Archive for November, 2008

I feel that we will get some follow through on Friday’s move.  Levels to watch begin with the swing low @8143 from 10/27, then the swing high @8504 from 11/19, swing high @ 8923 from 11/14 and finally the swing high @ 9653 from 11/4.  Also, it would be wise to see how the INDU reacts as it closes in on the top of the descending channel trendline.  The move Friday was not quite a Bullish engulfing pattern, but it was close. It occured on significant volume.  However, longer term, I feel that we could go back down to retest recent lows @ 7200-7400.  If those levels are broken, we could see 6400-6700. 

Similar to my comments on the INDU, I feel that we could get some follow through from Friday’s move.  The SPX formed a bullish Harami on significant volume.  Analyze how the index reacts at the following levels to give you clues on the sustainability of any move that may occur.  First the swing low @ 818 from 11/13, the swing low @ 845 from 10/28, the swing low @ 875 from 10/28. the swing high @ 917 from 11/14 and finally the swing high @ 1007 from 11/14.  Again, pay special attention to how the index reacts at the top of the descending channel.  Old support becomes new resistance. 

Look for tests at 1428, 1493, 1533, 1542 and 1786 on a short term move up.  Remember that old support becomes new resistance.

   TOOLS OF THE TRADE

THE LONG PUT

 

 

Graph courtesy of the options industry council 

The long put optimizes a bearish trend.  You can use this bearish instrument as a standalone strategy to take advantage of a falling stock or you can add it to a stock that you currently own to protect the value of that stock.  The aforementioned application of the put is known as a “Protective Put”.  The same position but with a bullish expectation is called a “Married Put”.  The “Married Put” is used when the trader is primarily bullish on the stock yet wants to hedge the downside in case of an unexpected drop.

There are also a number of spreads and combination plays using the long put which we will cover in future articles.  As is so with the long call from last week, the trader’s risk is limited to the cost of the option.  In the case of the long put, its’ value increases as the value of the underlying decreases.  The amount of the movement of the option in relation to the stock movement is represented by the ”Delta”, which in part is related to the positioning of the long put either ITM, ATM or OTM.  The proximity to expiration as opposed to long dated options also has an effect on the delta.  We will get into more details on the Delta as well as other “Greeks” in future sessions. 

Study the graph to get a firm grasp on the risk/reward of the position.  This tool would have saved many accounts this year had the strategy been used to hedge the recent bear market.  Next week, we will investigate the “Short Call”.  Best, Robin

ECONOMIC REPORTS

MONDAY 11/24

Existing Home Sales

TUESDAY 11/25

Chain Deflator-Prel, GDP-Prel, Consumer Confidence

WEDNESDAY 11/26

Durable Goods, Initial Claims, Personal Income, Personal Spending, Chicago PMI, Michigan Sentiment, New Home Sales

THURSDAY 11/27

Market closed for Thanksgiving

FRIDAY 11/28

None

 

 

EARNINGS OF NOTE

MONDAY 11/24

CPB, HPQ (Pre announced last week)

TUESDAY 11/25

AEO, BCSI, BGP, CHS, CSUN, CWTR, DHI, DLTR, FLE, HRL, JCG, SEAC, TLB, ZLC

WEDNESDAY 11/26

DE, TIF

THURSDAY 11/27

NONE

FRIDAY 11/28

FRO

 

            It looks like volatility is going to be with us for awhile.  This market is not trading on fundamentals, but rather, it is being driven by emotion. The market is reacting to any bit of news, and as such, it makes it more difficult to time the direction.  Case in point was Friday’s reaction to the appointment of Timothy Geithner as the new Secretary of the Treasury.  After the announcement, the market soared to close up almost 500 points.  It’s not a bad strategy to take advantage of the volatility as evidenced by the pumped up premiums currently available in options.  One of the ways that you can do that is by selling credit spreads out way out of the money.

When I was a child, my mother told me not to play in the street in worry that I may be run over by a car.  Stay out of the street and in fact don’t even stand on the sidewalk.  Instead, play on the lawn in front of the house so you don’t get flattened by an errant car.  The amount of premium available in the out of the money options still allow for a decent return without putting your life at risk.  Do some chart analysis to determine where the “curb and gutter” is located (support and resistance) and then give yourself an additional margin beyond that.  Probability calculators can help you determine the likelihood of assignment.

There is always a way to make money in any market.  You just need to assess the current market conditions and apply the proper strategy.  Robin

 

 

 

With the lack of economic news for the first few days of this week, the market  focused on the dismal retail numbers instead.  Case in point was CC filing for bankruptcy.  GM was downgraded by Deutsche Bank.  China announced their economic stimulus package.  The DOW closed down on the first day of the week by 73 points.

When will the triple digit days subside?  Tuesday, the DOW moved south 176 points on weak earnings reports from the likes of SBUX, TOL and SIRI.

Wednesday, continuing bad retail news contributed to a declining market as M and BBY guided lower.  The question remains unclear as to whether the automakers F and GM will receive government assistance.  Some on Capitol Hill view the systemic risk of a failing auto industry too much to take.  The DOW was down 411 points.

Thursday, lawmakers fought over the prudence of a bailout for the suffering car industry as INTC and WMT presented a pessimistic forecast.  A late day rally pushed the DOW up 552 points.

Friday saw the market down most of the day on poor Retail Sales numbers and a less than stellar Michigan Sentiment Report.  Even so, the DOW actually turned green ever so briefly in the afternoon before retreating to close down 337 point.

Week over week, the DOW was down 446 points.  The SPX was worse by 58 and the COMPQ finished off 130 points.

 Have a wonderful week!

Robin

The trading range in the DOW continues to be 7900-9600.  We will move in this range until we get a catalyst to break us out.  I am slightly bullish bias through the end of the year.  Both the MACD and Stochastics are showing a “Bullish Divergence”  which could move us back to the top of the range.  Volatility remains high with the VIX at 66.  I just recently did an interview with Brian Overby Director of Education and Senior Options Analyst at Tradeking and he said that he feels that 50 is the new 30 in the VIX.  I personally feel that as clarity in the economy returns and when financial meltdown is removed from the equation, we will see the volatility return to historically normal levels.  We shall see.  For us, it really doesn’t matter because we make money either way.

The trading range on the SPX is 845-1000.  I am bullish bias within the established range.  More immediately,  I see us moving to the upside within the range.  We also have a “Bullish Divergence” revealed by the MACD and Stochastics.

We are at the bottom of the trading range and I expect a move back up to the top of the range.  Again, we have a “Bullish Divergence in the MACD and Stochastics that indicates a higher probability of an upside move.