OptionsVest

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

In spite of some improvement in the January unemployment report, it looked like the stock market was headed south for the winter on Friday morning. Then just before 2PM, the Nasdaq bounced strongly off of support at the 2100 level. The other major Indexes followed suit and the stock market actually turned in a positive day. This was a turn around the likes of which we have not seen since the SP 500 lead the market by bouncing off of the 666 level on March 6th, 2009.

Quite often, this Hammer candlestick pattern turns out to be a good reversal signal. While this might have been a great opportunity for a Bull Put Spread or a Bull Call Spread, we need to see some confirmation early this week to conclude that this market correction is over. If we do not get that, you should be ready to use the bounce to implement some bearish strategies.

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

So much for the good start to 2010. That has already been swept under the carpet. The SP 500 had its worst day since the end of October, taking it back right to the point where it closed 2009. There are many reason for this pull back, including higher interest rates in China, a rising dollar, a Republican Senator in Massachusetts, more regulations on financial institutions, and a tired market after an amazing bounce, just to name a few.

The SP 500 has once again pulled right back to its 50 day MA, while the DJIA has fallen though slightly, and the Nasdaq is rapidly heading in that direction. Ever since the market took off from its bottom last March, it has pretty much held that support level. This time though, the news does not look as good as it has been recently. That being said, this could easily be the pull back I have been looking for as an opportunity get better pricing on some bullish strategies.

The market looks to be in transition, so do not be in a hurry to jump back in. There is always the possibility that we will experience a full fledged correction. If that’s the case, you can always place some option trades to take advantage of the ride down.  We could have an interesting conclusion to the week.

JD

The stock market ended a strong year with a final hour tumble on low volume that will likely prove to be insignificant. You should be able to find continued success by trading bullish option strategies on pullbacks to support level. Look for the market to hold up at 1,100 on the SP 500, 10,250 on the DJIA, and 2,200 on the Nasdaq Composite.

JD

The news on Friday was good. Unemployment had dropped from 10.2% to 10%.  The market gapped open considerably higher. And then a funny thing happened on the way to the bank: the market sold off into the close on very strong volume.

What’s that all about you might ask? Once the euphoria died down, investors realized that a few more good reports and the FED might just begin increasing interest rates. The dollar jumped, while Gold and Oil tanked. That’s not good news for stocks or bonds.

It will be interesting to see if the 50 day MA supports the market this time, or if the prospects for an L-shaped recovery hold the market down. While active traders might want to put on a bearish trade or two, longer term traders and investors should consider taking some profits on current long positions. If this is another pull back, you can always get back in. If the market decides it is time to head south for the winter, there will be plenty of time to profit on the downside.

JD