When the stock market broke down through its 50 day MA back in February, that level did not provide much resistance on the way back up. This time, events unfolded just a little bit differently. On cue, the SP 500 bounced back from the “Flash Crash” right up to its 50 day MA and then came crashing down right through its 200 day MA.

The only consolation is that stocks did not fall through their February lows of 1060 for the SP 500, 9,900 for the DJIA, 173 for the MNX, and 42.50 for the QQQQ.  In contrast to the SP 500, the Nasdaq is currently being supported by its 200 day MA at 44.50 for the QQQQ.

We will be watching this week to see if the 200 day MA is as resistant as the 50 day was, or if it becomes support for another run up. Technically, the market looks weak, so I would not be surprised if the SP 500 leads the market down, rather than the Nasdaq leading stocks back up. That being said, the SP 500 could just as easily head north to test resistance at 1,100 before heading back down.

JD

Last week I wrote that I thought the stock market probably would not be going up significantly before the next options expiration. Turned out to be an understatement.  Thanks to financial troubles in Greece and an extreme reaction to what may have been a typo (but could have been done on purpose) not only did stocks blow through support at the 50 day MA, they made it all the way down to the 200 day MA and quickly bounced back up. We have now found a new level of support, but this time it is the 200 day MA. The 50 day MA is now likely to provide some resistance for this rebound.

If you put on a Bear Call Spread last week, you might as well book your profit. While this trade was too conservative to provide a windfall, it still goes in the win column.

JD

The stock market is in almost exactly the same place it was for my last post, DJIA 11,000, SP 500 1200, and MNX 200. The difference now is that we are sitting at support rather than resistance.  While that sounds positive, the market rally from the February lows is under pressure. Stocks were up 2% or so in April, but the three heaviest volume days since last we wrote have all been down days.

In recent months, I have suggested using bullish option strategies to take advantage of minor pull backs in the stock market.  Given the current environment, I’m more inclined to take a slightly bearish approach now. Bear Call Spreads just above current market levels that are executed for a credit to your account are a good way to profit if the market “Does Not Go Up”.

JD

The good news is that stocks continue to act like they have hit a ceiling, but the ceiling keeps getting a little higher. For now, those levels are 11,000 for the DJIA, 1200 for the SP 500, and 200 for the MNX. The bad news is that the down days are coming with more volume than the up days. There is no reason to be overly bullish or bearish at this time. Option traders continue to be best served with spread trades sell some premium to take advantage of time decay.

JD

The seven week bounce by the stock market off of the February lows appears to have  run out of gas. This action improves the probability that the April options we sold to roll over our Bull Call Diagonal Spreads will expire worthless. Of course we do not want the market to make a complete about face, but a test of the support levels we mentioned last week should help these strategies. While stocks appear to be taking a breather, keep your eyes open for new opportunities to implement bullish strategies once the pull back is complete.

Last week the financial markets continued their slow march forward into new 52 week highs. The problem with this breakout was that it was not accompanied with a lot of volume. The SP 500 should go back and test support at the 1150 level, the DJIA at the 10,700 level, and the MNX at the 190 level.

When this happens, use it as an opportunity to place some new trades. If support holds, look to use bullish spreads to reduce your risk and improve your reward to risk ratio. If it does not hold, it will be a good opportunity for bearish credit spreads.

JD

The last time the 50 day MA held back the stock markets in early February of 2009,  just a little over a year ago. That recovery attempt preceded one of the worst 4 week periods in stock market history as stocks took their final plunge of the financial crisis.  In a similar fashion, the market has once again bounced back to this level. This confirms the fact that the 50 day MA is now providing resistance for the market to break through, rather than supporting the market as it has done since the market broke through this barrier after bouncing off its lows last March.

What may be different this year is that the market seems to have found a home at its 50 day MA. For the SP 500 this is 1110, for the QQQQ its 45. This is a sign that institutional investors are not ready to commit either way on this market. Those of you who follow Bill O’Neil of IBD fame may have noticed that the weekly chart looks like it is trying to put a handle on the big cup it has formed. While a completion of this pattern could bode well for stocks, its failure could send stocks plunging down further to seek support at the 200 day MA.

There is no need to act quickly at this point. If you already have positions where you have sold March options, you might as well hold on to let some time premium deteriorate. On the other hand, the only positions that might make sense now are those that take a neutral stance on the market for March.

JD

We had weak confirmation that the correction is complete this week as stocks moved higher off of last Friday’s Hammer Candlestick. While the weekly chart formed a Bullish Engulfing pattern, it did so on weak volume. The financial market looks confused, not knowing if it wants to go up or go down. My thoughts are that we will probably ride this bounce back up to the 50 day MA on the major averages before heading south again to find support at the 200 day MA. To put it another way, I expect the market to stay in a trading range between the  200 day MA and the 50 day MA for a while.

There are many ways to trade in this environment, including the Iron Condor. By selling an option spread above and below the current market, you would profit if stocks continue in their current trading range.

For those of you more interested in investing in the stock market this correction has provided a good opportunity to buy in at lower prices.  One way to use options to invest in a market that is rising slowly is with the Bull Call Diagonal Spread. For example, with Technology stocks showing strong relative strength lately, you could buy the June QQQQ 43 Call and sell the March QQQQ 45 Call. That should leave you in good shape as long as the QQQQ stay in its trading range, and set you up to profit at a lower cost of entry should the QQQQ break through its 50 day MA after March expiration.

JD