Here we go again. The market is taking a tank - it is time to really pay attention to the RUT position.

Somebody grab the band-aids, we need to stop the bleeding!

Wow, today just sucked. I had been checking in now and again throughout the day to see how things were going and things looked great. The bulls had started to rally again and it looked like we were ready for a nice bounce back up… Then the CEO of AT&T blabbed…

Ouch, it was rough. The Dow was down 238, the RUT 19, NASDAQ 59 and the S&P 500 down 26! Holy sea of red. Well, now it is time to take a good solid look at what is happening. This sort of downward movement is unnerving. The markets have pushed into truly bearish territory. I’m still a long term bull on this market, I think that 2008 will end higher than it started, however given the current crushing drop through all technical supports it is time to start playing it safe.

The markets have been closed for about 2 hours and the current after market data is showing the S&OP futures up. Ideally, tomorrow has a bit of a relief rally following today’s dramatic sell off.

Okay… so lets talk about the RUT(505.03 +0.00).

The RUT is a small cap index. Small caps get hurt when the economy gets hurt. The rumor mill around Countrywide and the comments today by AT&T sent stocks tumbling, and small caps tumble really, really fast. It must have to do with some arcane law of gravity or something… Okay, it likely has to do with fundamentals and the stuff that drives stock values.

So, now that the RUT has busted through support at 730 and then followed that by a critical breakdown past 705, what do we do? Today - nothing. I’m going to sit tight for a few more sessions and watch. 670 is still a long way away. I’m not saying that it isn’t possible. In fact, according to my trusty tools from thinkorswim, there is approximately a 15.96% change that the RUT will expire at or below my break-even price.

So, this is quite a jump up from the 6ish percentage chance we’ve been looking at. Personally, I’d agree that the chances have doubled. We have just come crashing down, a long way down. Let’s not forget to look at how far it can go in one drop!

The plan

First of all, I’m not going to break the rules. If the RUT comes crashing down through 680, I’ll start to unroll my positions - quickly.

Ideally, the RUT moves up nicely and we can let time decay work in our favor. If the index is able to get a strong move to the upside, and I can unravel the position for about $0.15 or so I’m going to. In fact, I’m going to go ahead and put an order out today to buy back the position for $0.15. I don’t expect that I will get filled anytime soon, however it will be there if the swing comes my way.

If the RUT rockets back upwards 40 points or so (un-likely) I’ll cancel my buy order before it is filled and let time work for me.

Basically, it is a little bit of wait and see. I think there is still money to be had here, but it is definitely time to pay attention! Figures… I’m traveling next week.

Good luck!