So Much for That Breakout
2nd September 2009
When the stock market broke out 10 days ago we mentioned the fact that it did so with a lack of volume. In addition, stocks reached new highs in the face of indicators like momentum showing a strong bearish divergence. Tuesday’s big drop in stocks was on the heaviest volume we have seen in quite some time. This not only confirms that the bulls have quit buying, but also signals that they are starting to take some profits after stocks have had their best 6 months since the first half of 1975.
I still think that a Bear Call Spread would be a good way to trade this market environment. At some point, like maybe when the SP 500 reaches support at 975, you could convert that to an Iron Condor by adding a Bull Put Spread if it looks like we will be staying in a trading range. For those of you that want to protect your long stock positions, consider the Stock Option Collar if you do not want to sell your positions.
JD
