November 11th, 2008

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

Disappointing Toll Brothers earnings set the tone on Wall Street.

Stocks slumped on Veterans Day on thin volume and a lack of guidance from the Treasury markets.  U.S. Treasuries were closed in observance of the holiday; while equities were open it seemed as if many traders opted to take day off. 

As it turns out, taking the day off was a great idea.  Equities plunged in early trade on weaker global markets and another string of disappointments.  A market that relied on consumers to keep it afloat in recent years is now realizing that they have become the anchor.  Few industries, or even firms, have managed to avoid the spending slump.  Late on Monday, Starbucks reported dismal sales and first thing today Toll Brothers Inc. announced a sharp decline in revenues.  In light of weakness among automakers, it is fair to say that this recession has the potential to cut very deep. 

A story that hasn't received a lot of attention is the seemingly never-ending plunge in crude oil.  The decline in energy prices has been even more relentless than the rally despite pledges of production cuts by OPEC.  There are reports of unleaded gasoline priced well below $2 per gallon in certain areas around the country.  This provides a significant improvement in the spending capacity of consumers; unfortunately the benefits are being offset by other factors. 

Market speculation is being made especially difficult by Government interaction.  The desperate state of the financial markets has lured lawmakers around the globe into becoming active participants.  At any given time, there is risk of a bail out announcement or another stimulus package, etc.  Not only does this have a negative impact on the predictability of the markets, it has substantially increased the risk of participating.  This afternoon's trade was a good example.  A Tuesday announcement regarding a combined assistance effort involving the government and the mortgage industry seemed to be the driving force behind the equity market recovery.  The plan is intended to help troubled homeowners speed up the process of renegotiating their loans. 

I am still not convinced that the afternoon recovery will be enough to change the trend.  I see the potential for the S&P 500 futures to trade at or near 855 in the coming sessions.  Likewise, the Dow could easily see prices near 8,160 and the NASDAQ 1177. 

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 7 - These are underwater, but not out of the question.  Place an order to sell them at or near $15.

November 4 - Buy the November e-mini S&P 850 puts for $6 or less

·          November 6 - If you were able to get in on this trade, place an order to sell it at $27 or better (don't get greedy, if you can get out for a little less take it). 

·         November 7 - You should be out of this trade.  Assuming that you were able to get in for $6 and out for $25 you would have been profitable by $950 before commissions and fees.

Dow Jones Futures and Options Trading Recommendations

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

Position Trade –

Flat

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.