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

The SP 500, DJIA, and Nasdaq all settled near their 50 day MA, and the lower 20 day Bollinger Band on Friday. Monday’s bounce off of these levels provided the support that bulls were looking for as once again investors were buying on the dips. While Bollinger Bands provided stock market support back in June/July, this is the second time the 50 day MA has been tested, and the first time it has held, during this market rally.

While bearish traders with options expiring in October may want to take their small profits now, this market rally continues to show signs of losing steam. Besides heavier volume on down days, technical indicators continue to show divergence with stock prices. For example: Momentum, MACD, and Stochastics all made lower lows while prices have now made higher lows at this latest inflection point.

The battle between the bulls and bears rages on. Trade with caution.

JD

I’d tell you the SP 500 hit bottom on Fridy and it is now headed for a recovery.

Unfortunately, this candlestick signal does not always indicate the end of a down trend. All we can do right now is wait for confirmation.  While the SP 500 is showing some promise by stoping short of this bear market low, the DJIA set a new one on Thursday and kept heading south on Friday. If the market moves up on Monday, I will begin looking for some long term bullish plays. If it fails to improve, all bets are off on the bullish side.

For the sake of showing a little optimism, here are some ETF’s that I am looking at that have been showing some good relative strength : AGG, GLD, IBB, IEF, IWF, IWP, LSC, PBP,  QQQQ, SHY, TIP, XLK, XLP, XLV. The MNX index option on the Nasdaq has been the strongest in 2009, so it would be the first I would consider for an option play.

It did not surprise me that the Bear Call Spread side of the Iron Condor trade for February expired worthless, allowing you to keep the credit no matter how you placed that side of the trade. On the other hand, the Bull Put Spread leg  may have caused a problem for some of you. but not if you exited the position on Tuesday when the SP 500 finally closed below 800.  You should have been in that position long enough for the decline in time value to allow you to break even on that leg of the trade.

We will wait until at least the end of the day on Monday before even thinking about reaching any conclusions on this market.

JD

When both stocks and bonds are losing value.

I was surprised to read Bob’s post about how bad January actually was for the stock market. When you consider that the top of the current trading range was set on the 2nd, and we are again looking to test the trading range lows at 800 on the SP 500, it is easy to see that it was not a good month. The fact that we have been in a trading range may have lulled me to sleep in thinking it was not that bad of a start to the new year.

What concerns me is that it was an even worse month for long term bonds. The exponential rise in bonds and fall in rates certainly set that market up for a big fall, but even investing in the good ole USA has proven to be a bad strategy since the beginning of the year. There really was no place to hide.

On the other hand, the Iron Condor we described a couple of weeks ago is still holding up. We will probably test the low end of that trade on Monday. We would like to see a bounce off of 800, but if we do close below 800, you will want to exit that trade.

JD

Just when you thought investors might be ready to throw in the towel once again, it did find some support at the levels I suggested in my last post. The DJIA held support at 8,000 and the SP 500 held support at 815. The market seems to be treading water while it waits to see if there is just one more shoe to drop in the financial crisis.

Credit spreads may be the way to go for the February options expiration. For example, Sell Feb SPX 950 Call and Buy Feb SPX 975 Call, or Sell SPX 800 Put and Buy SPX 775 Put.  Trading both of these together will leave you with an Iron Condor, which will give you even better profits if the SP 500 stays between 800 and 950. If I had to pick between them, I’d say the call spread has the better probability of success.

JD

The financial markets tanked all over the world when the Senate voted against the Big 3 Auto Bailout, but when the Treasury said it stood ready to provide funds for automakers until lawmakers could consider a longer-term package next year the market steadily rose thoughout the day to finish the day up slightly. For the week, the SP 500 and the DJIA were virtually unchanged, while the technology stocks in the Nasdaq posted a 2% gain.

Volume has been weaker during the rally over the last couple of weeks, so while it appears that sellers may be done with most of their selling, the recession appear to be holding back the buyers. It could not be that most investors still waiting for the next bomb to drop on Wall Street or in Washington. All of this helped the VIX fall by almost 10%, which may have been the most significant thing to happen in the markets this week.

The market appears to be in a trading range that has a slightly bullish tilt. Selling January puts will not provide near the profits that selling December puts did, but that strategy should still yield good returns. A safer way to profit in this market may be  Bull Put Spreads. Selling the SPX 850 and buying the SPX 840 will let you keep the credit as long as the market stays above 850 by the January expiration.

JD

Okay, so we have just went through the greatest wealth destruction in the history of the nation.  If you had been listening to this blog the whole way, you would have been much better off.   We have been preaching defense the entire time.  Now its time to begin looking for offensive plays.  Its time to start taking advantage of the extreme volatility.  I would recommend doing cash covered puts in quality stocks that have a very good chance of being here in 10 years.  Here is a short list: WMT, JNJ, MCD, KO, MSFT, XOM.  As you can see, the list is all Dow stocks.  A cash covered put means that you have the cash on hand to take delivery of the stock if the put is exercised.  You can get into these stocks at levels that are at least 20% lower than the current price.  If you don’t get the stock, you walk away with a nice 5%-10% return in 3 months.  I will give a quick example with MCD.  Lets say that you have 55k to invest.  Instead of buying 1000 shares at 55, you would sell 10 Jan 50 puts for 3.  At January expiration if the stock is above 50, you keep the 3000 dollars, a 5 1/2% return in 60 days.  If the stock closes at 50 or lower, you buy the stock at a break-even point of 47.  The only downside would be a huge rally in MCD in the next 60 days, something most investors aren’t worried about these days.

BA