April 9th, 2009

If you like this newsletter, you will love my book "Commodity Options"!  Now available at any major book outlet.

Positive earnings trigger short squeeze

Stock market bulls will likely have more than just a "Good Friday"; however, the bears may have a rough holiday weekend.  My clients were advised to sell S&P call options into the late day rally, so I will be biting my nails going into the Sunday afternoon open.  The original recommendation was to sell at $8 in premium, but depending on some discretion of the client fills ranged from $7 to $7.75.

Light volume and a surprisingly positive earnings report from banking giant Wells Fargo triggered a massive short covering rally to post the fifth consecutive week of gains for the major indices. 

More so than the fact that a bank has managed to post a profit (with lots of help), the likely culprit to the massive buying was short covering in financial stocks.  Believe it or not, coming into today there were reported to be very large speculative short positions in bank equity securities.  I am not saying that the banking sector is healthy, but in my opinion it doesn't make sense to sell short a stock that is valued under $5.  After all, the profit potential is limited (occurring if the share price goes to zero) but the risk is theoretically unlimited.  I am not a stock broker, or even a stock trader but it seem as though there are better ways to make money.  I will admit that option selling faces the same obstacle, but I believe that option sellers will normally experience far less volatility in their bottom line.

While I respect the possibility of some overflow buying early next week, I also believe that the buying will dry up.  Don't forget that stocks tend to sag just before the April 16th tax deadline as investors liquidate assets for cash.  If the Euphoria continues, the S&P has room to move to 867 or even the February highs just above 870 but at some point in the near future I think that we will see 800. 

I wouldn't be surprised to see 8,100 or even the 8,160 (the same area that we have been touting for weeks) early next week, but expect an eventual rollover that could bring the Dow back to 7,630.

If you took the NASDAQ recommendation below, we see resistance near 1347 but still feel comfortable with the downside.  If you are nervous, you may want to buy an April 1350 call for insurance, they are running at about $375.

Have a nice Holiday!

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

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 –

April 3 - If you followed our recommendation, you would be short a mini NASDAQ from 1337.

*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.