May 6th, 2009

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Stress test leaks relieve tension

Equities reacted positively to ADP's prediction of Friday's government employment report but it was leaking of the stress test results that kept the rally intact.  The early flow of banking information wasn't necessarily bullish but it was enough to relieve much of the tension going into tomorrow and likely enticed some short covering. 

In yesterday's newsletter we mentioned that we couldn't rule out one last push higher, and today's rally may have been it.  920 marks considerable resistance in the S&P, but above that we could easily see 940 if the circumstances regarding the stress tests and employment report are right.  As of now, we aren't expecting 940  but simply acknowledging that it could happen.  Therefore, any position or day-trading venture should be considerate of this possibility in the coming days. 

We are still favoring the theory of a market correction at some point going into the weekend.  It seems as though the news events may be treated in a buy the rumor sell the fact manner as the current rally has likely stemmed from the possibility of positive news.  Don't forget that the markets are forward looking and if investors start to feel as though all of the good news is out they will begin taking profits.

The market are looking toppy, but that doesn't mean that they can't creep higher before reversing.  A weekly chart of the Dow suggests that 8,900 is an eventual possibility but for now we think that 8,500 will pose problems for the market.  Similarly, the S&P could see 940 but the odds seem to favor a near-term pullback before reaching the objective.  Keep an eye on the Russell, it must hold below (close below) 520 to halt the rally. 

If you are long futures, you should be tightening stops.  If you are trading options, buying puts and/or selling calls is the way to go.  With that said, bears must be willing to ride out the potential move to 940. 

For a limited risk play, we like buying the May 875 put for about $6.

If you are interested in learning more about these types of trading strategies, join us on May 7th at 4:30 pm for a free online educational webinar.  Register at www.NYIF.Com

* 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.