May 4th, 2009

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Better data, better market

After being described as a patient in critical condition for much of the first quarter of 2009, the U.S. economy is showing glimmers of a recovery.  Futures were trading mixed to slightly higher in early morning trade, but a better than expected home sales number sparked a large rally in equities.

Pending U.S. home sales posted their second monthly gain and beat market expectations.  According to the National Associate of Realtors, the index of pending sales for previously occupied homes rose 3.2% to 84.6.  On the same note, the Commerce Department reported that construction spending rose .3%.  This was the best reading since September of last year, despite analyst forecasts for a negative number. 

According to historical statistics, Tuesday is neutral but Wednesday and Thursday are both bearish days.  We still believe that the June S&P could see 940, but wonder if a temporary pullback won't be seen going into this Thursday's bank stress results and Friday's employment data.  After all, 900 should present significant psychological resistance. 

Keep in mind that much of this rally has been at the hand of financial stocks.  Therefore the results of the bank stress tests could make or break the broad market in the near-term.  With that said, the stock reversal was founded on arbitrary comments made by a banking executive suggesting that the industry could actually be profitable despite the challenging environment.  Perhaps the market has already priced in a potentially optimistic view of the bank tests.  Accordingly, even if we do see a post stress-test rally it could give way to selling pressure shortly after. 

This afternoon we were recommending that our clients sell calls against the S&P.  We were selling the June 990 calls for about $7.25 in premium.  Normally we like to sell options in the front month, but there simply wasn't enough premium based on our possible scenario of a move to 940.  Although we think that such a move will be post-correction, it didn't seem wise to push our luck.  Ideally, we will get a chance to buy this position back on a dip (at a profit) and re-sell it if the market does rally to our target. 

Word has it that there are several stops above 902, therefore near-term resistance should be found near 905ish and again near 920.  On the downside, we have support at 885 and 870 with a possible correction to 855 later this week. 

On Friday we pointed out Dow resistance near 8,400 and today's high wasn't too far away.  However, the next ceiling should be found near 8,440.  We think a temporary pullback is looming which could extend to just above 7,800.  We still see the next major resistance area on the NASDAQ near 1495 but if you are bullish this market you should tighten stops, as a sizeable pullback (1350) seems necessary.  Additionally, we feel as though the June Russell futures could see 520 but overbought conditions leave the risk to the downside.

* 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

Russell 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.