November 24th, 2008  

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Equity Recovery in progress, but will it last?

Unfortunately I wasn't able to keep up with my newsletters last week due to, among other things, the Las Vegas Money show and extreme market conditions.  During times like this we are forced to prioritize and our clients always come first, newsletters second.  With that said, those that are following this newsletter via a free email subscription was provided with briefings.  If you are reading this from one of the various websites in which this content is posted, you may be interested in signing up for our free e-blast subscription at www.DeCarleyTrading.com to ensure timely delivery of our comments and recommendations. 

Stocks enjoyed another wildly positive day after the U.S. government announced its intentions to bail out Citigroup.  Adding to the positive momentum, President elect Obama announced his economic team.  While details were spared, the market seemed hopeful as the administration is promising the creation of 2.5 million jobs in the next two years.  Expectations seem a bit lofty, leaving the Street with hopes that they can deliver. 

While there were rumors of a Citigroup rescue last week, investors sighed in relief as the particulars were released.  The U.S government decided late Sunday night to invest $20 billion in Citigroup and guarantee $306 billion in risky assets.  The premise behind the move is to restore confidence in the once prominent bank but the behind the scenes impact should be a more stable banking system.  Along with the decision to step in, the Fed added "We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks."  According to Teck-Kin Suan, economist at United Overseas Bank in Singapore, "If they didn't' help, the damage would be beyond imagination."

At this point it seems that the market is happy to see the government step in, the market's consensus of whether or not the Fed is making the right moves will come later. 

Each of the major indices reached our downside targets late last week and have since recovered.  In the last newsletter, dated Wednesday November 19th, we stated

I still feel as though a bottom will be found shortly but am concerned that we may see 770 before turning around.  At this pace, we could see 770 by tomorrow as I have been told that there are several sell stops lingering below 800 and the market's tendency to inflict misery on traders tells me that we will run them...

Our downside objective for the Dow in yesterday's report was 7,900 and we aren't far away.  However, 7,650 offers the next level of support and may also be seen in the coming days before the market finds a bottom. 

As it turns out, we underestimated the magnitude of the drop but feel as though we called it relatively well.  If you participated in the short put recommendations noted below that were based on the premise of the scenario described above becoming a reality, we suggest that you exit to lock in a nice profit. 

Conversely, the recommendations to buy calls haven't necessarily worked out as well despite the recent rally.  It seems as though there were a lot of call buyers last week pumping up the value of the options.  As a result, the value of the December calls haven't really reacted to the futures rally.  Nonetheless, I would hang on to them as they could begin looking much better. 

We are looking for a rally to 895 in the December S&P and about 8,700 in the Dow.  the NASDAQ could see prices as high as 1228 by the end of the week.  Remember, Thanksgiving has been historically bullish for stocks!!

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 –

November 12 - Our clients were advised to buy the December e- mini S&P 500 1030 calls for $6 in premium or $300. 

November 19 - If you are willing to take on the risk, the premium is looking attractive in puts.  I like selling the December e-mini 575 put for $10 or better.  This is equivalent to $500 and has a breakeven point of 570.  Risk is unlimited below 570.

·         This would have been filled on Friday, we recommended buying it back for $3 or less on Monday (you should still be able to get this price or better tomorrow).  Assuming a fill at $10 to get in and $3 to get out, the profit would be $350 per contract 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 –

November 18 - There is a lot of premium in the puts, it is scary but selling seems to be a good call.  I like selling the December mini- Dow 6000 puts for 100 or better.  It will take additional weakness to get this filled. 

·         This would have been filled late last week. 

·         Place an order to buy this option back for 30 or better (don 't get greedy, if you can get out for a little more you should take it). 

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.