The stock market is once again approaching levels of support, this time at 9600 for the DJIA, 1040 for the SP 500, and 1675 for the Nasdaq. Since March, every time stocks have come down to their 20 day MA, they have provided bulls an opportunity to get into the market at better price levels. While a drop below these levels would signal a market correction rather than a pull back, we would have to see a close below 9200 in the DJIA, 1000 in the SP 500, and 1600 in the Nasdaq to signal an end to the market’s 6 month bull run.

We should know early this week if the first of these levels is likely to provide some support.  Traders can continue to hold their bearish option positions until one of these levels holds the market up.  If and when this happens both traders and investors can open or add to their long positions.

JD

The stock market hit a new intra-day high today after the FED left interest rates unchanged. While the expectation for low inflation helped bonds hold on to big gains, that may have done in stocks.

From a technical perspective, the SP 500, the Nasdaq, and DJIA all had candlesticks that were a cross between bearish engulfing and inverted hammer on heavier volume.  Combining these candles with momentum indicators that are showing a slowdown in the current uptrend, may signal that the market is finally be ready to take a breather.

Traders should be able to take advantage of this market correction on the way down, while investors could use this pull back to add to their long positions.

JD

The stock market continues to drift higher reaching a new high for the year this week. We continue to be concerned with the lack of momentum, though we must remind ourselves than markets can remain overbought (or oversold for that matter) for a long time. That being said, investors continue to take advantage of 5% dips in the market to load up on stocks, but each time they do it they show less conviction.

An option trade can be a safer way to tag along with this slow ride upward than an outright purchase. Using an option spread provides you with less risk should the next breather taken by the bulls turn into a full blown correction.

When the stock market broke out 10 days ago we mentioned the fact that it did so with a lack of volume. In addition, stocks reached new highs in the face of indicators like momentum showing a strong bearish divergence. Tuesday’s big drop in stocks was on the heaviest volume we have seen in quite some time.  This not only confirms that the bulls have quit buying, but also signals that they are starting to take some profits after stocks have had their best 6 months since the first half of 1975.

I still think that a  Bear Call Spread would be a good way to trade this market environment. At some point, like maybe when the SP 500 reaches support at 975, you could convert that to an Iron Condor by adding a Bull Put Spread if it looks like we will be staying in a trading range. For those of you that want to protect your long stock positions, consider the Stock Option Collar if you do not want to sell your positions.

JD