OptionsVest

The last time the 50 day MA held back the stock markets in early February of 2009,  just a little over a year ago. That recovery attempt preceded one of the worst 4 week periods in stock market history as stocks took their final plunge of the financial crisis.  In a similar fashion, the market has once again bounced back to this level. This confirms the fact that the 50 day MA is now providing resistance for the market to break through, rather than supporting the market as it has done since the market broke through this barrier after bouncing off its lows last March.

What may be different this year is that the market seems to have found a home at its 50 day MA. For the SP 500 this is 1110, for the QQQQ its 45. This is a sign that institutional investors are not ready to commit either way on this market. Those of you who follow Bill O’Neil of IBD fame may have noticed that the weekly chart looks like it is trying to put a handle on the big cup it has formed. While a completion of this pattern could bode well for stocks, its failure could send stocks plunging down further to seek support at the 200 day MA.

There is no need to act quickly at this point. If you already have positions where you have sold March options, you might as well hold on to let some time premium deteriorate. On the other hand, the only positions that might make sense now are those that take a neutral stance on the market for March.

JD

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 50 day MA has provided strong support for the SP 500, DJIA, and the Nasdaq as the stock market has risen from the ashes of the March lows. After last week’s pull back, the DJIA is still being held up at this level, but the SP 500 and the Nasdaq are being held back by this widely followed moving average.

While all three of these indices broke down through the 50 day MA back in June, they were all held up by the lower Bollinger Band,  just as they are today. What may be more important here is that the 200 day MA is not providing the reinforcement that it was back in July.  Should we break down from here, that is most likely how far down this market could go. That would turn this 5% pull back into a 15% correction.

With unemployment coming out on Friday, this will be an important week for the financial markets. This could be a good opportunity to add to long positions, take your profits and sit on the sidelines while the market corrects, or at least add some insurance to your current positions by using option strategies.

JD