This market keeps on going, and going, and going…down that is. So much for the trading range I was calling for. Just like last week, the market was up on Monday, and then headed south from there. We continue to see lower highs and lower lows on a closing basis. While Friday’s intraday low of 840 in the SP 500 was a few points higher than the lows on October 10th we may not have seen the bottom. Last week’s support at 900 has now become this week’s resistance. Resistance for MNX is now 125, and DJX its 85.

Even if we have hit a bottom, it seems apparent that we are not going to rebound too rapidly. That being said, a Bear Call Spread may be a reasonable approach to profiting in this market. You could sell a call at the next level of resistance, for example 1000 for the SPX, 95 for the DJX, and 140 for the MNX, and buy the next strike price call to protect your position. That way you get to keep the credit as long as the market doesn’t close higher than your sold call.

JD

With all the talk about the problems in the US stock market over the last couple of months, there has been little discussion about the fact that on a relative basis, the US market has been stronger than foreign markets. This is especially true for last year’s darling the emerging markets.

While recent stock market strength has been bolstered by the rising dollar, could it be that this strength is being caused by the fact that the rest of the world is finally feeling the effects of the credit crunch in the US?

So far, it looks like the Iron Condor would have worked again in September, and could work again for October, but the reward to risk may not be worth it. Some better ideas may be some bear call spreads on foreign market ETFs like EFA, and Bull put spreads on bond ETFs like IEF.

JD

The Iron Condor we suggested in late July expired worthless, so if you put that one on, you were able to keep all of the premium. The problem with that trade though, was the fact that the DJX was actually above 118 this week on an intraday basis, but never closed above that resistance level. While holding on would have produced a profitable trade, it is possible that you could have been stopped out at the break even level depending on the amount of risk you decided to take.

The 20% fall in the price of oil in the last month has certainly helped the stock market, but the DJIA is still showing signs that it is in a trading range, as it has had trouble trying to break out above resistance at 11,800. The SP 500 has looked a little better, closing the week above its 50 day MA. The Nasdaq, on the other hand has been strong in the last month, picking up 10 % since the July lows. It is now above both its 50 day MA and 200 day MA. Thats a sign that institutional investors are moving into Technology stocks.

The financial markets appear to be a little overbought at this time, but if oil continues to fall, they could continue that way for a while. On the other hand, it would not take much in the way of news to push the stock market back down again. This week could go a long way toward letting us know if it is time to start buying. Bullish Option Strategies like the Bull Call Spread or the Bull Put Spread will let you participate if a market rally comes to fruition, without you having to risk a large amount of capital.

JD

The market tried to break out on both sides of its current consolidation and failed to do either. The stock market finished this week almost exactly where it ended last week. We could not have asked for a better finish to the week for the Iron Condor we suggested last week. That being said, both sides of the trade looked like they could have been in trouble at times during the middle of the week. An active trader with good timing could have bought back both sides (at different times) for a small profit, whereas those planning to hold the trade until expiration to capture the premium are still looking food. Unless some big news hits the wires in the next couple of weeks, I expect the market to continue in this trading range for a while.

JD

We did not have any follow through on last week’s hammer candlestick on the DJIA and SP 500. It could be a good time to take that summer vacation. Looks like the financial markets are headed for a trading range for a while, which is actually an improvement from the bearish tone we have displayed this year. We are no longer oversold and I do not see anything that is going to push the market up very far. Even if oil continues its recent down trend in price, there is still too much other bad news on the economy to give this market much of a lift.

One way to play a trading range market is with an Iron Condor on the DJX. Since we have support at 110 and resistance at 118, you could structure this trade by selling the DJX Aug 110 put and the DJX Aug 118 call, while purchasing the DJX Aug 108 put and the DJX Aug 120 call to protect your sold options. If the DJX is still within this trading range by the August expiration, you would get to keep the credit you receive when placing this trade.

JD

The FED told us they were concerned with both the economy and inflation. Well guess what? So is everyone else. The reaction to these comments was subdued at the start. Option bid/ask spreads did not widen even close to the extent that they usually do after Uncle Ben speaks.

Eventually as the day finished out volatility increased in the stock market. The DJIA shot up over 100 points, but eventually settled in just about unchanged. The Nasdaq continued to distance itself from the rest of the pack by posting a gain of almost 1.5%. The problem from a contrarian point of view is that the volume was lower than the previous day.

There certainly has not been any news that would indicate that the economy is has started heading in the right direction. The Nasdaq is holding up better than the DJIA and the SP500 because it includes a lot of technology stocks, and no financial stocks. Besides that, money managers have to put their money somewhere and they, like me, want no part of the financials.

For those of you who like to hedge your bets, It turns out that one of the best plays for 2008 would have been to be long the QQQQ and short the DIA. Even better would have been to be long the XLE and short the XLF, but we’re not looking for perfection here. Option players could have put on a funky straddle with Calls on the QQQQ and Puts on the DIA. Of course this is easy to see in hindsight, so I for one would not take this approach. I preferred bearish spreads on the DJX. That proved to be worth the effort. The question now is will they continue to work?

So how would you play it if you agreed with me that there may not be a lot of downside left, yet you do not think this market is ready for a turn around. As we have said a few times already this year, the Bear Call Spread is your safest bet. An example of this would be to Sell the July DJX 123 call and buy the July DJX 125 to cover yourself. With resistance on the DJIA at 12,250 the probability of success is pretty good…and the DJIA does not have to drop another point for you to keep your credit.

JD

The CFC trade is working perfect. I would stay in it until the news is out. CLF didn’t disappoint but the trade is still a small winner. That is the benefit of getting a back spread for a credit. I would let the trade expire.

BA

Trade was iniated today.  Sold Jun 5 calls and bought Jun 5 puts +.30.  This trade should be kept on until the news is out.

BA

Most likely Cleveland-Cliffs will not disappoint on earnings but if it does it could get ugly. Trade recommendation: Buy 2 May 155p and sell 1 May 165p +.50. Any upside should make a small amount any big downside will do very well. The worst spot for the stock with this position would be a close at 155 at May expiration.

BA

Why should BAC continue with its purchase of CFC when the government is giving handouts to white knights? If it does go through with it, the price will be reduced. Sell any of the 5 level calls and buy 5 level puts.

BA