February 3rd, 2009

See DeCarley's article on option selling in the bonus issue of Stocks & Commodities Magazine!

Positive trade, but bears still have the upper hand

Stocks drifted higher on Tuesday but we are having doubts as to the sustainability of any gains...at least before a retest of the January lows and maybe even the November lows. 

U.S. auto sales plunged in the month of January.  Economists were expecting weakness, but estimates turned out to be overly optimistic.  Ford reported sales down 40% while GM sales were down over 50%.  Toyota outperformed, but still experienced a 32% drop in sales.  Weighing on sales was a lack of fleet buyers such as rental car companies.  To put the percentages into perspective, Ford sold 93,060 vehicles in January 2009 compared to 155,832 in January of 2008.  Clearly, the abysmal sales will cut deeper than Ford and GM as the car makers are operating at overcapacity and will be forced to continue layoffs and plant closures with or without government money. 

On a positive note, the National Association of Realtors reported much better than expected pending home sales.  Its seasonally adjusted index rose 6.3% in December despite analyst expectations for a flat line.  Additionally, a few better than expected earnings reports by firms such as D.R. Horton Inc, UPS Inc., and Merck & Co. gave investors a shred of hope.  However, the event that seemed to turn sentiment was rumors of a merger between Bank of America and UBS. 

Until mid-day, Tuesday was a painfully sideways session on Wall Street.  Since Monday, the indices have been trading in a gradually tightening range.  This can only mean one thing, breakout. 

In such instances, the direction is typically dependent on fundamental events in Washington, on Wall Street and released economic data.  It seems as though there was ample time for stop orders to accumulate on both sides of the market; it was just a matter of time before something triggered the stop running and the market would make a move.  I think that is what we saw on Tuesday and acknowledge that there may be some moderate follow through buying tomorrow.  Nonetheless, the trend is down and we wouldn't want to fight it.  My sources and assumptions, tell me that there are a pocket of sell stops under 808 in the S&P and 7,800 in the Dow and it seems likely that they will be executed sooner rather than later.

We are still looking for the indices to head lower to our noted targets of below 790 in the March S&P, 8,246 in the Dow and 1135 in the NASDAQ.  However, it seems as though the markets have potential to creep a little higher before the selling resumes.  We see resistance in the S&P near 852, 8,246 in the Dow and 1259 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 28 - Buy the Feb S&P 760 puts for about $350.  **This recommendations was made in the text of the 28th newsletter but was accidentally referred to as March. 

·         January 30 - Clients were recommended to exit this trade in late trade on Friday for about double their money (some may have gotten a little more, some a little less). 

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 Option 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.