December 29th, 2010

ES futures bulls grind, bears wine

It seems to happen every year...and in fact, we have been noting the holiday grind higher in this newsletter.  However, each year it is nearly unbelievable.  Traders typically take off this time of year to bask in their glory or mull over their mistakes; nonetheless, they aren't involved in the markets and that tends to favor a melt-up. 

Almost as common is the tendency to see modest market declines  after the New Year.  This comes as investors look to lock in profits and defer their tax liabilities to the 2011 tax year. 

Another seasonal pattern to keep an eye on is possible weakness in the Euro which kicks into gear in early January.  If this tendency emerges, it could promote the idea of weaker stocks in the near-term.  According to MRCI's data, the Euro and the S&P 500 futures have a positive correlation of 70%.  If this continues to be the case, pressure on the Euro could be the excuse traders are looking for to send the stock indices into corrective mode.

Not much has changed since yesterday, here is our overall "take": 

After all, it is quite possible the market has gotten too long and that leaves the indices ripe for a large correction.  Therefore, playing from the bull side of things might be a bit greedy.  On the other hand, the bears should take it nice and slow.  We like the idea of being bearish on rallies but can't rule out another run up before coming down.  For instance, we see resistance near 1160, but the chart suggests a spike high could print in the low 1170's.  If you are trading the NASDAQ, similar levels are 2240 and 2255ish.  In the Russell, this equates to 795 and 802.   

According to the Stock Trader's Almanac tomorrow is statistically bullish with increase in the S&P about 70% of the time.  Friday, however, is slightly bearish.   

The end of the official Santa Claus rally is Tuesday the 4th.  With this, and other things in mind, it feels as though any correction (if it occurs) will take place in the New Year.

**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

Position Trade -

December 10 - Clients were advised to sell the January S&P 1280 call, fills were reported from $6 to $7.50 in premium. 

Carley Garner

*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.