January 14th, 2009

Retail sales shocks equity bulls, long squeeze...

For the sixth day in a row, equities tumbled on concerns over the economy and the banking crisis.  Salt was applied to the wounds this morning on the announcement  of the most recent retail sales data.  Although dismal numbers were expected, the Commerce Department surprised the market with a draw of 2.7%.

Under more normal circumstances, the Treasury bond rally and corresponding incredibly low yields would be a bullish factor for stocks as it indicates that credit is cheap.  However, as we all know credit isn't flowing and low yields are nearly meaningless in this environment.  Also, yields in corporate bonds are at a polar opposite of those in government backed securities leaving it difficult for firms to raise much needed cash.  None of this is new information, but it is often helpful to take a step back and look at the big picture. 

It seems as though, as dire as things appear to be, government intervention into the markets via monetary policy and bailouts will eventually lead to a recovery of the most important aspect of the markets; confidence.  Accordingly, traders must make a conscience effort to avoid being overly bearish.  It could be months down the road, but once investors begin to see the light at the end of the tunnel and sidelined cash makes its way to equities there could be a large rally.  The late comer bears, or those that failed to hedge their risk could find themselves in the wrong trade at the wrong time. 

Likewise, bulls trying to pick the bottom in hopes of a recovery to the 2007 highs will likely be disappointed.  This is a traders market, taking a piece out of the middle of any move should be the goal, leave homerun hitting to those with deep pockets and nerves of steel. 

The major indices have traded through our projected downside targets and may be setting up for a corrective reversal.  I see potential for short covering to trigger a rally in the S&P to 888 in the coming days.  Likewise, look for a potential rally to 8,600 in the Dow. 

If you have the capital and the risk tolerance, you may want to consider selling put premium.  I am looking at the February e-mini 630 puts for $8 or better, this is equivalent to $400 per contract and will take additional weakness to get filled.  You may also want to look at a lottery ticket play using the January call options, for example the 860 e-mini S&P calls are about $250.  However, I can't make a concrete decision until I see what things look like tomorrow.  Call me for details. 

If you like our support, resistance and target numbers you should consider trading with us (if you aren't already), we have similar intraday analysis that is communicated to our clients upon request by email, instant message and phone. 

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 –

Flat

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

Position Trade –

Flat

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

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