The Action Will Pick Up Tomorrow. Wait For A Breakout Or A Breakdown!

March 30, 2010
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market continued to grind higher. The gains were marginal and the volume was very light. We have fallen into a very tight trading range the last 10 days and the market is searching for the next catalyst. There are many economic releases this week, none greater than the Unemployment Report on Friday. The expectations are high and analysts expect to see 200,000 new jobs. The market does not want to see all of the jobs come from government spending (census and stimulus). If that is the case, the reaction will be negative. However, if the private sector starts to expand, the market will rally. Tomorrow, we will get the ADP employment index. It completely focuses on the private sector and it will drive trading activity. My gut tells me that either way, the Unemployment Report will result in some selling. If the news is good and private sector employment is rising, the market will gap higher (perhaps 10 S&P 500 points or more). Inflation worries will surface and the Fed will be forced to raise rates in the near future. Friday's early rally will reverse and the ensuing pullback will be temporary (SPY 115). As long as the economy is recovering, higher interest rates will not impede this rally. If job growth is smaller than expected, the market will sell off. It is likely to find support at SPY 112. Traders will support the market and they will expect to see job growth in April. This is the fourth month in a row where job growth has been expected and it has not materialized. Yet, optimism is high and the market keeps clawing its way back. The market will rebound and interest rates will remain low. Earnings season is right around the corner and that will also lend support. One number will not drive the market in either direction. Private sector job growth over a number of months or job losses over the same period are needed to produce a sustained directional move. In the last four months, jobs have been flat and the market does not know which way they will go. That's why we are trading in a tight range. With every passing month, I get more bearish. The problems in Europe will escalate and we know that major bond auctions will be held by the PIIGS in the next four months. Government stimulus will have run its course and that will weigh on job growth. Severance pay and unemployment benefits will start running out and consumption will contract. States have run out of money and they are laying employees off. These influences will take a few months to fall into place. There was a very good article on CNBC's site this morning about state debt. They conclude by saying that states will not default. If you read between the lines, you can also conclude that state debt will weigh on the economy. Click the link below to read the article. State Woes This is not a trader’s market. Option implied volatilities have collapsed and it doesn't make sense to credit spread since the rewards are small. It also does not make sense to buy puts or calls until we break out from this range. If the next move is higher, I will only buy a handful of calls and I will limit the number of positions so that I can get out quickly. If the market breaks below SPY 115, I will buy puts. If SPY 112 support holds, I will take profits. If not, I will add to my positions expecting to see a decline down to SPY 108. It's hard not to trade. In this type of market, your best trade is the one you don't execute. Stay disciplined, be patient and research your longs and shorts so that you are ready. The next big move is around the corner. If you are not preoccupied chasing nickels and dimes, you will have a clear perspective and you'll be ready to attack when the opportunity presents itself. image

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