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 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

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