OptionsVest

It’s About Time for a Market Correction

Joe — Tue, 16 Nov 2010 20:06:35 +0000

The stock market has been moving up strongly for the last couple of months, so it was only a matter of time before it had a correction. Take your pick this time around, the potential for higher interest rates in China or another bailout in Europe, no matter how you slice it, the news was bad for the stock market. The SP 500 went crashing through its upward trendline, while the VIX burst through its downward trendline. In addition to that, momentum confirmed the market reversal by making a lower high as stock prices were making a higher high last week. as the rollover of momentum from a lower high.

SP 500 Divergence

What made today’s fall different from most was that fact that oil and gold also took pretty big hits. It was also rather strange to see bonds go up and interest rates fall on a day when a major concern was higher interest rates overseas. I guess the money had to go somewhere, so US Treasuries and the US Dollar reversed their recent declines. It would not surprise me if we see 1130 once again on the SP 500 and 10,600 on the DJIA before we get another buying opportunity. In the mean time a Bear Put Spread or a Bear Call Spread might be a good way to play this market in the short term.

Nasdaq Leads the Charge

Joe — Sat, 16 Oct 2010 08:05:17 +0000

Technology stocks lead the charge as the Nasdaq easily broke through its April highs at 2050. Not only is 2100 a new high for 2010, the Nasdaq has not seen these levels since the end of 2007. Now, let us see what the stock market can do from here. The DJIA managed to break through the 11,000 level to surpass its ‘Flash Crash’ bounce high, but it still has a little further to go to hit the resistance of its April high at 11,200. The SP 500 is the laggard this time around, as it is now sitting at its ‘Flash Crash’ resistance level at 1180. It still has a considerable distance to cover to reach its April highs at 1220. The stock market is looking strong heading into the November elections.

Breaking Through Resistance

Joe — Sat, 25 Sep 2010 08:03:49 +0000

After several tries, the SP 500 finally broke through resistance at 1130. Technically, there is nothing stopping it before 1180, which is an area that provided some resistance after the ‘Flash Crash’ on May 6th. Should it break through that area, then the next stop is the April high at 1220. The DJIA broke through the 10,700 level this week, which should provide support for a move to the 11,000 level. The Nasdaq has been even stronger than these two indexes as it has already cleared its post ‘Flash Crash’ bounce high near the 2000 level. Look for a pull back to these former resistance levels as a support area to put on some bullish positions.

A Decisive Move

Joe — Sun, 15 Aug 2010 23:01:53 +0000

A pessimistic outlook from the Fed this week spooked the financial markets and sent stocks heading south with a big drop on Wednesday. Both the SP 500 and the Nasdaq are below their 50 day MA and 200 day MA, while the DJIA is below its 200 day MA and hanging on to its 50 day MA by a thread. All of the bearish indicators we mentioned in our last post are still holding, so I’d be inclined to stick with the bearish strategies I have posted recently, like the Bear Call Spread and the Bear Put Spread. For those of you looking for the big score, you can always buy long put options.

Market Indecision

Joe — Sun, 01 Aug 2010 23:00:30 +0000

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.

Still Looking for Support

Joe — Mon, 26 Jul 2010 12:58:59 +0000

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.

Not a Good Sign

Joe — Sun, 18 Jul 2010 10:39:04 +0000

It is bad enough that the 50 day MA for the SP 500 is already below its 200 day MA, but Friday’s rejection of the 50 day MA on heavy volume completed a lower high an confirms the continuation of this markets downtrend from its peak in mid April. The DJIA was showing a bid more strength over the last couple of months, but that is not looking any better now. The 50 day MA on the Nasdaq is about to cross its 200 day MA to the downside to complete a triple confirmation of a downtrend.

There are a couple of ways you could play this market depending on how aggressive you want to be. For the conservative, the Bear Call Spread above the market would be a good approach. For example, you could sell the August SPY 110 Call and buy the SPY 112 Call. If you are more aggressive, you can go with the Bear Put Spread below the market. In this trade, you could buy the August DIA 100 Put and sell the DIA 98 Put.

Failure at Resistance

Joe — Mon, 28 Jun 2010 12:16:17 +0000

Take your pick, the DJIA, SP 500, and Nasdaq all tried to break through the resistance of their 50 day MA last week. They all failed miserably. In addition to that, the Bulls were unable to rustle up any support at the 200 day MA. A good deal of the news we are heading of late is pointing towards a double dip. With the 50 day MA poised to fall below the 200 day MA, institutional investors could be ready to bail out once again.

While technically the stock market looks very weak, it is at times like this that all of us get fooled, so be cautious no matter which direction you think the market is going. If the Bulls can hold the SP 500 above 1,050 and keep the 50 day MA above the 200 day MA this could be a good buying opportunity following a 12% correction. A failure of that could see a fall to the 950 level of a year ago.

A Lower Low for 2010

Joe — Mon, 07 Jun 2010 22:14:57 +0000

The SP 500 joined the DJIA in setting a new, lower low for 2010 by falling to 1050 on Monday. The DJIA set a new low for the year on Friday, and dropped even further today. While the Nasdaq has not made a new low for the year, yet, it did come crashing through its 200 day MA to join its brethren below this important resistance level. Look for the SP 500 to reach 1025 before it attempts to bounce back towards the strengthening resistance of its 200 day MA. This is beginning to look like a double dip than a correction. If that’s the case, bearish strategies will prevail before this market shows signs of life once again.

Sell in May and Go Away

Joe — Mon, 31 May 2010 13:20:09 +0000

The old adage to Sell in May and Go Away proved to be the right move this year as the SP 500 dropped 8% this past month. In an effort to recover at the end of the month, the SP 500 bounced right back to the resistance of its 200 day MA on Thursday this week. Unfortunately it then headed back south for the holiday weekend on Friday. Next stop is most likely the February end of day lows just below 1060. It is there that we find out if this is just a correction, or if the market is making its first move in a double dip.