January 29th, 2009

Buy the rumor sell the fact

The high flying optimism witnessed in yesterday's session, was nowhere to be found on Thursday.  Swiftly lower European markets influenced trade in domestic markets and carried throughout the session.  Today's selling suggests that the recent rally may have been primarily short covering and buy stop running as we had suspected.  Accordingly, it is likely that there are will be sell stops to be triggered on the way down.  Without a catalyst to halt the snowball effect, we should see the indices slide back to the January lows. 

With the FOMC out of the way as well as the Obama stimulus package, the market has little to look forward to.  As a result, traders were forced to turn back to earnings and unfortunately it isn't a pretty site.  Earnings results have been broadly weak; companies from Eastman Kodak to Qualcomm reported fourth quarter losses.  Putting salt in the wounds of the bulls is news of Starbucks plan to lay off 7,000 additional employees.

Despite plummeting pricing, new home sales dropped nearly 15% in December.  This translates into the slowest pace on record and resulted in the worst annual results in more than two decades.  The median price of a home sold in December was $206,500, about 9.3% lower than last year.  For those of us in Las Vegas, things are much worse.  According to insiders, the inventory of unsold new homes is still too high and prices will need to depreciate even further before finding an equilibrium. 

The indices have essentially  erased yesterday's euphoria, and to us it seems like the theme will continue into tomorrow.  Although we are likely due for a minor bounce, we expect lower prices going into the weekend.  Ultimately, we are looking for the S&P to make its way down to 793.  However, we realize that markets don't go straight down.  In fact, we can't rule out a bounce to 860 or even 866 before resuming its move lower. Our downside target in the Dow is 7,725 but we see resistance near 8,240 and 8,330.  Assuming a close below 1206 on Friday, the NASDAQ should see 1136 by sometime next week as seasonal pressures and earnings should take their toll on the index. 

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.