The stock markets started the week plowing right through resistance at 800 for the SP 500, 7,500 for the DJIA, and 120 for the MNX. A couple of days later the markets successfully tested their former resistance levels.

Only three weeks ago, we saw the AAII sentiment indicator at its most bearish level since it was started over 30 years ago. Today, sentiment has turned amazingly bullish as the market has gone from oversold to overbought. While it looks like the worst may be over, the bears are likely to make at least one more attempt to take the market down. I suggest waiting for this to run its course before making a few bullish trades.

JD

Last week’s short covering rally in the stock market finally hit some resistance after the FED said it would be going on a Treasury buying spree. 7500 on the DJIA, 800 on the SP 500 and 120 on the MNX. Volume has picked up during this rally, so it I would expect the trading range in the next month to be a bit higher than last month. Look for the DJIA to trade between 7000 and 7800, the SP 500 between 750 and 850, and the MNX between 108 and 128.

JD

As expected, the subsiding selling pressure turned into a short covering rally this week. I mean, what’s the upside of staying short C when its already down to a buck? The bargain hunters were out in force, while the short sellers were happy to oblige by taking their profits. The SP 500 has recoverd back to the level of the November lows near the 750 level, but the DJIA still has a way to go. The weekly charts for all of the indices show a nice bullish engulfing pattern, but volume was lower than the last couple of weeks when the stock market fell through support.  This week will tell us if prior support will become resistance, or if it will provide a level of support once again. I would be surprised if we see a move of more than 10% in either direction any time soon.

JD

The Nasdaq Composite finally joined its fellow indices this week by undercutting its lows from last November. Can the news get any worse? Sure. Can the market go any lower? Certainly. Is the market oversold? Yep. Are there any more sellers? Maybe, just maybe, the falling stock market is losing momentum on the down side.

Take a look at the attached chart of the Nasdaq Composite. While we actually touched a new low in the index price on Friday, the momentum indicator on weekly chart shows a strong divergence. This divergence is even more pronounced for the DJIA and the SP 500. A bounce is likely, but look for confirmation early this week that the market is at least taking a breather before you try to play it.

That being said, do not expect anything more than a resumption of a trading range environment. It would not surprise me if the MNX stays between 100 and 120. The use of options here can provide a low risk way to profit from this situation.

JD

Nasdaq Composite - March 6, 2009

Taxpayers should be infuriated by this mornings Wall Street Journal article on the AIG counter-parties who have received billions in taxpayer dollars.  Here is a list of some of the foreign banks that have been bailed out by us: Deutsche Bank, Societe Generale, Barclays, Calyon, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Lloyds Banking Group.  This is criminal.  The U.S. taxpayer has been taken advantage of and there is nothing we can do about it.

As for the market,  you would think that we are way over due for a rally but there has been no catalyst.  The new administration has fumbled nearly every ball given to them.  If we do get the inevitable bear market rally, it will be powerful.  Do not be fooled!  Use the rallies to raise cash.

BA

Let’s say your New Years resolution for 1997 was to invest in the stock market. Had you committed your capital on January 2nd, 1997, you would have caught the low for the year (though the SP 500 came back down on tax day just in time for your last minute IRA contribution to work almost as well). Even with the market collapse of 2002, you would still have been ahead of the game until this Friday.

OK, I am ignoring dividends, but even so, the buy and hold investor would have been better off with their money in a money market fund than in the stock market over the last dozen years. The trader, on the other hand, would have made money on the way up and on the way down.

What? You say you are not really a trader, or maybe you just don’t want to trade with your retirement money. Even so, you could have used your knowledge of trading to adjust your retirement portfolio to stay ahead of the game, or at least inflation, which is what this game is all about.

But I digress, that’s not what we are here for, go to Insightful Investing if you want to read about what to do with your retirement money. I’ve strted trading the MNX index options because unlike most other index options, the options are traded on multiple exchanges. The benefit of that is better bid/ask spreads.

If you are bearish, like most of the world now, you could keep buying put options, but be ready to get out quick because the over inflated prices will drop fast if the market turns around. Another way to play it would be to continue to sell Bear Call Spreads. They have been working well over the last couple of months.

When the time comes for the market to head north again, Bull Call Spreads will do well initiallybecause they will be helped by rising prices and falling volatility. Of course the other benefit is a reduced cost and risk on your trades.

The first week in March should be an interesting one for the financial markets.

JD