November 13th, 2008

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

Volatility spike on Wall Street as Equities Turn the Corner

After three consecutive days of selling pressure, early morning trade on Thursday was destined for lower levels.  Weekly jobless claims and dismal Wal-Mart forecasts gave traders a reason to retest the October lows as many technicians have been calling for.  However, short covering and bargain hunting managed an impressive intraday turnaround which could extend well into next week. 

The Labor Department reported that the number of newly laid-off individuals seeking unemployment benefits jumped last week to the highest level seen since just after September 11, 2001.  Not surprisingly, the shrinking employment market has lead to a severe pullback in consumer spending.  Intel Corporation shaved a little more than $1 billion from sales forecasts and retail giant Wal-Mart also cut their expectations for the upcoming year. 

After penetrating the October lows without the end of the financial markets ensuing, bargain hunters jumped in with both feet.  The only thing that is scarier than being in the market is being out of the market as it makes its recovery.  Once the rally was triggered, buy stops were hit and panicked investors rushed to jump on the band wagon.  Ryan Larson, senior equity trader at Voyageur Asset management used the phrase "herd mentality" to describe the move.  He added, "We started going higher -- and you don't want to be the last one on the boat."

Don't underestimate the momentum behind a "bear market bounce".  A key reversal leaves the bears panicking to cover positions and the bulls panicking to enter.  In the absence of any significant surprises in tomorrow's data, the market seems poised to extend the rally into mid-next week.   I see significant resistance near 925 in the S&P but ultimately think that we will trade above 1000 again.  Similarly, 8,900 may act as a temporary ceiling in the Dow but short covering alone could bring us back to 9,660.  NASDAQ futures look primed for 1277 and possibly 1400 in the coming weeks. 

On Wednesday, we were recommending that our clients buy the December 1030 calls for about $300, so far so good.  We may be looking to offset these in the coming sessions with a nice profit. 

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 19 - Our clients were advised to buy the December e- mini S&P 500 1030 calls for $6 in premium or $300. 

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.

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.