We Have A Breakdown! Don’t Add To Put Positions Unless We Close Below $112!

January 21, 2010
Author: Peter Stolcers, Founder of OneOption

I have put trades getting triggered left and right today so I need to keep comments brief. For the last two weeks I've told you that my approach is to line up weak stocks and to place orders to purchase puts when they break technical support. It is critical to have these orders working in advance of a decline because you don't have time to react when the @#$% hits the fan. I have been taking positions at excellent prices because premiums had not spiked. Once the market hit an air pocket this morning, bid/ask spreads widened and implied volatilities shot higher. Overnight, China posted 10.7% GDP growth and they don't want banks to lend until February. They are slamming on the brakes to fend off inflation and many analysts believe they will raise interest rates in March. Initial jobless claims rose to 480,000 when analysts had expected 440,000. Continuing claims also inched higher. This is the second poor initial jobless claims number in a row and it comes on the heels of a disappointing Unemployment Report. If this trend continues, fears of a double dip recession will surface. President Obama outlined his new restrictions on banking activity and the financial sector did not like the news. After blowing away earnings estimates, Goldman Sachs is trading lower and it has breached an important support level. Americans are getting tired of this constant tinkering that targets specific groups. There seems to be a new plan in the new committee every other day aimed at specific group. The tide is turning quickly and this week Republicans turned out in droves during the Massachusetts Senate elections. A warning shot has been fired and the nation has taken notice. Democrats lost an important seat that had been held for decades and because they have less than 60, filibustering is back. Earnings season is in full bloom and the results have been good. However, that is already priced into the market. Year-over-year comparisons are very easy to beat and it's conceivable that S&P 500 companies will collectively post earnings growth of 200%. As I've been pointing out, I am not seeing the demand for oil increase. If a global economic recovery was underway, consumption would rise. This is the fabric of every economy and a weak dollar is the primary reason oil prices have gone up. Transportation is also weak. CSX reported a 13% decline in year-over-year revenue and a 16% decline in income. Mind you, year ago shipping levels were horrendous and this should've been easy to beat. If the US is in an economic recovery, why haven't shipping volumes increased? The market has broken technical support at SPY $113.50 and I am buying puts. If we close below SPY $112 I will add to the position. Look for stocks that have broken important technical support levels on heavy volume. If you don't know where to look, subscribe to the Daily Report. All of the best candidates rise to the top of the Live Update Table and we have all of our shorts lined up. Wait for a confirmed breakdown before adding to put positions. I would still feel like we need a round of bad news before we see a sustained selloff. That could come in the way of higher inflation, higher unemployment, credit issues in Europe, higher interest rates in China, lackluster earnings guidance or any number of other events. Once the selling starts, investors will hit the exits. Bullish sentiment is at an extremely high level and we could see a sharp decline. Get ready to make some money on the short side. image

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