OptionsVest

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

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 stock market is in almost exactly the same place it was for my last post, DJIA 11,000, SP 500 1200, and MNX 200. The difference now is that we are sitting at support rather than resistance.  While that sounds positive, the market rally from the February lows is under pressure. Stocks were up 2% or so in April, but the three heaviest volume days since last we wrote have all been down days.

In recent months, I have suggested using bullish option strategies to take advantage of minor pull backs in the stock market.  Given the current environment, I’m more inclined to take a slightly bearish approach now. Bear Call Spreads just above current market levels that are executed for a credit to your account are a good way to profit if the market “Does Not Go Up”.

JD

Today’s big fall in the stock market established Tuesday’s rebound high as the first lower high in the stock market in 7 months last July.  At that time, the SP 500 fell through it 50 day MA, but was held up by its 200 day MA a week later. Since then, the 50 day MA has provided support since the market broke through once again last Friday. What we now see is that the 50 day MA has turned into resistance.

With such a big fall today, option prices are going to be more expensive than they have been in quite some time. If you are going to put on a trade, I would suggest you make it some type of option spread trade so you do not get killed if the market calms down and volatility drops. At this point, I will not speculate on what could be next, except to say that the SP 500 should find support around 1035, the DJIA at 9700, and the Nasdaq around 2100.

This market action is a confirmation that we are in a correction. The only thing we do not know now is how big that correction is going to be.

JD