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August 19th, 2011

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Jackson Hole repeat for stock index futures?

Stock index futures continue to be plagued with massive volatility and what seems to be a "buyers strike".  Despite several attempts at rallies, traders simply weren't willing to hold large equity positions into the weekend.  Adding to market volatility was expiration of the August options. 

The global financial markets have fallen into a vicious circle of bearishness that, once started, can be difficult to thwart.  For instance, traders in the U.S. look at the European markets for guidance, if the indices are down significant across the pond domestic traders tend to be heavy handed.  Similarly, Asian markets watch the U.S. session, and if they close lower it dramatically hinders the odds of a positive open there.  Eurpeans, on the other hand...look to Asia.  You can see how the phenomenon feeds on itself and can turn a normal market correction into a full-blown tragedy. 

Being an optimist at heard, I can't help but feel as though the market will eventually work through its problems and recover.  However, the near-term outlook is highly uncertain and we are probably in for more pain before things get better.  Although we feel like current action is an attempt at a bottoming process, it seems the September S&P is destined for a retest of the 1100 area and maybe even the 1077 low.  Look for support in the Russell near 620 and in the NASDAQ at 2007.

From yesterday, but still relevant:

It seems silly to see such market volatility in light of the recent blockbuster earnings season, but this is the world that we live in. 

I think it is fair to say that most of the market turmoil as of late can be attributed to Europe, but traders fear that chaos overseas could drag us down.  In fact, a bulk of today's selling was done on a mere rumor of a troubled bank across the pond.  Supposedly, "someone" borrowed funds in what seemed to be a hasty manner from the ECB's discount window. 

As a result, the markets nearly priced in another Lehman collapse despite widespread belief that the banking system is much more healthy at this juncture...I seem to remember European bank stress tests in the recent past that went relatively well.  However, the fear is that the current "crisis in confidence" could turn nothing into something very quickly.  After all, the Lehman and Bear Stearns collapse materialized very quickly as their lines of credit froze and clients ran for the hillls.

These markets are not for the faint of heart and certainly pose challenges for traders.  Despite internet chat rooms filled with self-proclaimed beneficiaries of the stock market crash, we are hearing the opposite from many professional traders and desks.  Hedge fund blow ups have been in abundance and similar to the 2008 debacle, margin calls trump logic and become a reason to liquidate indiscriminantly. 

* 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.  Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Please note: An e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini.  Unless otherwise noted, profit and loss will be based on the mini version.

Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

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*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.