April 20th, 2009

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Financials break the market

The same sector that allowed the market to rally nearly 30% in six glorious weeks drove broad based indices lower in Monday's session.  Despite better than expected earnings from Bank of America, the firm noted that it had set aside $13.4 billion to cover potential defaults.  Other big banks have also had upward revisions to the cash that they are setting aside to cover loans that may eventually become write-offs. 

Despite the convenient news stories that are said to have brought the markets down, we argue that perhaps it was option expiration and artificial buying as short call traders hedged holdings that buoyed the market last week.  In effect, without the option expiration blanket of security it was like the rug was ripped from underneath equities. 

On Thursday we had predicted a last gasp rally in the S&P to 872 and on Friday we got it.  In Friday's newsletter we noted that we thought that the highs were in and pointed out that the S&P could "trade back to the 820's before we know it" and here it is.  Going forward, things are a little less certain.  We see critical support at or near 828; how the index handles itself at such levels will determine the market's direction for the coming weeks.  Given the magnitude of the drop, the market seems prime for what will likely turn out to be a temporary bounce.  Nonetheless, we feel as though the rally has ended for now.  Should our analysis be correct, following a move higher that faces resistance at 851 we are looking for a continuation of the sell-off to bring the index to the mid 780's.

The Dow on the other hand has traded below critical support near 7,830.  Once again, this index is vulnerable to a dead cat bounce but it seems to me as though there is potential for the Dow to trade closer to 7,500 in the coming week or two. 

Critical resistance in the Russell lies at 443, and such levels will most likely be seen by mid-week.   

If you participated in the short S&P 940 call recommendation, our clients were recommended to liquidate this position today for $2.75 or better (most took $2.85).  If you are still holding this position, I suggest that you lock in your profit!

* 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 –

April 9 - We recommended to sell the April 940 calls for $8, but were getting filled between $7 and $7.75.

·         April 15 - We recommended that our clients with multiple positions lighten up by taking small profits with the intent of reselling them for better prices.

·         April 20 - Clients were recommended to take profits near $2.75, most fills were near $2.85. 

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

Russell Futures Recommendations

Flat  

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.

·         On April 9 we recommended to buy an April 1350 call against this position for about $375.

·         April 14 - You may have opted to take a profit on this position on today's dip, if not look to buy it back near 1275.

·         April 15 - Our clients were advised this afternoon to exit the NASDAQ recommendation below at or near 1296.  Assuming a fill at 1337 and 1296 the profit on the trade would have been $820 minus commissions and fees.  If you bought the 850 call for insurance, this works against your profit but hang on to it...it may pay off.

·         April 16 - I hope that you were able to liquidate the remaining long call position today.  If not, look to do so early tomorrow.

*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.