See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

Election rally, but will it last?

Global equity markets rallied on hopes of an election rally in the U.S. and so far they have it right.  Domestic equities enjoyed a pre-election bid which relentlessly held steady throughout the trading day.  Similar to yesterday, the market simply brushed off weak economic news in anticipation of burying the uncertainty of the election and hopefully the employment picture later in the week. 

Crude oil rallied approximately $6 per barrel on the day, helping commodity stocks to recover as well as the broad market.  However, as the day pressed on investors seemed to grow weary of the upcoming events and long profit taking ensued. 

The markets are expected to be volatile in overnight trade as votes are being counted.  If at all possible, it is probably best to be sitting on the sidelines as the event, and thus price, risk will be elevated.   Despite history that suggests the markets prefer a Republican victory; many analysts are predicting that equities will continue to recover despite who gains control of the White House.  They site that the policies of both John McCain and Barack Obama will likely be guided and focused on the economy and ongoing efforts to thwart a financial system collapse. 

Some are going as far as to suggest that the bear is dead and the bull has been reborn.  Matt King, chief investment officer of Oakland based Bell Investment Advisors, noted "It's pretty typical of how bear markets end." He added, "The sto market recovers well ahead of the economy."

If you have been following this newsletter, you have likely come to the conclusion that more often than not I am a bull (after all, equities have a long term tendency to go up).  However, even I am not convinced that we can breathe a sigh of relief...quite yet.  I agree that we are in the process of bottoming and seasonal tendencies favor more prices stability but becoming complacent is a recipe for disaster. 

The S&P is approaching significant resistance at 1020 and again near 1035 and in all likelihood will suffer a pullback.  This could bring prices to the mid 900's and maybe even the mid 800's again.   I like the idea of trying to buy the e-mini 850 puts for about $6, the risk is low and limited but if this market does in fact turn around the implied volatility spike could be significant. 

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 –

October 29 - Clients were advised to purchase the November mini S&P 700 puts, fills were at or near $6 or $300.

November 4 -  Buy the November e-mini S&P 850 puts for $6 or less, it will take additional strength to get filled. 

Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.

 

Dow Jones 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

Swing Trade -

Flat

There is substantial risk of loss in trading futures and options.