January 2nd, 2009

Equities soar despite ISM.

On the heels of the weakest consumer confidence data in history, stocks enjoy an optimistic start to 2009.  However, the question in the back of everybody's mind is whether or not a rally sustained on light volume will be enough to return confidence to the equity markets. 

The market rallied despite the lowest level in 28 years in the ISM manufacturing index.  The December ISM was calculated to be 32.4, a few points lower than expectations and well below the 50 mark which indicates contraction.  Investors already low expectations for economic data has paved the way for higher stock prices in the face of weak numbers, but one has to wonder how long this can go on.  Not all analysts are skeptic, "We like to see the markets shrug off the bad news.  That typically is a sign that we're forming a bottom," stated Eric Thorne, and investment adviser at Bryn Mawr Trust.

I am awaiting trade early next week before I am comfortable in making any bold predictions.  However, the major indices seem to be at or near relatively meaningful resistance.  Nonetheless, tighter volatility in recent weeks may have been what the market needed to shake out some of the shorts.  A weekly chart in the S&P suggests that if buy stop running begins to take over trade at some point next week we could get a swift move above 1,000 before the market finally succumbs to weakness once again.  Without the short squeeze scenario, the indices may struggle to get much higher than current levels.  We see 930 as resistance and a strong possibility of back and fill trade early next week with support at 883.

The Dow is also up against resistance and may see some selling pressure early next week.  Support lies near 8630 with resistance at 9,180.  NASDAQ traders may see prices retreat from overbought levels.  The first area of support is 1203.  Once again, I have a sneaking suspicion that short covering could take this market much higher.  Look for the possibility of a quick rally to 1408.

Don't forget about the January barometer; you have likely heard the adage, "As January goes, so goes the year".  According to the Stock Traders' Almanac, the January barometer has an accuracy rating of approximately 75%. 

It was also noted that (prior to 2008) the last 36 years in which the S&P was up in the first five trading sessions, full-year gains followed in 31 of the years.  On the other hand, the Stock Trader's Almanac also states that the 21 years in which the first five days were down were mixed with 11 up years and 10 down. 

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 –

Flat

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

Position Trade –

  Flat  

*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.