OptionsVest

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 turn out to 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

The stock market ended a strong year with a final hour tumble on low volume that will likely prove to be insignificant. You should be able to find continued success by trading bullish option strategies on pullbacks to support level. Look for the market to hold up at 1,100 on the SP 500, 10,250 on the DJIA, and 2,200 on the Nasdaq Composite.

JD

The 50 day MA held as support once again this week, but it did so on lower volume. The market has spent the last month going no where.  Often times this indicates that the market is digesting its gains before making another big move. The biggest problem I see though, is that its not really telling us which direction it wants to go.

A quiet market is a good time to try an option trade that benefits from time decay.  An Iron Condor or a Butterfly would fit the bill, but you may not get enough premium to make it worth while.

It looks like a lot of traders have already gone home for the holidays. It may be a good time to join them and take a break from trading the financial markets. That way we can all be fresh at the start of the New Year.

JD