January 26th, 2009

Choppy, directionless equities.

After a wild trading day on Wall Street, the major indices managed to close well into positive territory.  However, if history has anything to do with it the markets could struggle to hold gains into tomorrow's session. 

Monday's buying interest was sparked by Pfizer's $68 billion proposal to acquire Wyeth.  Investors were delighted to learn that there were at least a few firms with enough capital to conduct "business as usual".  Additionally, the market was relieved to learn that the National Association of Realtors data showed improvements, rather than contraction, in existing home sales. 

The excitement was offset by news of Home Depot layoffs, Caterpillar labor cutbacks and the fact that it took a massive plunge in home prices to entice moderate buying. 

Since the middle of January, we have seen S&P trade battle between running buy stops and running sell stops but the overall tone has been negative.  We respect the potential for a rally to reach levels as high as 867 in the March S&P and 8,410 as shorts seem to be slightly too abundant.  Nonetheless, we are still relatively convinced that a retest of the November lows are in store for the major indices.  Thus, approaching the markets with the mentality of selling rallies seems preferential.  With that said, caution is warranted in that we have witnessed a handful of swift rallies from similar levels. 

I wanted to point out a typo in the last newsletter, we stated that there were significant sell stops in the S&P through 845 or so, but the buying may begin drying up from there.  This should have read, buy stops in the S&P...So far, this prediction has been true. 

Our next downside target in the S&P is 792, but resistance can be found near 867.  We are expecting the March Dow to make its way to 7,750 and see resistance near 8,420.  1,133 seems to be a likely target in the NASDAQ.

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.