Up Trend Broken – Bearish Option Expiration Bias Forming!

The market is continuing its slide from last week. The horrendous Unemployment Report is still weighing on investor's minds. The unemployment rate stands at a 16 year high and it spiked to 7.2%. Most economists expected us to top out at 8% during the sub-prime trough. With the current rate of acceleration, they are revising their estimates and double-digit unemployment seems likely. President-Elect Obama has asked Bush to request the remaining $350 billion of TARP from Congress. It takes 14-days for Congress to vote on it and it means that when he takes office, Congress should expect this as one of his first initiatives. We will get a number of economic releases this week (PPI, CPI, Philly Fed, and Industrial Production), but I don't believe any of them will have a long-lasting affect on the market. Initial jobless claims could spike materially. Many analysts believe that workers who were laid off did not apply for unemployment during the holidays. The market has broken horizontal support at SPY 92 and it breached the uptrend line from November when it traded below SPY 90. We are in a gradual drift lower and that's not a good sign. As we approach the low end of the one-month training range, a negative option expiration bias is probable. If we break horizontal support at SPY 85, option expiration sell programs will kick in and the selling pressure will mount. There are a few earnings releases this week, but the vast majority will start next week. Financial stocks dominate much of the early action and they are likely to determine market direction. Much of the bad news has already been factored in. However, Goldman Sachs believes that an additional $1.6 trillion in losses will take place in 2009. They also believe that additional Federal assistance will be needed. That is consistent with Obama's request for the remaining $350 billion in TARP funds and he might already see the warnings signs. There is a decent bid to the market at lower levels and there is not a shortage of sellers at higher prices. Since December, the market has moved from SPY 85 to 92 - four times. Choppy action should be expected the rest of the week and perhaps for the rest of the month. I stated last week that if the market breaks SPY 90, you should buy back your short put positions. I am buying back my puts on stocks that have broken support. I do have many far OTM puts that I expect to expire worthless this week and I will keep those positions on with a stop. They were initiated more than a few weeks ago and the stocks have distanced themselves from the strike price. A new put writing opportunity should be right around the corner and earnings season will help. Focus on stocks that released their earnings, met quarterly estimates and that reiterated their 2009 guidance.

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