February 27th, 2009

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Equities avoid early morning meltdown, but rough afternoon 

When traders turned on their computers this morning, the financial markets appeared to be fighting what could have turned out to be somewhat of a meltdown.  With broad based indices at or near their November lows on a Friday morning, it isn't hard to imagine panic selling to cascade into a sharp decline. 

The original selling came on the news of the U.S. government taking a large stake in common shares of Citigroup.  Wall Street doesn't look favorably toward government intervention in business and any form of nationalization that may follow.  Shares of Citigroup plunged anyway suggesting that market participants are questioning the government's ability to properly manage the bank. 

As if Citigroup woes weren't enough, the U.S. economy shrank at an annual pace of 6.2% in the fourth quarter.  This was worse that the already dismal expectations. 

On a side note, the Dow Jones Wilshire 5000 index, one of the broadest measures of the U.S. equity market, id down over 50% and $10 trillion from the October 2007 high.   

We were right to suspect some selling in today's session but slightly underestimated the magnitude in the S&P.  As of Friday's close, our downside targets of 7,000 in the Dow, just under 1,100 in the NASDAQ and 735 in the S&P appear to be trying to hold.  However, I am unwilling to try to pick a bottom at this point.  I prefer to see how things open up on Monday.  Support in the S&P looks to be near 725 and again near 712.  Dow traders may see a slide to 6,930ish. 

Should we see strong selling in early trade, I may favor selling puts against the move.  Also, the increased volatility should allow for a good opportunity for ratio put spreads...stay tuned. 

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* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

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 –

February 18 - Short March S&P 660 puts at $8, looking for a quick rally to cover. 

·         Buy this back at $3 or better to lock in a profit of $250 minus commissions on a mini and $1,250 minus commission on a full sized contract.

·         February 26 - Our clients were recommended to take a profit on the March 660 puts this morning on the rally near an option premium of $4.20 for a profit of $190 per mini contract ($950 if you are trading the full sized S&P).

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.