly above  their “fair” value.  (Note: This strategy is described in detail in an article I wrote for Stocks, Futures & Options magazine. If you’d like a copy, click here and I’ll gladly e-mail it to you.)  With the Diamonds falling even further as the day ended, we covered half of the short calls for $1.25, giving us an effective cost basis of about $2.40 for the half that remains. At that price, we’ve got a 400-point cushion before we’d start to sweat the May 16 expiration.

Bottom line: The stock market’s occasional flightiness can be exploited for profit if you are able to estimate precisely how crazy things might get.   

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Hidden Pivot Seminar May 21-22

Because seats for the recent Hidden Pivot seminar were nearly sold out, I’ll be offering the course again in May – on May 21-22, from 6 p.m. to 9 p.m. Mountain Time.  Click here, and then on the “Upcoming” tab to register;  or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator (our latest model, perfect for beginners).