We appear to be at a crossroads for the stock market as the bulls and bears fight it out in a volatile market that is more suited for day traders than swing traders. The question in both of these traders minds is: what are investors going to do next?

Despite today’s attempt to break out of the downtrend, that trend remains intact with another lower high. That being said, it seems to be running out of steam. Many technical indicators, including momentum shown below, are now exhibiting a bullish divergence because they are making higher lows in contrast to the price charts.

The market continues to favor short term traders over longer term traders and investor, but stay tuned, that could change in a matter of minutes.

JD

S&P 500 October 29, 2008

This market keeps on going, and going, and going…down that is. So much for the trading range I was calling for. Just like last week, the market was up on Monday, and then headed south from there. We continue to see lower highs and lower lows on a closing basis. While Friday’s intraday low of 840 in the SP 500 was a few points higher than the lows on October 10th we may not have seen the bottom. Last week’s support at 900 has now become this week’s resistance. Resistance for MNX is now 125, and DJX its 85.

Even if we have hit a bottom, it seems apparent that we are not going to rebound too rapidly. That being said, a Bear Call Spread may be a reasonable approach to profiting in this market. You could sell a call at the next level of resistance, for example 1000 for the SPX, 95 for the DJX, and 140 for the MNX, and buy the next strike price call to protect your position. That way you get to keep the credit as long as the market doesn’t close higher than your sold call.

JD

Of the emergency broadcast system. Had this been a real emergency you would have been instructed to buy gold bullion and hide them all under you bed :-). The worst week in stock market history was followed by the best day in stock market history. October of 2008 is a month that continues to bring back memories of October 1987, and this one is only half over.

Just as soon as every one heard the news that they had missed the great stock market revival, traders took their profits quickly. While they did not succeed in bringing the SP 500 lower on Thursday at 865 than they had on the previous Friday at 840, they did manage to cause enough panic to set a new high of 81 on the VIX, easily topping last Friday’s peak of 77. Could that have been the test we needed to establish the market bottom? Only time will tell.

You’ve got to be a pretty quick trader to make money in this market, but with the wide daily trading ranges, there are plenty of traders making good money. With the high volatility, its a little harder to do that with options, so spreads continue to look better than outright positions to help reduce the risk of the eventual volatility crash when the market calms down.

The biggest problem of the high volatility is the large bid / ask spreads, especially with Index options. The best options to trade in that arena right now appear to be the MNX (Mini Nasdaq 100) because they are traded on multiple exchanges and the competition of the market makers is keeping spreads much more reasonable. The same holds try for SPY and QQQQ options.

It would not surprise me if the market established a trading range in the last week between 900 and 1000 for the SP 500 that will last until the November elections.  While we may not have seen ultimate bottom to this market, it would surprise me if we make much forward progress in the next few weeks. Plan your option strategies accordingly.

JD

Watching the market over the last couple of days made me think I was listening to that Reggae dude singing the “Limbo” song during Thursday’s close and Friday’s open.

If you thought Friday’s 3 o’clock hour 800 point 30 minute bounce in the DJIA was fast, the maket musicians began playing ‘You Ain’t Seen Nothing Yet’. In only 5 minutes the DJIA dropped off a cliff 500 points only to bounce back to positive territory once again. The final score saw the DJIA down ‘ONLY’ 128 points. While that seemed quite insignificant compared to the standards set in the last couple of weeks, the only real way to describe this day is to do a time warp back to the 70’s to listen to the financial markets try apply their musical talents to the playing the tune “Rollercoaster”.

If you have been keeping a good supply of your power dry, its beginning to look like it might be time to start putting some of that cash too work. In a market like this option spreads may be the safest way to get back in.

JD

Today’s open was a good reminder of the impact of volatility on option prices. If you were looking at buying some call options at the close yesterday with the thought that the market was just too oversold not to have some kind of a bounce you would not have been real happy this morning. The SPY, for example,  opened $2.00 higher, but the call options went absolutely nowhere. A large part of that was because the volatility as represented by the VIX dropped by almost 10%.

With the market falling into the close, volitility has been pushing up the price of options. Waiting for today’s drop in volatility would have helped the cause, but a better strategy would have been a bull put spread. Selling the 95 put and buying the 90 put would have been profitable with this mornings bounce since the 95 put lost value faster than the 90 put.  The other good reason for a trade like this is that it will hold up better should the bounce fizzle.

JD

Well I certainly picked the right (or maybe wrong) time to go on vacation.  Getting back to the real world, the financial markets are still in turmoil. Congress passed the bailout bill that was so full of pork barrell extras that the markets headed south even faster than they were moving before it was passed. Today’s news that central banks executed a coordinate rate cut helped the markets for a few minutes. In reality it just gave short sellers a higher place to sell from.

The SP 500 reached levels that have been supported the market 3 times in the last 10 years, the last being in after 9/11 in 2001. While 950 sounds like a good holding point on the surface, the problem is that this support level did not hold in 2002. In fact, the market fell almost another 200 points.

Is all the bad news out yet? Doubtful, but it still might be time to start thinking about getting back into the stock market again, but there is no need to be in a hurry. This would be a good level to hold, providing a higher low when looking at the long term monthly chart of the stock market. It won’t take long before we find out how this story unfolds.

JD