January 27th, 2009

See DeCarley Trading in the March Issue of SFO..."Trade Like a Girl"

Stocks rally ahead of FOMC

A handful of positive earnings kept the market afloat on Tuesday.  Some of those positing quarterly profits were U.S. Steel, American Express, Netflix, Inc. and Texas Instruments Inc.  In oversold market conditions, it can sometimes take little to excite the bulls and scare the bears. 

Crude oil tumbled sharply too continue the downtrend as more job cuts are announced and lagging consumer confidence threatens energy demand.  The day's losses have essentially erased last week's gains and look to be headed below $40 per barrel.  Lower energy prices will arguably be the largest catalyst for an economic recovery, but without investor confidence it seems as though the drag on commodity stocks is outweighing the economic benefits.  This will eventually reverse itself, but will likely be later in the year. 

According to Bloomberg news, the commercial paper market is steadily improving and the part that the Fed must play in retaining liquidity is diminishing.  However, the bad news continues to plague stock trade.  The Conference Board's index of consumer confidence reached an all time low of 37.7 in January and the Standard & Poor's Case/Shiller Index showed that home prices are down about 18.2% in November from a year ago.  Additionally, while the Richmond Fed's regional manufacturing index improved, it still suggests contraction. 

It isn't impossible for the markets to rally on bad news, but it doesn't seem sustainable either.  With that said, we are of the opinion that the major indices have a bit of room to move on the upside but have serious doubts in regards to their ability to hold gains.  We believe that short covering alone, could bring the S&P to 867 and the Dow to 8,420 but are of the opinion that the bears will be rewarded for taking risk at such levels. 

The NASDAQ is facing considerably weaker seasonal pressures than that of the Dow and the S&P.  Accordingly, the index may struggle to post gains alongside the broader based indices.  Look for resistance near 1203 and again near 1270.

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 –

January 15 - If you took our advice in yesterday' report to sell the February e-mini 630 puts for $8, we recommend being quick to take a profit.  It may be possible to buy it back for $2 or $3 tomorrow.

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.