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September 15, 2011

Now that's a squeeze!

We had a feeling the shorts would be feeling the pain this week as the market squeezed them into the September expiration; trade didn't disappoint.  Except perhaps for those on the wrong side of things (possibly UBS rogue trader Kweka Adobili?).  Just when it looked like the world was coming to an end, the December S&P rallied approximately 80 handles from the Monday morning lows to the Thursday night highs. 

As good as the markets look, we have to approach tomorrow with caution simply because we are headed into what could be an eventful weekend in Europe.  Also, markets are sadistic and have a tendency to behave in a manner that will inflict the most pain to the most traders and selling off after expiration would do just that. 

As mentioned in yesterday's newsletter, quarterly futures expiration (early tomorrow morning) has a tendency to mark the short-term highs of a move.  All of those traders holding short September e-mini S&P futures until the last minute could end up offsetting near the highs (hopefully, they have enough margin to roll into December).  Similarly, short call traders that have suffered on the way up have simply run out of time.  Watching the market pull back tomorrow or Monday would be torture, but that is exactly what has happened historically in similar situations. 

Although we are neutral to bearish in the coming sessions, we still think the intermediate-term trend will continue to be up.  If you are "long" the market with futures or options, we like the idea of lightening up, or taking profits completely, with the intention of trying to get in at better prices if seen. 

In yesterday's newsletter we stated "...bears might look to enter trades near 1190 and then again near 1204 (more reliable)."  The original resistance triggered a moderate pullback that should have worked well for aggressive day traders and the second resistance area was near the high of the day and occurred on the close.  We still feel like it will act as valid resistance going into tomorrow's trade...look for a pullback (possibly) overnight, or more likely early tomorrow morning as the September contract drops off the board.  Intraday support lies at 1188 and then again near 1174 in the December S&P future. 

In a longer-term view, we feel like this move will eventually see 1224ish in the S&P, and possibly 1244.  This would put the NASDAQ above 2300 and the Russell near 740.

* 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

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*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.