OptionsVest

The last time the 50 day MA held back the stock markets in early February of 2009,  just a little over a year ago. That recovery attempt preceded one of the worst 4 week periods in stock market history as stocks took their final plunge of the financial crisis.  In a similar fashion, the market has once again bounced back this level. This confirms the fact that the 50 day MA is now providing resistance for the market to break through, rather than supporting the market as it has done since the market broke through this barrier after bouncing off its lows last March.

What may be different this year is that the market seems to have found a home at its 50 day MA. For the SP 500 this is 1110, for the QQQQ its 45. This is a sign that institutional investors are not ready to commit either way on this market. Those of you who follow Bill O’Neil of IBD fame may have noticed that the weekly chart looks like it is trying to put a handle on the big cup it has formed. While a completion of this pattern could bode well for stocks, its failure could send stocks plunging down further to seek support at the 200 day MA.

There is no need to act quickly at this point. If you already have positions where you have sold March options, you might as well hold on to let some time premium deteriorate. On the other hand, the only positions that might make sense now are those that take a neutral stance on the market for March.

JD

We had weak confirmation that the correction is complete this week as stocks moved higher off of last Friday’s Hammer Candlestick. While the weekly chart formed a Bullish Engulfing pattern, it did so on weak volume. The financial market looks confused, not knowing if it wants to go up or go down. My thoughts are that we will probably ride this bounce back up to the 50 day MA on the major averages before heading south again to find support at the 200 day MA. To put it another way, I expect the market to stay in a trading range between the  200 day MA and the 50 day MA for a while.

There are many ways to trade in this environment, including the Iron Condor. By selling an option spread above and below the current market, you would profit if stocks continue in their current trading range.

For those of you more interested in investing in the stock market this correction has provided a good opportunity to buy in at lower prices.  One way to use options to invest in a market that is rising slowly is with the Bull Call Diagonal Spread. For example, with Technology stocks showing strong relative strength lately, you could buy the June QQQQ 43 Call and sell the March QQQQ 45 Call. That should leave you in good shape as long as the QQQQ stay in its trading range, and set you up to profit at a lower cost of entry should the QQQQ break through its 50 day MA after March expiration.

JD

In spite of some improvement in the January unemployment report, it looked like the stock market was headed south for the winter on Friday morning. Then just before 2PM, the Nasdaq bounced strongly off of support at the 2100 level. The other major Indexes followed suit and the stock market actually turned in a positive day. This was a turn around the likes of which we have not seen since the SP 500 lead the market by bouncing off of the 666 level on March 6th, 2009.

Quite often, this Hammer candlestick pattern turns out to be a good reversal signal. While this might have been a great opportunity for a Bull Put Spread or a Bull Call Spread, we need to see some confirmation early this week to conclude that this market correction is over. If we do not get that, you should be ready to use the bounce to implement some bearish strategies.

JD

Today’s big fall in the stock market established Tuesday’s rebound high as the first lower high in the stock market in 7 months last July.  At that time, the SP 500 fell through it 50 day MA, but was held up by its 200 day MA a week later. Since then, the 50 day MA has provided support since the market broke through once again last Friday. What we now see is that the 50 day MA has turned into resistance.

With such a big fall today, option prices are going to be more expensive than they have been in quite some time. If you are going to put on a trade, I would suggest you make it some type of option spread trade so you do not get killed if the market calms down and volatility drops. At this point, I will not speculate on what could be next, except to say that the SP 500 should find support around 1035, the DJIA at 9700, and the Nasdaq around 2100.

This market action is a confirmation that we are in a correction. The only thing we do not know now is how big that correction is going to be.

JD

So much for the good start to 2010. That has already been swept under the carpet. The SP 500 had its worst day since the end of October, taking it back right to the point where it closed 2009. There are many reason for this pull back, including higher interest rates in China, a rising dollar, a Republican Senator in Massachusetts, more regulations on financial institutions, and a tired market after an amazing bounce, just to name a few.

The SP 500 has once again pulled right back to its 50 day MA, while the DJIA has fallen though slightly, and the Nasdaq is rapidly heading in that direction. Ever since the market took off from its bottom last March, it has pretty much held that support level. This time though, the news does not look as good as it has been recently. That being said, this could easily be the pull back I have been looking for as an opportunity get better pricing on some bullish strategies.

The market looks to be in transition, so do not be in a hurry to jump back in. There is always the possibility that we will experience a full fledged correction. If that’s the case, you can always place some option trades to take advantage of the ride down.  We could have an interesting conclusion to the week.

JD

Technology stocks in the Nasdaq lead the stock market out of the gate to start the new year off positively to more than make up for its year ending final hour fall. While stocks spent the rest of the week drifting slowly upward, it does not look like it will experience much more than a pull back to support levels as it marches forward once again.  It would not surprise me if the market returns to its normal mode of operation this year, with stocks picking up 10 to 12 percent.

Option players can take advantage of this with with some bullish spread strategies, like the bull call spread and the bull put spread.  You might want to consider options with at least 90 days to expiration.

JD