Only time will tell if the SP 500 is providing more reliable signals than other indexes, but for now many of them are signaling that the recent bounce is over. Tuesday’s Doji candlestick at the 200 day MA of 1,115 not only confirmed resistance, it also marked a lower high for the stock market.  In addition, momentum is flashing a bearish divergence. While that was a good indication for short term traders to place a bearish trade,  option investors should be cautious about placing any new trades. That is because the SP 500 continues to trade between its 50 day MA and its 200 day MA.

That being said, this market indecision favors credit spreads like the Bear Call Spread we suggested a couple of weeks ago, a trade that continues to look like it will expire worthless, allowing you to keep the credit you received when you placed the trade. The benefit of credit spreads like this one, or the Bull Put Spread, is that you can profit even if the market does not move from where it was when you executed your trade.

JD

The bearish cross of the 50 day MA under the 200 day MA for the stock market a few weeks ago was a bad omen, that turned out to be a pivot point in the opposite direction of what one would have expected. Since that time, stocks have bounced back strongly with the DJIA and the Nasdaq both moving above both their 50 day and 200 day moving averages.  The only hold out, unless you want to count international stocks, seems to be SP 500, which ended the day at its 200 day MA of 1,115. Should that break through tomorrow and hold over the next couple of days, look for that to provide needed support for the stock market over the next few months.

Last week we made a couple of suggestions on how to play the bearish trend in the market, but the market has bounced back  since then, so both of these trades are under water. While the conservative Bear Call Spread above the market can still turn into a winning trade if the 200 day MA provides some resistance to the SP 500, the more aggressive Bear Put Spread below the market is one that you should have cut your losses on when it went south as the market headed north a few days ago.

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 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.

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