November 5th, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

Six day winning streak comes to an end.

After six positive day for the domestic stock indices, Wall Street took a breather.  U.S. stocks suffered losses of nearly 3% on the day following gloomy economic data and an election night hangover. 

According to ADP's estimates of Friday's non-farm payroll data, the U.S. economy lost over 150 thousand jobs last month.  While ADP has yet to prove its accuracy, it seems to be relatively safe to assume that job losses are accumulating at a quick pace.  Analysts are looking for numbers closer to 200 thousand, but anything in that general ballpark will likely weigh on the market.  It seems as though the market will need a reading of 130 thousand or less to avoid another wave of selling. 

The Institute for Supply Management added to the bearish tone with the release of their non-manufacturing (service) index.  The index was reported to be well into contraction territory (below 50) at 44.4.  In case you were wondering, the services sector represents about 80% of the domestic economy and includes activities such as banking, air transportation, hotels and restaurants. 

Today's post-election plunge is somewhat in line with historical standards.  As we have mentioned before, the equity markets have a tendency to rally on a Republican victory and sell-off on a Democratic.  On average, S&P losses are approximately 1% making today's move a little more dramatic.  However, given economic conditions and the frailty of the financial markets today's move wasn't necessarily surprising. 

I was hoping for a little more out of this rally, but the tide may have turned.  The markets will have to get off to a good start tomorrow, or we will likely see another run at the October lows.  Critical support in the S&P lies at 940, while resistance is at 1020 and 1035. 

The Dow on the other hand, did meet our upside target and seems to have sharply reversed course.  8,927 must hold in order to avoid the seemingly inevitable retest of the lows.  Similarly, the NASDAQ must hold above 1300 to avoid panic sellers. 

Hopefully you were able to buy the November e-mini 850 puts as recommended in yesterday's newsletter!

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.

 

S&P 500 Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

October 29 - Clients were advised to purchase the November mini S&P 700 puts, fills were at or near $6 or $300.

November 4 - Buy the November e-mini S&P 850 puts for $6 or less

Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.

 

Dow Jones Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

Flat

NASDAQ Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Swing Trade -

Flat

There is substantial risk of loss in trading futures and options.