November 10th, 2008

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

Stocks under pressure despite Chinese stimulus package.

Stocks suffered from what appeared to be a delayed reaction to Friday's employment numbers and early morning warnings from Circuit City and AIG (again).  The major indices enjoyed a healthy bid on the open of electronic trading yesterday afternoon and for the most part carried it into the open of the day session.  However, buyers were scarce and another round of selling ensued. 

Investors were excited about China's plans to aid its economy via a mix of spending, subsidies, looser credit policies and tax credits.  The package could help many of the commodity based stocks as well as global businesses such as General Electric.  However, reality soon sunk in as traders were left with the rest of the day to contemplate. 

The lack of economic news reported in today's session, and in the next two sessions for that matter, gives investors time to dwell on what has been released in recent weeks.  Overall, the data has painted a bleak picture; the longer that the market has to sulk, the "worse" things could become.  My instinct tells me that we could be in store for another retest of the October lows, or at least 855 in the December S&P futures and 8,160 in the December Dow futures.  However, if I am right it will likely occur by the end of this week.  My floor brokers are reminding me of option expiration coming up next week and the tendency for the indices to find a low on the Thursday or Friday preceding expiration. 

Adding salt to the wounds of corporate America, retailer Circuit City filed for bankruptcy protection on Monday.  This news comes on the heels of an auto-industry with their hands out and another aid package given to AIG. 

Even at levels that seem to be "cheap" in terms of book values, P/E ratios, etc.  investors aren't willing to acquire risky assets.  Instead they are favoring the guaranteed, but low yields, provided by U.S. Treasury securities.  According to Hugh Johnson of Jonson Illington Advisors, "They'd like to be optimistic, but individual investors are still very worried."

In my opinion, the late day recovery from the lows wasn't enough to turn the tide.  I have revised my downside targets somewhat, but nonetheless I am still looking lower.  I see the potential for the S&P 500 futures to trade at or near 855 in the coming sessions.  Likewise, the Dow could easily see prices near 8,160 and the NASDAQ 1177. 

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 7 - These are underwater, but not out of the question.  Place an order to sell them at or near $15.

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

·          November 6 - If you were able to get in on this trade, place an order to sell it at $27 or better (don't get greedy, if you can get out for a little less take it). 

·         November 7 - You should be out of this trade.  Assuming that you were able to get in for $6 and out for $25 you would have been profitable by $950 before commissions and fees.

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

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.

 

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.