OptionsVest

A pessimistic outlook from the Fed this week spooked the financial markets and sent stocks heading south with a big drop on Wednesday. Both the SP 500 and the Nasdaq are below their 50 day MA and 200 day MA, while the DJIA is below its 200 day MA and hanging on to its 50 day MA by a thread.

All of the bearish indicators we mentioned in our last post are still holding, so I’d be inclined to stick with the bearish stratagies I have posted recently, like the Bear Call Spread and the Bear Put Spread.  For those of you looking for the big score, you can always buy long put options.

JD

Only time will tell if the SP 500 is providing more reliable signals than other indexes, but for now many of them are signaling that the recent bounce is over. Tuesday’s Doji candlestick at the 200 day MA of 1,115 not only confirmed resistance, it also marked a lower high for the stock market.  In addition, momentum is flashing a bearish divergence. While that was a good indication for short term traders to place a bearish trade,  option investors should be cautious about placing any new trades. That is because the SP 500 continues to trade between its 50 day MA and its 200 day MA.

That being said, this market indecision favors credit spreads like the Bear Call Spread we suggested a couple of weeks ago, a trade that continues to look like it will expire worthless, allowing you to keep the credit you received when you placed the trade. The benefit of credit spreads like this one, or the Bull Put Spread, is that you can profit even if the market does not move from where it was when you executed your trade.

JD

The bearish cross of the 50 day MA under the 200 day MA for the stock market a few weeks ago was a bad omen, that turned out to be a pivot point in the opposite direction of what one would have expected. Since that time, stocks have bounced back strongly with the DJIA and the Nasdaq both moving above both their 50 day and 200 day moving averages.  The only hold out, unless you want to count international stocks, seems to be SP 500, which ended the day at its 200 day MA of 1,115. Should that break through tomorrow and hold over the next couple of days, look for that to provide needed support for the stock market over the next few months.

Last week we made a couple of suggestions on how to play the bearish trend in the market, but the market has bounced back  since then, so both of these trades are under water. While the conservative Bear Call Spread above the market can still turn into a winning trade if the 200 day MA provides some resistance to the SP 500, the more aggressive Bear Put Spread below the market is one that you should have cut your losses on when it went south as the market headed north a few days ago.

JD

Take your pick, the DJIA, SP 500, and Nasdaq all tried to break through the resistance of their 50 day MA last week. They all failed miserably. In addition to that, the Bulls were unable to rustle up any support at the 200 day MA. A good deal of the news we are heading of late is pointing towards a double dip. With the 50 day MA poised to fall below the 200 day MA, institutional investors could be ready to bail out once again.

While technically the stock market looks very weak, it is at times like this that all of us get fooled, so be cautious no matter which direction you think the market is going. If the Bulls can hold the SP 500 above 1,050 and keep the 50 day MA above the 200 day MA this could be a good buying opportunity following a 12% correction. A failure of that could see a fall to the 950 level of a year ago.

JD

The SP 500 joined the DJIA in setting a new, lower low for 2010 by falling to 1050 on Monday. The DJIA set a new low for the year on Friday, and dropped even further today.  While the Nasdaq has not made a new low for the year, yet, it did come crashing through its 200 day MA to join its brethren below this important resistance level. Look for the SP 500 to reach 1025 before it attempts to bounce back towards the strengthening resistance of its 200 day MA. This is beginning to look like a double dip than a correction. If that’s the case, bearish strategies will prevail before this market shows signs of life once again.

JD