January 28th, 2009

It's been nice, but will it last?

Stocks have rallied sharply in recent sessions leaving many traders wondering whether or not the rally can sustain itself.  For a little over a year, the answer to that question has always been no.  Until the market can prove otherwise, it seems like the safest bet is to assume that this will continue to be the case for now.  While I strongly believe that a long-term equity market bottom is looming, I am not convinced that it is already in place. 

As much as I would love to open my 401k statements and see green, the major indices are at or near major resistance levels and could very well be in store for another retest of the recent lows and maybe even the November lows that we have all been touting.  Based on conversations with market insiders, there are rumors of large institutions selling into this rally, and I wouldn't want to be the on other side.  If you are long with either options or futures, we recommend taking profits.  Aggressive traders may even want to position themselves on the short side of the market.  Those with less risk capital or less fortitude in regards to being exposed to market risk may look to buy the March e-mini S&P 760 puts for about $350.  The risk is limited to the premium paid and the profit potential is unlimited.  Although it will take a large move for a substantial profit to materialize, it seems as though the risks are worth the potential rewards. 

The bulk of the rally occurred as short traders appeared to be covering positions ahead of the Federal Open Market Committee announcement but the buying didn't end there.  Post Fed, the market found new buyers as optimism over bank bailouts and the governments dedication to repairing the economy lured pockets of investors.  Don't forget that the only thing scarier than being exposed to a crashing market is missing the rally.  Sidelined investors don't want to watch the bus leave the station without them. 

Despite being overall bearish, we acknowledge that we may see spillover buying early in tomorrow's session.  With that said, it seems relatively likely that we will also see a wave of buyer's remorse that could lead to lower indices in the next few trading sessions.  Keep in mind that many buy stops were taken out in the last few trading days, and there are likely just as many sell stops lining the downside.

Resistance in the S&P lies at 876 and again at 890, but we are leaning toward a move toward support near 793 in the coming weeks.  Dow traders should be aware of resistance near 8,420 but we feel as though failure at or near this level will lead to selling pressure all the way to 7,750. 

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.