OptionsVest

We have now been holding around the 1,000 level on the SP 500 since the first of August. That’s two full weeks in which the bulls and the bears battling it out for control of the financial markets. We have not determined a winner yet, but one thing is for sure, no matter if you look at a daily or a weekly chart, the stock market is losing momentum. The most obvious indication of that is the divergence between Momentum and Price. This would normally indicate that the stock market is headed down.

While this is all well and good, the problem I see with playing this market right now is the fact that many of the talking heads keep shouting that the stock market has gone up too far and too fast. While I would agree with that thought, I must remind you that these are many of the same guys that were calling for a big fall in the market a month ago because of the formation of the infamous ‘Head and Shoulders’ pattern on the stock charts. The problem now, just as it was then, is jumping the gun by anticipating what is going to happen. If you were one of those people that bet the SP 500 would break support around 875 you certainly got burned when that pattern failed and the market rocketed up 12% in just two weeks.

You have probably been successful in the past with trades when you anticipated correctly what the market was going to do. The questions you must ask yourself though are: Was I just lucky?  Or would I have been better off if I waited for confirmation from more than one signal before placing that trade?

Probably the safest way to play this chart would be with a bear call spread, but I am going to wait to see what direction the market tells us it wants to go in before I place my next trade.

JD

SP 500 Divergence

The SP 500 hit the 1000 target level yesterday and maintained it today. It looks like it might be time for a breather as the sharp rise over the last three weeks seems to be running out of steam. The good news for the bulls is the fact that the stock market is holding steady at this strong resistance level. The naysayers, on the other hand, can point to a bearish divergence with several technical indicators including, Momentum and MACD as a signal that this market is heading down soon.

We are not likely to see how this market will resolve until seeing the unemployment numbers on Friday.

JD

While the economy is not really looking much better, the financial markets went roaring ahead this week. All of the major market indices set new highs for the year this week, finally holding steady in positive territory for 2009.

From a technical perspective, the stock market is now being solidly supported by both its 50 day MA and 200 day MA. On the top end, the 1,000 level on the SP 500 will provide the next resistance level. You should be able to use a pull back from that area to put on more favorable bullish positions.

JD

All that talk last week about the formation of a Head and Shoulders pattern in the stock market fizzled on the opening bell Monday. The SP 500 bounced off the neckline at 875 taking off like a rocket. This looks like an attempt to set a new rally high while confounding those (including myself) that would say this market has gone too far too fast.

A closer look at a stock chart and you will see a bullish divergence between the price action and several indicators, like momentum, stochastics, and MACD to name a few. It should not take more than a day or two for the market to decide if it is going to break through its June highs.

JD

A dismal jobs report put a damper on the financial markets 4th of July celebration of the stock market’s outstanding performance in the second quarter of 2009. Thursday’s fall of almost 3% took the SP 500 crashing through the support of its 50 day MA established only last week. Bullish traders are hoping the 200 day MA will provide some support in the coming week, but if the DJIA  is any indication, that will not provide any support for the market either.

A fall below 875 for the SP 500 or 8200 by the DJIA would confirm that this week marked the first Lower High since February.  The ‘green shoots’ appear to be suffering from the heat of a spring with too much sunshine and not enough rain to keep them from burning out.  The financial markets need to catch their breath. A pull back of at least 10 % from the highs will give them time to digest recent gains, and give those investors who missed the boat in March and April another opportunity to get back in.

JD

With all the talk about the market recovery from the March lows, the SP 500 and the DJIA have done nothing in the last two months. The technology heavy Nasdaq continues to be the strongest market index, but even that has picked up only 5% over the last 8 weeks.

On the good side, the financial markets managed to hold support levels; Nasdaq at 1400, the SP 500 at 875, and the DJIA at 8200.

Expect more of the same in this short week going into the 4th of July holiday.

JD

As expected, the stock market took a breather from its three month rally. The drop was not significant, but it was on heavier volume than the previous week. The market has been consolidating for a month now, tightening the noose around a narrow trading range.

Interestingly, the SP 500 headed south off of a resistance level reached at the start of this year, but managed to find support from the intersection of its 200 day MA and its 50 day MA. On the other hand, the DJIA could not hold support from its 200 day MA, but was held up by its 50 day MA. The Nasdaq has been leading the market up during this recent rally, but took a breather for the second week in a row. It will not be surprising if the financial markets continue to meander around over the next few weeks.

JD

The stock market continues to trade in a narrow range half way through June as the debate rages on between the bulls and the bears. There are good arguements on both sides of the fence, most likely leading to the market going virtually nowhere for a while. The SP500 is trading between 875 and 950, the DJIA is confined by 8200 and 8800, while the Nasdaq 100 has been a little more volatile between 1350 and 1500.

Upside momentum continues to diminish as interest rates have started to rise. This is likely to be a better time to be selling premium than buying premium, even if you have a directional bias.

The Iron Condor is a good strategy for a relatively stable market that may be a successful approach for the July expiration.  This is the combination of selling a Bull Put Spread below the market and selling a Bear Call Spread above the market. You can enter this trade all at once, orenter one side at a time. For example, with the market currently on the high end of the trading range you could sell the 100 call on the SPYand buy the 101 or 102 call for protection to enter your Bear Call Spread. Then wait for a market pull back to around the 900 level on the SP 500 to sell the 87 put and buy the 85 put to enter the Bull Put Spread side of the trade. How you approach this trade is a matter of personal preference.

JD

The stock market finished the first week in June with a volatile day. It ended close enough for government work to the same place it ended the day before. In fact, looking at a chart you can see that the SP 500 is just about Dead Even with where it started the year. Speaking of the government, it was the release of the May unemployment numbers that caused the volatility in the market. We are still losing jobs at a clip of 1 million a quarter, but the news media keeps telling us that things are getting better. While that is better than the 2 million a quarter just that long ago, how do they consider that a good sign? 9.4% unemployment is not a good thing. The lack of progress by the market today indicates that I am not the only one questioning this rally.

And then there is increasing interest rates and climbing commodity prices. These do not normally go hand in hand with a streaking stock market.

If you are still riding this bounce, it it time to take some profits, and look for a better level to get back into the market.

JD

The headlines this week shouted out that Home Depot (HD) posted a 44 percent increase in 1st quater profits. Looking a little closer at the details we find that the reason this number looked so good was because it was compared to the year ago quarter when HD wrote off the expense of closing its Home Expo stores. What the headline doesn’t tell you is that sales were down 10%, not exactly good news. Savy traders took this opportunity to book profits on the home improvement store’s 50% rise since the March lows.

HD’s story illustrates what has been happening over the last couple of weeks in the financial markets. Traders have been taking profits on this two month rally by selling to investors that are afraid they are going to miss the boat on a new bull market. If we have a real bull market, the is no need to hurry.

The SP 500, DJIA, and MNX all made their first ‘lower’ high in a couple of months this week. It was a good time to initiate some bearish option trades. Watch the 875 level in the SP 500, 8200 in the DJIA, and 134 in the MNX for support.  If these hold, expect the stock market to stay in a trading range for a while. If they break down, this pull back will become a full fledged correction.

JD