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S&P 500 futures recover from payrolls selling

December 3rd, 2010

The S&P has rallied 54 handles from Tuesday's low but, as we mentioned yesterday, the buying seems to be largely attributable to short covering as opposed to speculative longs.  The size and speed of the rally smells of buy stop running and panicked shorts gunning for the exits (each dip has been met with buyers looking to cover shorts at slightly better prices).  Don't forget, stop orders become market orders once the stated price becomes part of the bid/ask spread.  By nature of the order type, stop running can often go unattested and can result in quick and unrelenting gains in prices.  Ironically, traders going short are often propelling the rally by placing tight stop orders.

If this assumption is accurate, the rally could have room to run as latecomer bulls look to chase performance.  Unfortunately, the market tends to rally just enough to lure the last of the cautious investors in...this is when you want to be a bear. 

We can understand where the bear camp is coming from; after all, commodity prices are moving up and this pinches the wallets of consumers, today's employment report showed stagnant growth in the jobs sector and there are undeniable debt woes overseas that could cascade the global financial system if gone unchecked.  However, we feel like these factors won't be focused on until much later in the year or even early next year. 

In the near-term, we see a weaker dollar keeping the stock rally alive.  We also can't deny the seasonal tendency in stocks that suggests traders might  be better off playing the month of December from the long side.  In yesterday's newsletter we were pointing out resistance in the S&P 1228ish, and that turned out to be a good place to play the downside. 

However, a strong close in the Euro, gold and crude oil have us looking for more gains on Monday.  We see resistance in the S&P near 1232ish, with the next area being 1240 which is possible a little later in the week.  Depending on how things "feel" we could be looking to temporarily play the downside near the noted resistance levels.  If you are trading the NASDAQ look for 2206 and 2255ish as similar levels.  Russell traders should look for 763 and then 780.

* 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.  Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Please note: An e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini.  Unless otherwise noted, profit and loss will be based on the mini version.

Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

November 23rd - Clients were advised to sell the January S&P 1040 puts for 8.25.  This order was filled on Monday November 29th. 

December 2 - Clients were recommended to buy back their short 1040 puts near 3.75 to lock in a quick profit of $225 per contract on a mini, or approximately five times that amount on a full-sized. 

*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.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.