The Market Feels Tired – Take Profits On Bullish Stock Options.

As reflected in the chart below, the market has fallen into a very tight trading range. After five months of extreme volatility, I am welcoming the breather. The earnings and economic releases are very light this week and chances are that quiet trading lies ahead. Yesterday, Alcoa kicked off the earnings season on a sour note when they reported that earnings dropped 50% year-over-year. This morning, Advanced Micro Devices projected revenue would fall below its expectations and it said it would cut its workforce by 10%. Pending home sales fell by 1.9% in February and that indicator is considered to be a reliable predictor of existing home sales. It is down 21.4% from February of last year and it is at its lowest level since inception (2001). Asian markets closed marginally lower and higher commodity prices were blamed for the move. European markets followed suit and they are down marginally as well. All of this news was enough to dampen spirits and the market feels soft today. We are reaching an intermediate resistance level at SPY 138. I feel that we might still get one more good run at the resistance level this week, but the market feels like it's getting a tired after last week's gains. Next week, we will hear from the major banks and that should bring the volatility back to the market. Traders are looking for signs that the write-downs are starting to slow. I believe we are going to be stuck in a trading range for at least a few months. The extremes of that range will be SPY 125 – 145. The majority of the time we will trade between SPY 130 – 140. Even though the financial stocks might have reached the write down trough, it will take time before we see top line improvement. Consumers are tapped out and rising unemployment will weigh on discretionary spending. The tax rebate will not provide the stimulus that politicians had hoped for. A large number of mortgages will reset in June and July and that will also restrict spending. This is a good time to take profits on long positions. We have already seen how the bid to this market can disappear. You don't want to be getting out of your bullish positions when we hit an air pocket. Given my opinion that we have passed the halfway point of the financial crisis, I prefer to buy the dips. I won’t short until we reach SPY 143 – 145. If we never get that high, I will stay in cash and wait for a pullback to get long.

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