Day Trade This Bounce and Get Ready For Another Round Of Selling Next Week!

January 26, 2010
Author: Peter Stolcers, Founder of OneOption

Traders have digested last week’s news and some of the nervousness has come out of the market the last two days. The market was able to find support yesterday and after testing the downside this morning, prices have rebounded. Traders are still worried that Congress wants to get actively involved in the Fed's decisions. Ben Bernanke is likely to be reappointed, but no one thought it would be this much of a struggle. The FOMC meets tomorrow and it should be a non-event. They will keep rates low and describe improving conditions and a fragile recovery. Overseas markets were weak when Standard & Poor's downgraded Japan's credit. Traders are also worried about China's banking system since they are putting the brakes on new loans. Europe's credit concerns eased a little when Greece was able to secure capital over the weekend. It came at a high price, but at least there was some demand. Global credit concerns are starting to heat up and if a major market correction is in the cards, this will be the source President Obama is in damage control mode after Democrats lost a Senate seat in Massachusetts last week. He is trying to appeal to Republicans by instituting a selective price freeze. He recognizes that our debt is spiraling out of control and he wants to give it some lip service during his State of the Union address. This should mean that another stimulus program is out of the question. Earnings have been decent and more than a quarter of the S&P 500 companies have reported. Over 85% of the companies have reported higher earnings and 65% of companies have reported higher revenues. In aggregate, year-over-year earnings are up 192%. This sounds amazing, but it is largely priced in to the market. A year ago, we were headed for disaster and the economy contracted instantly when credit dried up. As a result, the comps are very easy to beat. Earnings for the rest of the week will include all sectors and we will get a broad-based view of where the economy is heading. Until I see oil demand pickup and increased shipping activity, I'm not buying into this recovery. Many analysts expected December's Unemployment Report to show growth. Instead, we lost 85,000 jobs. That does not include the 600,000 workers that were conveniently left out of the number because they have given up hope. Since then, each initial jobless claims number has been worse than expected. If Thursday's jobless claims exceed 460,000, we will see a market decline. Traders will get nervous ahead of next week's Unemployment Report and two bad months in a row will raise fears of a double dip recession. I am not looking for a dramatic top and a freefall. Earnings are strong and interest rates are low. In order to see a sustained decline these conditions (in combination with softer economic numbers) will have to change. Now that some of the optimism has been flushed out of the market, we are likely to see a bounce. Once this rally runs its course, we will get a feel for where resistance lies. Profit takers will be a little more aggressive and a warning shot has been fired. Longer-term shorting opportunities will set up in a month or two. Shorter-term bearish opportunities will present themselves Monday. Ben Bernanke will be reappointed, GDP will show strong growth (although I expect it to be revised downward) and month-end fund buying will support prices into the weekend. After our typical Monday rally, things should soften up next week. Take profits on put positions and look to re-enter next week. I still like placing orders to purchase puts based on technical breakdowns. Once the stock breaches support, the order is triggered. These orders need to be placed in advance on a good till canceled basis. If you took this approach last week, you made great money and trades were firing before the option prices jumped. Once the panic selling sets in, you don't be scramble looking for opportunities – prepare ahead of time. It will take you too long to enter the orders, you’ll get emotional and you will miss the "meat" of the trade. Start entering orders. As the stock moves higher, raise your trigger point. If you are a very short-term trader, consider day trading stocks and take advantage of this brief rally. Do not hold long stock positions overnight. image

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