About the only thing Friday’s Candlestick hammer did was pound another nail in the coffin of this bear market. The stock market was hammered again Monday, only this time it did not recover. The only good thing you can say is that the SP 500 just about even with its November low. The DJIA left that low behind a week ago, while the Nasdaq is still trying to catch up, or was that fall down?

So what did we learn from this? You’ve got to have confirmation before you can reasonably rely on a signal, especially from a candlestick. We will see tomorrow if the market bounces up from support, or goes crashing down to a level you can not even find on your charts.

JD

I’d tell you the SP 500 hit bottom on Fridy and it is now headed for a recovery.

Unfortunately, this candlestick signal does not always indicate the end of a down trend. All we can do right now is wait for confirmation.  While the SP 500 is showing some promise by stoping short of this bear market low, the DJIA set a new one on Thursday and kept heading south on Friday. If the market moves up on Monday, I will begin looking for some long term bullish plays. If it fails to improve, all bets are off on the bullish side.

For the sake of showing a little optimism, here are some ETF’s that I am looking at that have been showing some good relative strength : AGG, GLD, IBB, IEF, IWF, IWP, LSC, PBP,  QQQQ, SHY, TIP, XLK, XLP, XLV. The MNX index option on the Nasdaq has been the strongest in 2009, so it would be the first I would consider for an option play.

It did not surprise me that the Bear Call Spread side of the Iron Condor trade for February expired worthless, allowing you to keep the credit no matter how you placed that side of the trade. On the other hand, the Bull Put Spread leg  may have caused a problem for some of you. but not if you exited the position on Tuesday when the SP 500 finally closed below 800.  You should have been in that position long enough for the decline in time value to allow you to break even on that leg of the trade.

We will wait until at least the end of the day on Monday before even thinking about reaching any conclusions on this market.

JD

The financial markets continue to exhibit erratic behavior as they mimic the actions of our new leaders in Washington. No telling when something positive is going to come out of that group. In the mean time, over the past month, the Nasdaq has been making slightly higher highs and lows, the DJIA has been making slightly lower highs and lows, and the SP 500 appears to be going nowhere fast. While things have not been good for investors for quite some time now, the tightening of the trading range is starting to make it difficult on traders too. This could be an indication that something significant is going to happen. We just do not know when it is going to happen, or which direction it is going to push the markets.

Take this time to look for trades on stocks that are starting to show some signs of life using strategies like stock option collars,  bull call spreads or the more conservative bull put spreads, that will limit your downside.

JD

Maybe the honchos in Washington need to call US Air pilot Chesley B. Sullenburger III about a rescue plan, because the financial markets certainly did not like what they heard today from the Treasury Secretary. That being said, the financial markets are still treading water, in spite of the fact that the DJIA had its lowest close since the market low set on November 20, 2008.  The SP 500 and the Nasdaq still have a way to go before reaching that level,  so even with all the news floating around today, we are still in a trading range. That is helping those credit spreads we suggested last month, though we will probably test the one placed under the market tomorrow.

I’m not changing my tune until someone in Washington changes theirs.

JD

What a great time to be a lawyer in this country.  The litigation will be going on for years to come from all of the events that have transpired in the last 18 months.   If I were a BAC stockholder, I would be livid after reading Ken Lewis’s admission in the WSJ this morning that, by completing the MER takeover, they were doing what was right for the country.  Are you kidding me?  Where did the “Maximize Shareholder Value” decree go?  Who exactly is he working for?  This is a stunning admission from a CEO.  If this is the new belief in the business world, then every shareholder had better sell out now!

BA

The SP 500 and the Nasdaq established yesterday as a short term ‘Higher Lows’.  The low for the DJIA on the other hand, is not what I would consider a higher low, but if you want to go with a short term double bottom, I will not argue with you. The selling pressure seems to have diminished as the stock market, led by the Nasdaq, tries to give a positive bias to the trading range that it is in. There is no reason to be overly bearish or bullish at this time, so concentrate on strategies that will earn a little income in a slow moving environment.

JD

When both stocks and bonds are losing value.

I was surprised to read Bob’s post about how bad January actually was for the stock market. When you consider that the top of the current trading range was set on the 2nd, and we are again looking to test the trading range lows at 800 on the SP 500, it is easy to see that it was not a good month. The fact that we have been in a trading range may have lulled me to sleep in thinking it was not that bad of a start to the new year.

What concerns me is that it was an even worse month for long term bonds. The exponential rise in bonds and fall in rates certainly set that market up for a big fall, but even investing in the good ole USA has proven to be a bad strategy since the beginning of the year. There really was no place to hide.

On the other hand, the Iron Condor we described a couple of weeks ago is still holding up. We will probably test the low end of that trade on Monday. We would like to see a bounce off of 800, but if we do close below 800, you will want to exit that trade.

JD