January 16th, 2009

Option expiration and holiday trade left indices mixed. 

The equity markets began the day swiftly higher, but at one point traded equally as swiftly lower.  Fundamentals continue to weigh on trade and Bank of America's first posted loss in 17 years added fuel to the bear camp.  In our opinion, yesterday's sharp reversal was triggered by short covering and buy stop running.  While there may be some additional room for the indices to move on the upside, the market will need some fundamental backing to break major resistance levels near 888 in the S&P and 8,550. 

After reporting a quarterly loss and receiving a lifeline from the government to the tune of billions, Bank of America rightfully slashed dividends.  The largest U.S. bank is struggling to absorb Merrill Lynch and the divisions losses of $15.31 billion.  Citigroup on the other hand is scrambling to shed troubled assets and split into two divisions in order to survive.  Clearly, banking news didn't bode well for financials or capitalism in the face of a Nationalized banking system. 

The trading floor will be closed on Monday in observance of Martin Luther King Day but the indices will be trading an abbreviated electronic Globex session.  We don't recommend having open futures positions, if you do don't take the shortened day for granted.  I am still having nightmares regarding last year's MLK weekend in which the futures opened limit down (70 points) on the Sunday night before the holiday.   Keep in mind, that at that point a 70 point day in the S&P was unheard of and while many Americans were enjoying their day off without knowledge of what was going in on in the futures markets (cash equities were closed) I was in full panic mode as we had clients short put options.  Adding to the dramatics, the Tuesday following the holiday the Fed announced an emergency rate cut and the market rallied sharply to blow out the shorts (and likely many accounts).  By the way, the pre-market selling has been blamed on a rogue trader from Societe Generale that triggered a global sell-off. 

We see a continuation of the short covering rally going into the Obama inauguration, but have doubts as to whether the move will lure enough buying interest to bring the markets back to levels seen earlier this month. 

Have a great three-day weekend!

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 –

January 15 - If you took our advice in yesterday' report to sell the February e-mini 630 puts for $8, we recommend being quick to take a profit.  It may be possible to buy it back for $2 or $3 tomorrow.

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.

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.